Manitowoc Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 12 speakers on the call.

Operator

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

Operator

Please proceed.

Speaker 1

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's Q2 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 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 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 will now turn the call over to Aaron.

Speaker 2

Thank you, Ion, and good morning, everyone. Please move to Slide 3. Before jumping into my update on the crane market, I would like to provide some color from our Crane Days event in May. 1st and foremost, it was a very successful event with over 850 customers and dealers visiting our Shady Grove campus. We hosted attendees from 18 countries and we showcased 35 cranes garnering excellent feedback.

Speaker 2

It takes an enormous team effort to pull one of these events off, a huge thank you to the team involved and a big thank you to our customers and dealers that showed up in force. Although there was plenty of banter regarding the next 6 months around the impact of the presidential election cycle, I had multiple customers tell me that they see a wave of Crane folks are actively Crane folks are actively quoting projects for roadwork, bridges, rail, power generation and power transmission. And of course, everyone is seeing incredible momentum to build data centers to support the AI boom. These centers will consume massive amounts of electricity and folks see this as a potential second leg of demand. Unfortunately, however, we haven't started to see this good news translate into orders yet.

Speaker 2

The current operating environment remains very challenging around the world. For sure, the geopolitical environment and high interest rates are taking their toll, and elections around the world have created even greater uncertainty. Consequently, customers are slow to move forward on orders. In addition, issues such as part shortages and shipping vessel disruptions have improved since the peak of COVID era, but they surely haven't gone away. To recap the Q2, orders were down 22% year over year and total backlog ended the period at a still strong $837,000,000 Please turn to slide 4.

Speaker 2

Starting with the market overview in the Americas, the mobile crane industry remains solid with good utilization. Many of the big crane rental houses are talking about buying new iron and our quote logs are very strong. Nevertheless, this positive momentum hasn't yet resulted customer purchasing activity. 1st, many customers are struggling to find crane operators. I had multiple customers tell me recently that they can't grow their fleets until they can find additional operators.

Speaker 2

2nd, we as well as our dealers have seen an abnormally large number of requests for RPOs or rent to purchase deals. I speculate that folks are hesitant to lock in the current interest rates with the expectations that rates will decline. As I've stated many times, the crane industry always slows down as we approach a U. S. Election.

Speaker 2

We clearly saw this in our orders during the Q2, and I expect to see more of the same in the Q3. Moving to dealer inventory, current levels in the U. S. Are mixed. Rough terrain and all terrain cranes have been at the high end of the range for several quarters.

Speaker 2

On the other hand, boom truck dealer inventory is at low levels. In conclusion, crane operators are clearly gaining confidence in the business and interest in ordering new cranes is strong. At this point, however, we need to get through the election and any reduction in interest rates would help. It sure feels like a crane renaissance, particularly in the U. S.

Speaker 2

Is just around the corner. Turning to Europe, it was a tough second quarter. As if the Ukrainian situation wasn't enough upheaval in the region, elections and a general concern for previous coalition governments in the UK, France and Germany have led to more uncertainty. Starting with mobiles, although orders were surprisingly light during the period, crane activity at large crane rental houses remained strong. Similar to the U.

Speaker 2

S. Situation, everyone is talking about large infrastructure projects for energy and rail. While the local daily crane activity has been okay, the continued slowdown in residential and non residential construction markets, combined with an unclear political environment and higher interest rates, are making it harder and harder for smaller crane rental houses to make purchasing decisions as they look forward. In terms of the European tower crane market, I'm hopeful that we're at the bottom. New crane orders were down 21% year over year and adjusted EBITDA was roughly a $14,000,000 headwind in the quarter.

Speaker 2

Looking forward, I don't expect any major news in the Q3 given the nature of the summer months in Europe. The Q4 should give us some indication of what 2025 will look like. My gut says that the best that we can hope for is a slow recovery. In the Middle East, although there's been some negative reports in the press on project postponements, quoting activity remains extremely high, particularly in Saudi. Orders were slightly up year over year.

