Manitowoc Company Inc (MTW) 2018 Q3 法說會逐字稿

Good day, everyone and welcome to the Manitowoc Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introduction, I would like to turn today's call over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the Manitowoc conference call to review the company's third 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 filings.

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. And I will now turn the call over to you, Barry.

Thanks, Ion, and welcome, everyone. Well, we did it. This has been another quarter of excellent operational performance by the Manitowoc team. We delivered adjusted EBITDA of $31 million, up 34% over third quarter 2017, which marks the sixth consecutive quarter of year-over-year EBITDA percentage improvement. These results reflect our ability to effectively manage cost and our supply chain in a difficult environment while executing our strategy for profitable growth. I ask our 5,300 employees to come to work each day and make Manitowoc a little bit better every day they are here. Our results show that our team continues to rise to the challenge. We are stronger, more agile and a profitable company than we were 3 years ago. I thank each and every one of them for their commitment and look forward to our future accomplishments together.

Orders during the quarter increased 22% year-over-year as we see continuing momentum primarily in North America. Customers continued to respond positively to our new products, which deliver superior performance as well as lower total cost of ownership. As I mentioned, continued North America momentum drove most of the year-over-year growth with major project work underway in energy and commercial construction. The North American oil and gas environment continues to improve with investment in upstream well completions continuing to drive crane utilization and replacement demand. Asia Pac continues to show increased demand primarily in India. However, this was offset by continued weakness in the Middle East. In Europe, I would describe the market as generally stable.

Our global aftermarket business continues to perform extremely well, showing growth across all regions while delivering increasing margins. Our net sales grew 13% for the quarter, primarily driven by increased demand in the United States and Asia Pac markets, including Australia, China and India. U.S. rental utilization continues to be strong, reflecting the fact that a growing number of cranes are working in the field. Market feedback on rental rates is also favorable showing year-over-year improvement. Our revenue was up while channel inventory is stable, which provides opportunities for growth in key markets as we continue to effectively manage our working capital needs for the future.

Last quarter, I spoke about the input cost headwinds that we and all equipment manufacturers are experiencing. We took swift actions to find and secure materials at the lowest possible cost, and we continued to offset these increases with pricing actions. Additionally, our team has been able to navigate through the constrained supply chain environment without having to shut down any production lines or delay any shipments, something we are extremely proud of.

While these cost challenges are real and persistent, commodity prices appear to have moderated at least for the time being. Let's face it, this is a tough competitive business and we are working with our supply chain partners and customers to reduce the effect on our overall profitability.

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

Thanks, Barry, and good morning, everyone. Let's move to Slide 4. Our third quarter orders totaled $458 million, an increase of 22% over the third quarter of 2017. Included in third quarter orders were approximately $29 million of stocking orders that are typically placed during the fourth quarter towers winter campaign. In addition, orders were unfavorably impacted by approximately $4 million due to changes in foreign currency exchange rates. Adjusting for these items, orders in the quarter were up 15% year-over-year. The increase in orders was primarily driven by new products and favorable market conditions in the energy and commercial construction end markets in the United States.

Our September 30 backlog of $700 million was up $232 million or 50% over the prior year and 51% on an FX-adjusted basis. Currently, over 75% of our backlog is scheduled to ship by the end of Q1 2019.

Third quarter net sales of $450 million increased $51 million or 13% from a year ago and 14% on an FX-adjusted basis. The year-over-year net sales increase is across all regions and mainly driven by increased shipments to customers in the United States and the Asia Pacific regions.

Gross profit of $80 million improved by $8 million or 11% year-over-year. The increase was primarily due to increased sales volumes, partly offset by increased input cost as well as unfavorable changes in foreign exchange rate.

SG&A costs in the third quarter were $62 million, which were $3 million higher than the prior year. The year-over-year increase is due to a $4 million noncash adjustment on a long-term note receivable related to the 2014 sale of our Chinese joint venture, Manitowoc Dong Yue.

On a GAAP basis, the team delivered operating income of $17 million in the quarter, an increase of 72% from the prior year. On an adjusted basis, operating income rose $8 million over the prior year to $22 million, and our margins improved by 140 basis points to 4.8%.

