Manitowoc Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Manitowoc First Quarter 2024 Earnings Conference Call. And I would now like to turn the call over to Ion Warner, Senior Vice President, Marketing and Investor Relations. You may begin your conference.

Speaker 1

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's Q1 2024 financial performance and business update as outlined in last evening's press release. Participating on the call today are Aaron Ravenscroft, President and Chief Executive Officer and Brian Regan, Executive 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 under Events and Presentations. We will reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to 1 and a follow-up and return to the queue to ensure everyone has an opportunity to ask their questions.

Speaker 1

Please turn to Slide 2. Please note our Safe Harbor statement and 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 or actual projections due to 1 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.

Speaker 1

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

Speaker 2

Thank you, Ion, and good morning, everyone. Please turn to slide 3. Today, I'd like to start with my update on market conditions. Our orders for the Q1 were up 6% year over year. Total Black Dog ended the period at a strong $971,000,000 In the U.

Speaker 2

S. Train activity around the country remains strong. Utilization and rental rates continue to hold up. And although short term is a bit mired by the election cycle, the overall outlook remains positive. With this in perspective, I recently spent a day with the owner of a large crane rental house who's been in the business for more than 50 years.

Speaker 2

And he told me that he's seeing more work coming than he's ever seen. Of course, we all see the announcements around new semiconductor projects. This fellow indicated that data storage centers, rail and power generation were driving his regional market. It will be interesting to see how this plays into decision making over the couple of quarters, but I view the medium and long term outlook in the U. S.

Speaker 2

Favorably. Turning to Europe, the tower crane market remains very challenging. Our machine orders for tower cranes decreased 34% during the Q1 of 2024. Our data suggests that the tower crane market is operating at 2,009 levels. In spite of this difficult environment for machine orders, our aftermarket sales have held up relatively steady.

Speaker 2

The CECE or Committee for European Construction Equipment recently published their annual economic report. The report suggests that the overall European construction market will stabilize in 2024 and start to recover in 2025, driven by government investment in renewable energies and industrial infrastructure. In addition, there's a huge housing shortage and we have already seen some of the large crane rental houses start to sell off their older assets outside of the region. Finally, I would add that the comparable should start to get easier the Q3, which is normally the basis for recovery. There's no doubt that mortgage rates have been far more inelastic in Europe than they've been in the United States.

Speaker 2

The current mortgage rate in France is around 4%. I believe that even a modest reduction in these rates would provide some relief and a basis for recovery in the residential end market. As it relates to mobile cranes, demand in Europe is stable. We have surely seen a wide variation of behaviors from customers across Europe, but on the whole activity is positive. Italy and Poland have been particularly good for us and we saw some green shoots in France during April.

Speaker 2

Utilization remains good at the crane rental houses and folks are actively managing their fleets. Heading into the next couple of quarters, we have a pretty strong order book, which is always a good sign. Moving to the Middle East, our orders for the Q1 increased more than 10% year over year. Coating activity remains at an all time high driven by investments in Saudi Vision 2,030 and Qatar's Northfield expansion project for natural gas. Although the timing of big orders isn't always easy to forecast in this region, the strong demand is broad based in nature and we expect this to continue for the foreseeable future.

Speaker 2

Not surprisingly, however, Chinese competition in the Middle East has started to heat up and we're starting to see pricing pressure. Lastly, Asia Pacific remains dominated by the storm clouds over China's construction market. Although we've seen some bright spots in Hong Kong and Singapore, in South Korea the tower crane market has slowed, but it's been offset by good demand in the mobile crane market. And lastly, Australia continues to chug along. Please move to Slide 4.

Speaker 2

Just to briefly touch on the Manitowoc Way, I visited our French facilities a couple of weeks ago and they've never looked better. In spite of the volume reductions, the team remains extremely motivated and I'm very proud of how they continue to manage the things that they can control in a very difficult environment. On this slide, I've shown 3 great achievements at our Sharyu factory. At Manitowoc, we always strive to eliminate forklifts on our plants to improve safety. Given the size of our parts, there isn't always a good alternative.