Speaker 2

While many pundits are skeptical of Saudi's current cash flow, we need to keep in mind the immense scope of Saudi Vision 2,030. Even if Saudi adjusts projects over time to address its cash flow situation, it's important to keep in mind that projects like Trajana are underway and the 2029 Asia Winter Games are only a couple of years away. Moreover, Trajana is more than just a ski hill. It's multiple massive projects, of which the centerpiece is a 2.8 kilometer man made lake that requires building 3 large dams. The main dam will be 145 meters high and 4 75 meters long.

Speaker 2

This is a huge engineering feat. In addition, luxury companies such as Raffles Hotels and the Ritz Carlton have begun to make commitments to build a combinations. The transformation of Saudi will surely have its ups and downs, but it's underway and happening. Moving to Asia Pacific, I recently returned from a 2 week visit to the region. The local China market remains very muted without much new news to report, and this continues to overshadow the region.

Speaker 2

In addition, delays in South Korean semiconductor facilities and commercial construction projects throughout Southeast Asia have contributed to the regional slowdown. It was good, however, to see that Vietnam and Hong Kong are starting to turn the corner. And I'm optimistic that South Korean market will begin to turn in 2025. In Australia, customer sentiment is very similar to the U. S.

Speaker 2

Train activity is good and excitement is starting to grow around the 2,032 Olympics, but customers are slow to place orders as they juggle high interest rates and wage inflation. Please turn to Slide 5. The most exciting news from my trip to Asia was our China team's progress on our large tower crane strategy. From a product standpoint, we've sold 14 MCT-eleven05s, which was the first large crane that we launched last year. We've erected the prototype MCT-two thousand two hundred and five, which is currently being tested.

Speaker 2

And I saw several prototype components for the MCR 815, which will be erected in the Q4. To manufacture these massive cranes, the team has held several Kaizens, including our annual global Kaizen, to increase our physical capacity and to improve our overall productivity. A big thank you to Zhonghua Shi and his team. On the left side of this slide, you can see some pictures of the area in the factory where we retrofitted the plant to meet the lifting requirements for the big cranes. On the right is a picture from our recent global Kaizen, which was focused on improving our flow, kitting and material presentation to increase our output.

Speaker 2

Turning to our aftermarket business, it continues to do well considering the softness in the global tower crane market, which underscores that our strategy is working. Our non new machine sales in Q2 were $147,000,000 only slightly down year over year. During the quarter, I visited our MGX Phoenix and Salt Lake City branches and I was extremely impressed by how these teams are servicing customers such as the local mines through superior build service support. A big thank you to Robert Thomas and Leon Cornaby, our branch managers and their teams. I think this is a good point to summarize where we sit for the balance of the year.

Speaker 2

Orders were lower than anticipated in the Q2, and I expect order levels to remain depressed until we get through the U. S. Election. After weighing the lower demand with our elevated inventory, we adjusted our build schedule to support our year end free cash flow target. Although this decision will negatively impact our short term financial performance, which was reflected in our updated guidance, it will better position us as we enter 2025.

Speaker 2

With that, I'll turn it over to Brian.

Speaker 3

Thanks, Aaron, and good morning, everyone. Please move to Slide 6. During the period, we had orders of $428,000,000 a decrease of 22% from a year ago, bringing our June 30 backlog to $836,000,000 The lower order intake was primarily in our Americas and European businesses. While mid term and long term customer sentiment remains high, prolonged higher interest rate environment and the political uncertainty around the world has negatively impacted the near term demand. Net sales in the quarter were $562,000,000 a decrease of 7% from a year ago.

Speaker 3

As it relates to our expectation going into the quarter, we missed our net sales significantly. This was driven by 4 major items. Number 1, parts shortages number 2, logistics and vessel disruptions number 3, a variety of customer financing issues and number 4, lower than expected demand for certain products. Our non new machine sales were $147,000,000 during the quarter, slightly down year over year. This was a great accomplishment considering the European tower crane market is at 2,009 levels.