Our non-GAAP adjusted EBITDA for the third quarter was $31 million compared to $23 million in the third quarter of 2017. As Barry mentioned, this marks the sixth consecutive quarter of year-over-year growth in adjusted EBITDA percentage and the fifth consecutive quarter of year-over-year EBITDA dollar increase.

Our other expenses net were $6 million, which was $3 million higher than last year. The increase was due to a noncash pension settlement charge of approximately $5 million.

During the third quarter, we entered into a definitive agreement with an insurance company to purchase group annuity contracts, which transferred approximately $19 million of pension benefit obligations off of our balance sheet and will also result in a lower PBGC premium going forward.

With regard to taxes. In the third quarter, we recorded a benefit for taxes on income of $11 million, which included a discrete benefit of $13 million related to the partial release of a valuation allowance on our U.K. tax attributes. Our full year income tax expense guidance of approximately $14 million to $16 million equates to a fourth quarter tax expense of approximately $3 million to $5 million excluding discrete items.

Our income from continuing operations was $12 million for the third quarter 2018 or $0.32 per diluted share. Excluding special items, as outlined in last night's press release, our adjusted income from continuing operations for the quarter was $7 million or $0.20 per diluted share.

As of September 30, our total liquidity was $213 million as compared to $166 million as of September 30, 2017. Cash on hand at the end of the quarter was $91 million, an increase of $62 million from September 2017.

I would also like to point out that we are reviewing all of our options to refinance the $260 million senior secured notes and anticipate refinancing the notes in February 2019. Our goal is to optimize our capital structure and reduce interest expense while replacing current restrictive covenants with ones that allow more flexibility.

Cash flows used by operating activities on a GAAP basis were $160 million for the quarter. And on a non-GAAP basis, our cash flows provided by operating activities were $11 million, a 7% 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. We have been able to decrease working capital as a percent of sales by approximately 700 basis points year-over-year to 22.7%. This has mitigated what has historically been a large use of cash as volumes have increased.

Turning to Slide 5. Our 2018 full year guidance is as follows: revenue of approximately $1.8 billion to $1.825 billion; non-GAAP adjusted EBITDA of approximately $105 million to $115 million; depreciation of approximately $36 million; restructuring expenses of approximately $11 million to $13 million; capital expenditures of approximately $30 million; and income tax expense of approximately $14 million to $16 million, excluding discrete items.

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

Thank you, David. Moving to Slide 6. The third quarter was an important quarter, one where we demonstrated our continuing ability to deliver improving financial performance while both capitalizing on increasing demand and navigating significant supply chain challenges. Exiting Q3 and moving into Q4, we see customer sentiment continuing to improve. However, as a reminder, we face a very steep Q4 orders comp. In spite of this, we still expect a higher backlog entering 2019 than we did entering 2018. The true task at hand is to keep strong momentum with our operational process improvements while continuously to effectively manage all elements of our P&L to deliver on our commitments using the principles of The Manitowoc Way.

We are committed to delivering improved shareholder returns by executing on our 4 key strategic priorities: margin expansion, growth, innovation and velocity.

Starting with margin expansion. Our focus on maintaining our price rigor, especially in an inflationary environment, was relentless this quarter. We also saw better aftermarket performance than we have seen over the first half of the year with the growth coming from higher-margin parts and services. The momentum of the aftermarket is encouraging and reflective of the efforts around here to clearly focus on strategy and initiatives to grow this important part of our business. As David mentioned earlier, resyndicating our debt is paramount and will provide us additional flexibility to deploy capital in an efficient manner. We currently anticipate this happening in February of 2019.

Our next strategic priority is growth. Not so many years ago, the Middle East represented a significant portion of our revenue. As we sit here today, it's a much smaller piece of our revenue. During my recent trip to the Middle East, I was encouraged by the potential we can unlock there once pent-up demand starts to be realized. We are working closely with our channel partners to ensure that the new Manitowoc crane company is well represented as this market inevitably turns to growth.

Our third strategic priority is innovation where we continue to lead the industry by providing differentiated products that add value to our customers. I am pleased to report that we introduced the new 30-ton tractor mount National Crane at the Permian Basin International Oil Show. Customer response for this crane has exceeded our expectations with several cranes ordered with many more to come.