Speaker 2

As you can see in the picture on the left, however, the team is now using some very basic equipment to move large mass from the shop floor, which eliminates the hazards created by forklifts. The center picture shows a drum that the team developed in 3 months. This will be the heart and soul of the large 64 meter tonne muffing crane that the team is developing to serve major Saudi projects and future European nuclear projects. And lastly, the picture on the right is a remanufactured mass for a large topsoil crane. A key differentiating factor for Potong cranes is that we use a pin system to erect and assemble masks, which is significantly faster than the typical bolt system that our competitors use.

Speaker 2

These pinholes wear out over time. Since the team started on this initiative roughly 12 months ago, they've been able to reduce our cost for remanufactured mass by 56%. This is quickly becoming a viable aftermarket product offering that we've dreamed about for more than 25 years. With that, I'll pass it over to Brian for a financial update.

Speaker 3

Thanks, Aaron, and good morning, everyone. Please move to Slide 5. From an overall perspective, the Q1 results were in line with our expectations. During the period, we had orders of $554,000,000 an increase of 6% from a year ago, bringing our March 31 backlog to $971,000,000 The higher order intake was primarily driven by the European mobile business. Net sales in the quarter were $495,000,000 a decrease of 3% from a year ago.

Speaker 3

The year over year decrease was primarily driven by continued softness in our European tower crane business. This impact was partially offset by the Americas and the European mobile crane business. Our non new machine sales were $145,000,000 relatively flat year over year. MGX, our in house distribution business continues to grow its aftermarket. However, used sales in our traditional OE business were down modestly.

Speaker 3

SG and A expenses were $76,000,000 or 15% as a percentage of sales and relatively flat year over year. Our adjusted EBITDA for the Q1 was $31,000,000 a decrease of 31% year over year. The adjusted EBITDA margin was 6.3%, a decrease of 2 60 basis points over the prior year due to unfavorable product mix. The European tower crane market continues to be a headwind with a year over year impact to adjusted EBITDA of approximately $20,000,000 This was partially offset by incremental shipments from the rest of the business. As we have stated in previous calls, power cranes sold into Europe represent our highest margin product.

Speaker 3

And unfortunately, our European factories also have the least flexible overhead structures, resulting in weak absorption of fixed costs as volumes decline. Our GAAP diluted income per share in the quarter was $0.12 On an adjusted basis, diluted income per share was $0.14 a decrease of $0.32 from the prior year. Please turn to Slide 6. Net working capital ended the quarter at $509,000,000 Although our accounts receivable ended higher than we anticipated due to the timing of the Easter holiday, the main driver for our increase in working capital is inventory. While we have our normal seasonality with line starts relative to our build schedule, the single largest growth in inventory, whether it be year over year or versus year end, is in our internal distribution channel.

Speaker 3

Our build schedule for these businesses was more heavily weighted in the first half, giving us more flexibility to ship products in the second half. We expect to work our inventory down significantly

Speaker 4

by the end of

Speaker 3

the year. Moving to cash flows, We used $31,000,000 of cash for operating activities during the quarter. Capital expenditures were $12,000,000 of which $6,000,000 was for our rental fleet. We ended the quarter with a cash balance of $32,000,000 Total outstanding borrowings under the ABL increased $14,000,000 during the quarter, leaving $74,000,000 outstanding. Our net leverage ratio was 2.4x, well under the targeted 3x and total liquidity was $233,000,000 With that, I will now turn the call back to Aaron.

Speaker 2

Thank you, Brian. Please move to Slide 7. Next week Manitowoc is holding a Crane Days event at our Shady Grove factory where we expect to host more than 1,000 visitors. This is always a great opportunity to showcase our new technology, our latest aftermarket initiatives and of course new cranes. We'll display 34 machines at the event of which 5 will be new unveilings.

Speaker 2

Over the last couple of quarters, we've been very focused on integrating our dealer acquisitions and growing our aftermarket. And I think this is an appropriate time to remind everyone just how much we've done in terms of innovation without much fanfare. Since 2021, we've launched 29 new or refreshed crane models, and here's a few highlights. Firstly, we developed Grove Connect and Proton Connect telematics solutions with a suite of remote diagnostic and troubleshooting capabilities. To date, over 2,500 cranes have been equipped with this capability.