Speaker 3

After adjusting for charges related to the EPA legal matter, SG and A as a percentage of sales was 14%, up 120 basis points year over year. This was primarily driven by lower sales in the period. Our adjusted EBITDA for the 2nd quarter was $36,000,000 The adjusted EBITDA margin was 6.4%, a decrease of 3 60 basis points from the prior year. European Tower Crane business continues to be the major headwind with the year over year impact to adjusted EBITDA of $14,000,000 Our GAAP diluted income per share in the quarter was $0.04 On an adjusted basis, diluted income per share was $0.25 a decrease of $0.50 year over year. Please turn to Slide 7.

Speaker 3

Net working capital ended the quarter at $517,000,000 24% as a percentage of trailing 12 month sales. The main driver for our increase in working capital continues to be inventory, driven primarily by the sales miss in the 2nd quarter. As Aaron mentioned, we reduced our 2024 build schedule, which will take effect in the second half and help us achieve our year end inventory target. Moving to cash flows, we generated $11,000,000 of cash from operating activities during the quarter. Capital expenditures were $13,000,000 of which $6,000,000 was for our rental fleet.

Speaker 3

During the quarter, we repurchased roughly 478,000 shares for $6,000,000 effectively buying back our CREIT. In the second half, we will opportunistically look to repurchase additional shares while managing our leverage. We have $29,000,000 remaining under our current authorization. Our cash balance was $38,000,000 and total liquidity was $226,000,000 at the end of the quarter, relatively unchanged from the Q1. Our net leverage ratio was 2.8 times, which is a reflection of the lower trailing 12 month EBITDA and the higher working capital.

Speaker 3

As it relates to our debt, our high yield notes are due in April 2026. I'll ensure to provide specifics, we continue to evaluate our options. Please move to Slide 8. When we set our budget, we expected difficult comparisons in the first half as a result of the slowdown in our European tower crane business. We also assumed a slight rebound in this part of the business in the second half and expected strong mobile demand throughout the year.

Speaker 3

At this time, it's pretty clear that the European tower crane business will remain at low levels the remainder of the year. In addition, mobile crane orders across our segments have tempered. As such, we've adjusted our full year 2024 guidance as noted on Slide 8. Net sales of $2,175,000,000 to $2,250,000,000 adjusted EBITDA of $125,000,000 to $140,000,000 adjusted diluted earnings per share of $0.45 to $0.90 free cash flows of $30,000,000 to $50,000,000 With that, I will now turn the call back to Aaron.

Speaker 2

Thanks, Brian. Please turn to slide 9. Entering the year, we knew that 2024 would be an uphill battle, particularly after a great 2023. While the year hasn't played out as expected, I'm very encouraged by the resilience of our non new machine sales and the growing positive sentiment in many of our core markets. And although we haven't seen the European tower crane business turn the corner yet, as John Templeton said, bull markets are born on pessimism and grow on skepticism.

Speaker 2

Regardless, Manitowoc is a significantly better company today than when we became a standalone crane company 8 years ago. The Manitowoc Way combined with our Cranes plus 50 strategy has transformed the company and we are still in the early innings of the game. I would remind everyone that since we launched Cranes Plus 50, we've grown our higher margin, less cyclical aftermarket business by 34%. By any standard, that's a great accomplishment and puts us in a much better position to drive shareholder value long term. With that, I'll open it up to questions.

Operator

Thank you. Your first question comes from the line of Steve Volkmann with Jefferies. Your line is open.

Speaker 4

Good morning, Steve. Good morning, Steve.

Speaker 5

Good morning, guys. Thank you for taking the question. So kind of interesting sort of near term, long term dichotomy here because it feels like things really sort of zagged on you in the quarter here. So I guess my first question is what really changed in the last 90 days that really moved this so aggressively? And the second thing is, Aaron, it feels like you're actually more optimistic sort of the out years.