Our fourth strategic priority is velocity. Progress continued on our LEAN journey to provide opportunity to get rid of nonvalue-added work from our operations using the principles of The Manitowoc Way. Last month, I witnessed strides in our implementation of LEAN operations in Europe. In Milan, France, I reviewed the implementation of a key line side material feed kits via installation and expansion of the existing Andon system. This is a proactive process used to highlight material requirements in our assembly cells by using a highly visual green, amber and red lighting system. As the amber or red signal is activated, an electronic signal is automatically transmitted from our assembly cell directly to the warehouse and forklift truck to alert the operator of the need of additional material. This provides the logistics team with enough time to replenish the assembly stock prior to a stock-out while maintaining a just-in-time approach to inventory.

I'd also like to recognize the Chakan, India facility for their continued commitment to the principles of The Manitowoc Way. As you may recall, this is our newly relocated facility in a key growing market in India. The team continues to increase their output, resulting in a return to profitability there. Great accomplishment.

While we remain focused on closing out 2018, we are well along in our planning for 2019. We know the challenges that are ahead of us for the next year from a cost perspective, and we continue to have a positive, long-term outlook in our markets and for our business. As a more agile, standalone crane company, we will continue to provide the products and services that our customers demand while continually dealing with the increased cost and trade policy uncertainties.

In closing, for more than 115 years, we've been a global leader in providing lifting solutions. We are a trusted partner of choice for our dealers and our customers, delivering exceptional value. We are confident in our vision, providing innovation and velocity in everything we do while delivering long-term shareholder returns.

With that, operator, I'll open up the line for questions.

(Operator Instructions) Looks like our first question will be from Seth Weber with RBC Capital Markets.

I'm just trying to square up the price cost discussion. Can you just help us, I think, Barry, you said that you're covering your higher cost here in the third quarter. Do you expect that headwind to get worse here in the fourth quarter and then into the early part of next year still? Or I'm just trying to kind of calibrate where we are from a price cost perspective going forward and understand how much of the margin decline from 3Q to 4Q is a reflection of that.

Yes. As we said in the second quarter conference call, we expected the steel and tariffs to be somewhere around $10 million for the second half of the year. Our experience in the third quarter was exactly that run rate and we were able to offset that and understand from a pricing perspective what we needed to do going forward. We've taken a stab at looking to what we think is going to happen with these particular areas in 2019 and our current price that we're giving to our customers is reflective of that.

Okay. So just to be clear, so fourth quarter is going to be more negative than the third. So it sounds like third quarter was an offset, but fourth quarter is going to be more negative? Is that the right way to think about it?

So Seth, this is Dave. So historically, our second and third quarters have been our best quarters. The fourth quarter tends to be around the first quarter. So we've anticipated a lower quarter. We do have the cost headwinds. I'd say that the cost headwinds are nominally higher in Q4 than they are in Q3. But there's a lot of other issues and mix being product mix in the fourth quarter sales that is driving that as well.

Sure. Okay, that's helpful, David. And then just as we're thinking about what the incremental margin on this business should be for next year, is -- do you feel like this could be north of a 20% incremental margin in 2019, including the cost headwinds that you're talking to?

Yes, that's a great question. However, we haven't finalized our '19 plan yet. There are a lot of uncertainties coming around that, and until we identify and deal with those questionable items, we're not going to elaborate on 2019 at this time.

What I would say, though, is when you look at 2019, it's a math game, right? And not necessarily a game, it's a math fact. Yes, we're going to have a revenue assumption, we're going to have a cost assumption, we're going to have a price assumption and we have a bottom line assumption. And where the shortfall is and what our expectations are going to be for the year has to come from intense cost reduction. And I think this management team has exhibited over the last 3 years and prior lives that where we need to take out cost, we're pretty successful in doing so.

Sure. Okay. Maybe if I can just ask it a different way. Can you just give us any color on the backlog, the mix in the backlog? Will mix be accretive to 2019, do you feel, at this point?