Speaker 2

Next, we launched 2 new truck mounted cranes and a new boom truck that specifically served the U. S. Taxi market. Aligned with our breakthrough initiative to drive new product development for all terrain cranes, we've launched 9 new or refreshed models. We continue to push forward to commercialize models with our hybrid technology.

Speaker 2

With respect to our breakthrough initiative to grow sales in the Belt and Road region, our team in China has launched 8 new tower crane models in record time. Most recently, we launched the MCR 325 and MCR 625, 25, which are key luffing cranes to serve the Belt and Road region. Lastly, for European tower cranes, we launched 7 new models. Most notably, we started to incorporate CCS, our crane control system into our Poton muffing cranes, which provides better load charts and simplified operations. In addition, we've begun to introduce our EV crane.

Speaker 2

This is our next generation of self erecting cranes, which meet the new European safety standards and come with added features like Poton Connect, providing extensive fleet management functionalities and remote or local troubleshooting capabilities with a smartphone. In closing, expected, the slowdown in the European tower crane business is dampening our profitability in the short term and we will continue to battle the situation for the balance of the year. Fortunately, although it's difficult to see in our results, the early gains from our Cranes plus 50 initiatives to grow our aftermarket is helping us manage through the cycle. On the one hand, our aftermarket business in the European tower crane market is proving to be far more resilient in spite of the depressed market for new machines. On the other hand, our dealer acquisitions from a few years ago continue to grow and exceed our expectations.

Speaker 2

We didn't expect to break the impact of the crane cycle in 3 years our crane plus 50 strategy is bearing fruit. Overall, orders remain very strong and we see good signs of pent up demand around the globe. We're already seeing projects move in Saudi Arabia and we are slowly but surely starting to see signs that the U. S. Infrastructure and semiconductor bills are moving.

Speaker 2

Concurrently, many of the large crane rental houses around the world have been very focused on reducing the age of their fleets for the first time in my 8 year tenure. In the meantime, we remain focused on controlling the things that we can control, which include: number 1, leaning into the Manitowoc Way to reduce our inventory and generate cash number 2, executing our Cranes plus 50 strategy to get closer to our customers and increase our aftermarket and number 3, doing what we've always done, engineering, manufacturing and selling the best cranes in the industry, which we'll showcase at Crane Days next week. Before we hand it over to the operator, I would like to thank the Manitowoc team. Over the last couple of years, it seems like we've drifted from one crisis to the next. Whether it be COVID, inflation, an unexpected geopolitical calamity or a bridge accident that shuts down our main port of entry into the U.

Speaker 2

S, the team always steps up and tackles the problems head on. I would just like to express my heartfelt gratitude to our employees for their endless commitment and dedication to the company. Thank you. With that, operator, please open the lines for questions.

Operator

And thank you. We will now start the Q and A session. And your first question comes from Jerry Revich with Goldman Sachs. Your line is

Speaker 5

open. Good

Speaker 2

morning, Jerry. Hey, this is Clay on

Speaker 6

for Jerry. Just quickly, with supply chain performance seems to be normalizing moving forward, could decremental margins be relatively muted given as the improved productivity offsets the lower volumes in the cycle? Thanks.

Speaker 3

Yes, I think definitely seeing a tailwind related to supply chain, but the bigger impact as we talked about in the prepared remarks is the tower crane business and we'll see that from a comp perspective in the Q2 as well. It starts to normalize in the second half. So I think that's the bigger kind of issue that we're working through right now.

Speaker 6

Thanks. And then as a follow-up, just can you update us on the strategic priorities over the next 12 to 18 months, particularly just around capital deployment?

Speaker 3

Yes. I think, again, as we've talked about in the prepared remarks, inventory management over the next 9 months is going to be really important. We did see the normal seasonality kind of spike in Q1, but trying to get through some of that inventory, particular in the distribution business over the next 9 months is really the priority.

Speaker 2

And our CapEx remains $60,000,000 Yes.

Speaker 6

Thanks. I'll pass it on.

Speaker 2

Thanks, Clay.

Operator

And your next question comes from the line of Mig Dobre with Baird. Your line is open.

Speaker 5

Good morning, Mig.