Well, when you look at our backlog at this point in time, Seth, as I mentioned, most of this stuff is going to ship in 6 months, right, over 75%, and the vast majority of that is going to ship in Q4. So I would say that when you look at the backlog, you're talking about a small portion of the overall 2019 revenue that it's going to impact. But we've had order intake that has had price increases on certain things. I'd say most of our products have had 2, if not 3, price increases throughout the year.

I would add, Seth though, when you look at what our planning is for '19, we're not expecting a significant change in mix. The significant change in mix that would positively affect us is RT volume coming back stronger to 50% of historical levels. Based on what we currently see in the market and what we're projecting, we're not projecting a significant recovery on RT, so we still have that to deal with. But that's just a fact of our business. And where we can't get the increased hours in Shady Grove as a result of RT production, we have to make it up somewhere else. And that's what I think this management team has proven it's able to do quarter after quarter, year after year.

The next question will be from Clifford Ransom with Ransom Research.

If -- when you look back, I've watched you do this kind of transition at any number of companies. Is there anything different about Manitowoc crane than the other businesses that you've done? Or should we look out over the next 3 to 5 years with the same kind of timetable for the full LEAN transformation of this business?

Cliff, the only difference is that things are much bigger, that's the only difference. The principles remain the same. The principles of standard work, the principles of 5S , the principles of policy deployment, the principles of customer driving our behavior when it comes to new product development are all the same. The only difference is the products here are much bigger.

Just as a follow-up question. You still have a pretty elevated working capital-to-sales number. Is that a high priority? Are you looking at other things first? When you do the Hoshin, where does that fit?

Well, believe me, we are very conscious of inventory. And I think we look at our historical levels, we are definitely continuing to make improvements there. But David's group globally pretty much manages the effects of working capital on a daily basis in our business, so I'll let him comment a little bit more.

Yes, so Cliff, I think you're fully aware that one of our expectations is that we improve our turns by 0.5 turn each year. That is the benchmark that we set for everybody, and one of the other things is the timing of shipments in the quarter. From a working capital standpoint, I'd rather have the money tied up in perhaps a quick turn of receivable than inventory. So I would say that nothing has changed relative to our belief that we can continue to improve our working capital in inventory and that will drive better cash management within the organization.

Our next question will be from Charley Brady with SunTrust.

I just want to just talk about the orders for a second. And I guess, your commentary, obviously, you're up against a pretty tough comp. But as you're 1/3 of the way through the quarter, I'm just wondering if you could kind of trend for us kind of what it looks like relative to a year ago even on that tough comp? And I guess, I'm trying to gauge is there a level of conservatism built into the expectation given that you've got new products coming out, you've got to pick up some of the end markets that you're seeing. And then also your comment on the $29 million in Q3 that came from, it sounds like, maybe a pull-forward of some towers. Just kind of go into what's causing that?

Yes. The history of the company has been that, in the fourth quarter, we do in the towers business what's called the winter campaign. And the winter campaign is basically an opportunity for our customers to place orders, get in line for when the spring season comes around. And when the spring season comes around, based on what the order in which they placed their orders for the winter campaign is the priority at which they get shipped. One of our largest dealers in all of Europe decided that he wanted to get ahead and because he sees in the areas that he serves in Europe a need for increases in tower cranes in the March timeframe of next year. So he came to us and said, I'm going to give you our order that we normally give you in the fourth quarter now, so that I can be first in line. So that's the entire reason why our customer decided to do that. And your other question was...

Conservatism.

Yes, just want to get -- or maybe kind of how the...

Conservatism.

I mean, we are always, always, always very conservative. I will say that our October orders were good. Very good, as a matter of fact. We are very pleased with our October orders. But we do have a very tough comp. If you looked at the orders that we had in the fourth quarter of '17, we're out there fighting for every order. But I will tell you that when it comes to booking an order now, we've got to have margin in it. If there's no margin in it, we're not going to take an order.

Yes, that's good to hear. Just one for me then. On the engineering selling and administrative expenses, the percent of revenue, you've taken that down nice over the past 12 months. I guess, will we expect, as we look at Q4, from a percent of revenue standpoint, would you expect that to continue down on a year-over-year basis or sort of flat sequentially as a percent of revenue goes?

I think a little bit down on a year-over-year basis, Charley.

Our next question will be from Steve Volkmann with Jefferies.

I wanted to come back just to the margin question a little bit, if I may. And you may not think about it this way, so that's fine, but I sort of think about underlying incremental margin of sort of 20% to 25% normally, whatever normal is these days, and then I look at things like your cost savings and LEAN efforts, sort of, on the one side and potential cost increases on the other side and that's sort of how we like to try to think about the bridge for margins. So I guess, I'm just curious, A, if you think that's a reasonable way to think about it. And secondarily, I'm trying to think about what I should be assuming relative to your LEAN and operational improvement efforts and kind of if there's a way to measure how much impact that's having on the margin.

It's very difficult to measure. But we have internal measurements that we use to gauge, particularly the amount of hours that it takes in order to produce a particular product. And we want to constantly see those hours reducing. And I'd like to say that we're all the way where we thought we could be, but we're not. So we still have a lot of opportunities on our shop floor to take hours out, and therefore, reduce our overall cost. From a margin perspective, I'll defer to David. But I mean, all you have to do is look at what we've done. And every single quarter, we tell everyone that whatever we need to do to offset those increases, we do. And I think we exhibit the fact that we're able to do it. And we'll continue to be able to do it. And that is from an operating philosophy of The Manitowoc Way. Whether it comes from 5S in the Chakan, India factory or whether it comes from a value stream that's happening in accounts receivable or whether it's coming from a kaizen event that's happening in the Shady Grove facility in the fabrication department or whether it's coming from on and on and on, I could go on and on. But this is philosophy, and really, all we want to see is continuous improvement and where it comes from and how it comes is less important than the fact that the culture is being established, that we must improve our operations day after day, after day, after day.

Okay, fair enough. I apologize if I missed this, but I wonder if, Barry, you've seen any kind of long lead indicators that make you any more optimistic relative to crawlers?

Utilization is pretty high and that's a good leading indicator. Win continues to be good, particularly in the U.S. The one thing I'll say about crawlers, it's a very, very, very competitive market and we have to make sure that the technology that we're offering our customers give them the intended advantages that we believe that they should in order to command a price that we're able to command in this particular market.

Our next question will be from Jamie Cook with Crédit Suisse.

I guess, 2 questions. You talked about order trends in October being positive. Can you just give us some numbers around that like how big were the increases and what regions were driving that specifically? And then also, when you're thinking about sort of 2019, can you talk to sort of the conversations you're having with your customers on the energy side, in particular on the Gulf Coast, with a lot of LNG projects expected to go FID as well as petrochemical projects? And then my last question, any color on sort of the supply chain issues and whether or not you think that's improving and should that be a headwind in '19?

Supply chain issues are always a headwind. It's a matter of how you deal with them, and I think this team has demonstrated that it's got enough operational prowess to deal with them effectively. I think I said in my prepared remarks, and I mean it, that we did not miss a single shipment nor did we shut down a production line due to our supply chain in the quarter. That's a pretty doggone good accomplishment, and I think it goes back to the strategy that we have. When I came onboard here, we had a consultant that was going to save this company hundreds of millions of dollars in supply chain costs by doing this 10-step process. And I went into the second -- the third day I was on the job here and I had a meeting with these people and I said, when do you actually talk to the suppliers? Well, that was like foreign language to them. So I fired them. And what we did is we partnered with our suppliers and we've given them the opportunity to partner with us and tell them that, you know what, if you're doing $25 million a year with us, we'll guarantee you that baseload. And we guaranteed the baseload, they're able to invest in their business, they're able to hire the best people and they're able to keep themselves moving along. When the market goes south, guess what, they're going to continue to get that $25 million worth of business instead of taking it back from them moving it internally, which is the way this company used to be run. If you want -- when you want -- when times are good, if you want suppliers to give you a level of parts and services that you need in order to satisfy your customers, you'd better be taking care of them when the market is down. And that's been our overall strategy and our philosophy and I think it's paying dividends now.