Speaker 4

Good morning, Mig. Good morning. Can you maybe recalibrate our expectations relative to your prior guidance? And maybe help us as to how we need to think about Q2 relative to Q1 as well? Thank you.

Speaker 3

Yes. As we said, Q1 was in line with expectations. We didn't update our guidance intentionally because we think our guidance is still the right range at this point in time. The sensitivity around the tower crane as we don't have much of a backlog and we're really living hand to mouth right now makes that wide range still appropriate.

Speaker 4

Okay. So you're reiterating guidance, but it sounds like the tower crane headwind is still there. So as we're thinking about Q2 specifically, I mean, normally we have a seasonal ramp in revenue, margins also a little bit better. Is that still to be expected or is this more of a back half story at this point?

Speaker 3

Yes, I think the Q2 impact related to towers is going to be from a comp standpoint is going to be similar, maybe a little bit less, but it will be similar to what we saw in Q1 and then the second half normalizes.

Speaker 4

Great. Then my follow-up on this tower crane discussion, and I recognize that the industry wide data here can be a little fuzzy. But one of your Japanese competitors put out some data in this regard. And what they're pointing out is that the tower crane market has actually been really, really robust in 2023, probably some of the best demand we've seen since 2,008. I'm kind of curious your perspective here.

Speaker 4

Have we sort of seen such an investment cycle in tower cranes to where maybe this downdraft is more than just a year, it could be multiple years in nature? Or is this or are you frankly saying something completely different for your business? Thank you.

Speaker 2

Yes, I don't know of any Japanese tower crane companies. So I'm not sure who you're referring to. With respect to the European market, it's broad based. Everyone we speak to is seeing the same thing. If you dig into that CECE report, there's some more data in terms of the downturn last year.

Speaker 2

Given that we're at 'nine levels, we'd like to believe we're at the bottom and feel that we're at the bottom. But there is a bit of normal seasonality of the tower crane business too. I mean folks like to take their cranes in the beginning of the Q1 and really sell them or rent them sort of March April. So we're already sort of through that cycle. And of course, everything is slow in the Q3 in Europe.

Speaker 2

So I think from a seasonality standpoint, we're really looking to the Q4 before we get a good view and that's normally when we have our winter campaign and we start to see orders for folks for the next fall.

Speaker 4

Thanks for the color.

Speaker 2

Thanks, Mig.

Operator

And your next question comes from the line of Steven Volkmann with Jefferies. Your line is open.

Speaker 3

Good morning,

Speaker 4

Steve. Good morning, guys. Thanks for taking the question.

Speaker 7

I'm going to stay on tower cranes, if it's okay. It sounds like I think you've said a couple of times that the comps sort of get easier in the second half. Could towers be flat in the second half? Is that the right way to think about it or we just don't know?

Speaker 2

Well, we're sort of hand to mouth since we don't have much backlog, but that's generally sort of how we view the second half as well.

Speaker 3

Yes. But that's why the broader range is because if you get a big order, it could change it or so that's we're hopeful, but

Speaker 7

that's where we're sitting. And if towers are flat, maybe my words are not yours, but that should sort of reduce a bunch of kind of year over year margin headwind because of the margin mix issue?

Speaker 2

That's correct.

Speaker 7

Okay, great. And then Crane Days, Aaron, is that like a catalyst for orders do you think? Or is this just sort of getting the word out?

Speaker 2

Yes, I mean anytime we have that many customers we're hopeful to get some orders. As you can see we got plenty of inventory. So we're eager to start pushing machines next week. Normally, there's always some things that have been in the works and folks bring those orders to the event. But the real intent is to get out and be communal with our customers.

Speaker 7

Okay, great. Thank you guys. I'll pass it on.

Speaker 2

Thanks, Dave.

Operator

And your final question comes from the line of Tami Zakaria with JPMorgan. Your line is open.

Speaker 2

Good morning, Tami.

Speaker 8

Good morning. How are you? So I also have a follow-up question on tower cranes. That's been weak for a few quarters now. What KPIs are you watching to gauge any signs of inflection there?

Speaker 8

Basically, the reason for my question is, is there any catalyst you're looking forward to which would drive stabilization in trends in the back half? What needs to happen in that market?