Yes, Jamie, let me take your first 2 questions. So with regard to the order trends in Q4, I will say that October, as Barry mentioned, was a good month for us. However, I'll caveat that by saying that in looking at the quarter as a percentage of our order book, that is the lowest quarter within our order book. Our winter campaign really kicks off in the November-December timeframe. And when you look at how we are going to comp versus last year, it's really the orders that are going to be coming in, in November-December and most of those are driven by, what I'll say, orders from the European part of the world. With regard to our 2019 conversations with customers. I will say that those have been ongoing. We've talked with our customers in all facets, whether they be in the -- dealing into the energy sector, the wind sector or outside in the commercial and resi construction businesses, and as far as their sentiment goes, I think there's pockets of sentiment still in the U.S. in the energy side of it and the wind side of it. European side of it is yet to be determined. Asia Pacific has been reasonably good as well. So we do have those conversations on an ongoing basis. We're in the midst of putting all that together and determining where we think 2019 will end up. So I just say stay tuned on where we think we'll be in 2019.

Our next question will be from Jerry Revich with Goldman Sachs.

I'm wondering if you can talk about where your win rates are running on bids that you folks have in place and how that compares to 1 or 2 years ago now that you've had the product refresh. Can you just give us a broad sense for how the share is tracking?

Yes, our share is doing well. Very pleased with our share. We're gaining share in the areas that we targeted to gain share and we're losing share in areas that we targeted the lose share. In areas where our margins, our standard margins, are not up to where we need to be in order to provide a shareholder return, if we can't get the cost base right, then we're not participating in that share. We have adopted internally a saying that's called profitable market share growth. Market share growth that's not profitable is not something we want.

And Barry, can you give us just some more context? I guess, historically, tower cranes and crawlers have been really profitable areas for Manitowoc. Is that the area where you're achieving more share gains? Can you just give us more context behind your comment a moment ago?

Tower cranes continue to gain share globally. We continue to fight back and forth with our #1 competitor as to who is the #1 globally. But I think with the advent of the investments that we're making, particularly in China and being able to serve the Asia Pac market from that facility with very high-quality products, which we haven't been able to do in the past is really showing us the ability on the bottom line as to our market share growth in towers. Europe has been stable. We fight every day, but very well. With regards to a crawlers, it's just such a competitive market. It continues to be a competitive market. Where we see that we have a competitive advantage, particularly in cranes like the MLC650, where we're able to really give a competitive advantage over some of our competition, we're doing extremely well and we've targeted share in that particular area. We've also targeted share in the 100-ton class. And I think that with the MLC100 that we're going to producing in Shady Grove and all the features and benefits that that's going to be able to offer the market as well as being produced in the United States, which is one of the largest markets for those, I think we're going to continue to see share gains in the targeted areas of crawlers that we'd like to.

Okay. And Barry, can you expand on the supply chain discussion? Where do your lead times stand from your major Tier 1 suppliers now? Where would that had been 1 to 2 years ago? Can you just give us a rough sense for how your work has helped reduce the time?

Well, we're producing a lot more product today than we did a year or 2 ago. And so we use a concept called standard work, which means we operate to takt time. And takt time means that we have to be starting a product every 3.5 days, for instance, in some of our operations particularly in like Wilhelmshaven, Germany. And our supplier who supplies us the frames knows that every 3.5 days, we need a frame and we need an upper. And they're tied into that cadence and we don't make it any more complicated than that. We try to give them a firm schedule for 90 days and we try not to vary from that. That gives them the ability to plan and they've been doing an outstanding job of supporting us as we continue to grow volume.

Our next question will be from Ann Duignan with JPMorgan.

It's Ann Duignan. I wanted to go back to your comment about supply chain management, Barry, and I appreciate you committing to suppliers in an up cycle and in a down cycle. But should we be concerned that in a down cycle, then it means that Manitowoc will have under-absorption and then, how do I frame decrementals, worse decrementals in a downturn?

No, you shouldn't. What that means is we have to adjust our cost base as we go down, so that when we're at the bottom, we can make money. And that's not something we've been able to do in the past. So yes, we have to make commitments to suppliers, which means internally sometimes we're going to have to take cost structure out in order to maintain that. But it's a philosophy that I've been practicing for the last 30 years I've been in business. You can't -- they are -- the suppliers are as important to us as they're one of our key stakeholders and we invest in them, we work with them and we have to make sure that when we go down, that we have the ability to adjust our cost base accordingly.

Yes, and I would just add one other item to that. Obviously, we've made some commitments to be profitable at certain levels within the organization. That's an ongoing process that we have in the event of a downturn. When you look at this organization, I think we had 5 years of continuous sales decline through 2017. So obviously, we plan for the worst, and in that particular case, if that were to happen, we do have some contingency plans in place that we can lever with.

Okay, I appreciate the color and I do empathize with the supplier relationships management. And then just switching gears a little bit, you mentioned on Slide 6 -- or you mentioned in your prepared remarks some pent-up demand in the Middle East. Can you talk about where you think there's pent-up demand as opposed to perhaps the opposite that demand might be rolling over in some regions in the Middle East or some countries in the Middle East?

I just got back from the Middle East 3 weeks ago and I can tell you that I -- whether I was in Dubai -- Dubai, I would, say is doing fine. There's not really pent-up demand in Dubai. Dubai is -- I mean, there's more tower cranes in the sky that you can shake a stick at. Abu Dhabi, there's investment happening in Abu Dhabi. But there are a lot of projects that are still -- haven't been funded that are being looked at in the -- looked at for the future. When you go to the Middle East, I spent a lot of time in Bahrain and Saudi Arabia and that's where I would say, Saudi is where there is a significant amount of pent-up demand.

And do recent political events in Saudi make it any more difficult to do business over there? I know maybe not a fair question to ask of you, but does that change any of the sales practices or how you think about that as an opportunity?

I mean, we have a very good dealer. I mean, one of our longest-standing dealers is the Kanoo business. They are very much in touch with the Saudis. They tell us that it's going to be another couple of years prior to them really pulling the trigger. The Yemen war, of course, is really sucking a lot of resources out of the country. That is anticipated to resolve itself through political actions. And the intent, from everyone that I talked to, is that once that war has ended, there's a substantial amount of capital that is going to be freed up for infrastructure.

Our next question will be from Steven Fisher with UBS.

This is Nick on for Steve. Just had a quick question. So if nothing really changes here from demand drivers, how should we be thinking about the expected replacement timeframe for rough terrains and crawlers?

I wish I could answer that with a lot of confidence. Rough terrains, they're highly utilized now. There's not many going to auction and that's -- and price is down. But I think that's indicative of the fact that the good RTs are out working and the ones that are -- been around for a while and require replacement are heading to the auction. There is a lot of great activity in the basins, oil-producing basins, and we believe that as we continue to see opportunities for growth in those areas, that RTs are going to recover. But we are not anticipating in our plans for '19 any substantial increase in RTs in our plan. As far as crawler demand is concerned, we have a lot of -- we're anticipating a lot of crawler demand from 2019. A lot of it comes from the fact of our new product introduction of the MLC100.

Okay, great. That's...

There's the increased crawler demand for '19.

Okay, great. That's helpful. And then, I guess, just -- is there -- to piggyback, I guess, on Jerry's question before, is there any meaningful difference in regional trajectories from here? I mean, we look at your overall sales growth of about 13% then you have some of your competitors out there showing about a 51% increase in new crane sales. So I just want to try and see if they're just seeing benefits on different regions or not?

Which -- I have not seen any competitor have an increase of 51% in crane sales. But -- anyway, that's unbelievable to me. But if your question is which areas of our business are stronger than others, I think I tried to handle that in the prepared remarks in saying that the Americas are very strong for us right now.

All right. I'm sorry. Maybe not a competitor, more the distributors.

Yes, I mean, some of our -- one of our dealers, in particular, who's a public company had very good crane sales and I think that's fantastic and I think it's reflected in some of the sales that we're projecting into the fourth quarter and the beginning part of next year. That particular dealer is in an area where it's pretty hot for oil and gas and they're doing extremely well.

Great. And then, I'm sorry, so just one last thing to clarify. I believe you guys had previously mentioned the target of 10% margins by 2020. And so we just want to square, is that EBIT or EBITDA margin? And then assuming rough terrains don't come back, could you reach that target with just crawlers?