Speaker 2

Yes. So I think to get us going again, we need to see interest rates come down a little bit. So that's probably the first thing that I've been tracking. Secondly, you can look at the residential permits in Germany and France. I think that's there's good data out there.

Speaker 2

So we're tracking that as well. But as always in the crane business, it's always built off of confidence. So I think until you start to see those metrics move, it's going to be tough for folks to really get a lot of confidence to start spending CapEx again.

Speaker 8

Got it. So a quick follow-up. When you look at residential permits in, let's say, Germany, France, how if it inflects, let's say, tomorrow, does it does your orders come in at a lag, like orders improve at a lag or do you usually see orders improve in the same quarter?

Speaker 2

Yes, there's a lag to it. There's always some timing to it. You definitely let me go back a couple of years when it started to dip down, we didn't actually go. So there's definitely some lag to it.

Speaker 8

Got it. If I can ask one more question. Saudi Arabia, I think recent reports suggested that they scaled back some of the mega projects. Can you comment on what you're seeing in the Middle East and whether your long term outlook for the region has changed based on some of these reports?

Speaker 2

Yes, our outlook hasn't changed. I know that they've changed the scope relative to the line, but I don't think that anyone really believed the full scope would happen and it wasn't going to happen by 2,030. Even when I was there last time they were telling that really it would be more like 2040, 2045. So it's a long term investment. So there's no real surprise for us.

Speaker 2

That being said, all of the other projects are continuing to move forward. They've got a lot of different global or international events that rely on that. So our outlook still remains very strong relative to the Middle East.

Speaker 5

Got it. Thank you.

Speaker 3

Perfect. Thank you.

Operator

And we will take our next question from Clifford Ransom with Ransom Research. Your line is open.

Speaker 5

Good morning, Cliff. Good morning, gentlemen. I hate to say it because you give me a lot of crap about being so old. This is now my 52nd year around lifting companies. We all know this is a cyclical business.

Speaker 5

You're doing things to reduce that cyclicality and I commend you for what you've done on the balance sheet and particularly new products. But what have you done recently to I saw enormous changes in France when we were there a month ago. But what are you doing in the rest of the company or at the top of the company that's notable to promote the Manitowoc Way?

Speaker 2

Yes. So I'd say that our real focus these days has been around our aftermarket business and trying to figure out how we can apply our lean tools to an aftermarket business, which has been great. Of course, having distribution, we're starting to learn more and more about our traditional business and what we can do better to be a better partner to our internal distributors as well as our existing distributors. So I'd say that's our main focus is really dragging it out off the manufacturing floor and into the service locations and to some of our other administrative offices and of course around environmental and some of the things we can do to reduce our costs relative to our gas usage and our paint booths. Have

Speaker 5

you adapted anything in the culture of the Manitowoc Way to make that transition from the factory floor to what we call the carpetland world? Are there any particular success stories or learnings that you've made from things that didn't work well?

Speaker 3

Yes. Excuse me. When I look at the distribution business and the finance organization, they conducted a value stream mapping session to really look at what impacts and what time they can take out of their process to provide more value to the business and be more of a partner to the business. And that's really on the compliance side. So they spent a few days together to look at their processes and try to identify ways to take out time of that process and really better utilize the system, the finance and back office system that they use.

Speaker 3

So I think we had some good successes, but more to go with that. Yes.

Speaker 2

I think in terms of challenges, anytime you're trying to standardize fixing cranes, I mean that's a tough deal. So I think there's a lot of different good ideas floating around the company. And in fact, I'm pretty optimistic that AI will give us some tools that will help us become more productive and just more effective at doing that.

Speaker 5

Thank you very much.

Speaker 3

Thanks, Cliff. Thanks, Cliff.

Operator

And there are no further questions at this time. So Mr. Warner, I will turn the call back over to you for any additional or closing remarks.

Speaker 1

Okay. Thank you. Before we conclude today's call, please note that a replay of our Q1 2024 conference call will be available later this morning by accessing the Investor Relations section of our website at manaswap.com. Thank you everyone for joining us today and for your continued interest in The Manitowoc Company. We look forward to speaking with you again next quarter.

Operator

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

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