That's very, very difficult, to do that without RTs. I mean, you've got to remember, when I looked at RTs back in the beginning of 2016, the level we are at today is substantially below that. And that was not taken into account. That doesn't mean we're giving up. That means -- it just means it's a steeper hill to climb and there's other actions that we have to take in order to make that happen. But rest assured, we are not giving up on our long-term goal of having double-digit operating margins in the Crane business.

Our next question will be from Robert Wertheimer with Melius Research.

My question is pretty simple. You guys were, I think, fairly clear on orders and you mentioned a strong October. But the equity markets are obviously pricing in a chance of a recession or some sort of obviously risk. What are your customers feeling like? I mean, do you feel that any contagion is spreading from the market? Is confidence ebbing? Or are we just sort of slowly climbing out of a long recession still?

I think it's a combination of both depending upon where you're at in the world. I think in the Asia Pac region, with a few exceptions, it's significant growth. I think in other areas, it's more replacement demand. And I think in other areas, it's stable. And in the U.S., I think we're in a growth environment, continued growth environment, into '19 and '20 for what we would call our boom trucks, our all-terrain vehicles as well as crawlers longer term.

Yes. And I'm sorry, just like sentiment as you talk to customers. Are people looking at the markets and worrying that they've got their own end markets wrong? Or do you still feel confident bidding reporting is still healthy?

No, I think our customers are very positive about the future. A lot of them are, of course, watching what happens today and today will determine, I think, a lot of sentiment change one way or the other in the country. And I think that will -- that remains to be seen what happens by the end of the day today.

Our next question will be from Stanley Elliott with Stifel.

A quick question. When we think about kind of after February, what sort of investments kind of high level are you thinking about? Cost-out piece, maybe even a payback on some of those investments.

We want 1-year payback on any investment that we make internally. That's our hurdle mark.

And does the debt levels, do they change at all? I mean, you'll be fairly low on an EBITDA basis...

Yes, Stanley. I would anticipate that our overall thought process on the debt is that it would go up, and what we use that money for is still being evaluated. But I think it makes general sense in the market to get more than the $260 million that we have outstanding on our notes.

Perfect. And then, lastly, you may have said this and I apologize, are you currently producing the 100-ton crawlers here domestically? And then with bauma coming up, can you talk a little bit more about some of the other introductions you might have for 2019?

We currently purchase the 100-ton crane from a supplier and we are in-sourcing that due to strategic reasons. So that answers that question. As far as bauma is concerned, we have planned to have at least 5 new fully redesigned cranes for display that I think our customers will be extremely pleased with.

The next question is from Larry De Maria with William Blair & Company.

You just answered part of my question, but -- and you may have touched on this earlier. But curious, obviously, with the new product cycles strong for you guys, you're getting newer products out the door quicker. I'd be curious, in the order book that you have now, how much of the new order book and how much do you think going forward is cranes that are new to market in the last year or 2 that maybe wouldn't have gotten or you're forcing upgrades with? And secondly, can you just remind us, I'm sorry I don't have this number, but what's the difficult book-and-ship in any given quarter?

Yes, so the second one, I would say, Larry, in book-and-ship in the quarter, I'd say that ranges anywhere from what I'll say is 60% -- 55%, 60% up to just shy of 80% depending on the backlog at any point in time. Like we said, 75% of the backlog that we have currently is going to ship out by the end of Q1 2019. And the first part of your question, Larry, was just on...

Let us get back to you on the first part of the question because, quite frankly, we haven't calculated for our backlog. But let us calculate for what it is in the past then we'll get back to you.

Okay. But is it fair to say that the new products, because of your shrunk cycle, you're getting more business just simply because of those?

Absolutely, absolutely. We would be out of the truck-mounted crane business in the United States today if we did not introduce that new product. We'd completely out of it. And it's a great business for us now.

I'm showing no further questions in the queue at this time.

Okay, thank you. Before we conclude today's call, please note that a replay of our third 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 next quarter. Have a good day, everyone.

Thank you, ladies and gentlemen, this concludes today's teleconference. You may now disconnect.