Speaker 5

And I'm curious what's pivoted there that's made you kind of more optimistic if I'm reading your tone right?

Speaker 6

Yes. I mean, we still continue to have all these big opportunities for large infrastructure projects. I mean, you saw yesterday there was a bill that came out for I think $2,200,000,000 for power transmission. So when we talk to folks in the business, I mean, we I talk about power transmission specifically, our dealer in the Northeast, total states see work in that space for the next 10 years potentially. So I mean, these big deals are finally starting to come through and those big activities also are big generators of crane activity.

Speaker 6

So long term remain optimistic. I think that hasn't changed. It's good to hear that the crane operators are actually starting to see some of this activity, which we hadn't really seen or heard much about. But in the short term, really, it's the electric or the election curse as I see it. I mean, business just sort of tapped off in May and it's still really been depressed.

Speaker 6

I mean, our July orders were 121,000,000 just to keep it into perspective. So, and of course, with all of the things that we've seen in the U. S. Election and interest rate discussions in the last couple of weeks, I think that just really hurts confidence in the short term for people to pull the trigger on new orders.

Speaker 5

Okay. All right. Thanks. Anything to call out sort of on competitive dynamics or price cost? And any headwinds there we should know about?

Speaker 6

Yes, I mean on Asia Pac and in the Middle East where we compete with the Chinese that definitely has gotten more aggressive. So there's been a little bit of price compression. In terms of our normal Western markets, I wouldn't say anything's changed.

Speaker 4

Yes. I'd say just it was nice to see the Bank of Japan raise interest rates and the yen strengthened a bit, but it's still pretty high. So from a competitive standpoint, that's definitely still impacting us.

Operator

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

Speaker 6

Good morning, Mig.

Speaker 3

Hi, Mig.

Speaker 7

Thank you for taking the question. I apologize, I'm a bit sick here. So hopefully you can hear me okay. I guess my first question, just a little bit on understanding the cadence here for the back half, 3Q versus 4Q. You had to adjust your production and we understand that.

Speaker 7

But

Speaker 8

is there

Speaker 7

a more pronounced effect in 1 quarter versus the other? And what's the right way to think about margins also? Thank you.

Speaker 4

Yes. Seasonally, Q3 is always our weakest quarter. So I'd say that's definitely going to still happen, in particular in Europe. And, you know, obviously, the tower crane business continues to be soft for us. So q3 is going to be a lower quarter than q4.

Speaker 4

Q4, we tend to be a bit stronger. So just from a cadence standpoint, I'd expect Q4 to be higher revenue, higher margin quarter than Q3. And we don't obviously, we don't give quarterly guidance, but I'd say just directionally, that's what I would expect.

Speaker 7

Okay. Okay. And then maybe I guess to follow-up on Steve's questions about the tone Aaron's tone longer term. And I don't know, maybe to challenge that a little bit, I guess if we're looking at what we've experienced here in say 2023 and into 2024, this period has really been some of the strongest level of activity in non residential construction in the U. S.

Speaker 7

That we've overseen the manufacturing vertical has grown materially because of mega projects. Even on the public side, we have seen very, very robust spending in street and highway in 'twenty three. And all of this is now decelerating in 2024 and certainly the starts seem to be pointing to lower levels of activity. So I guess I'm curious on 2 things. First, why do you think we haven't seen a more robust level of ordering and crane demand despite construction being as good as it's been?

Speaker 7

And then how comfortable can we be with this notion that from current levels there's going to be yet another leg up, yet another reacceleration that can support demand? And I'll leave it there. Thank you.

Speaker 6

Yes. So first of all, with respect to commercial construction, if you go back to 2016 2017, it was up 20%. Meanwhile, crane orders were flattish. I mean, that was a pretty weak period for us. We got a lot of questions during those days about that level of activity.

Speaker 6

And there's no real strong correlation when we look through the data relative to the crane business relative to the non residential segments. So yeah, we definitely see the data is unfavorable there, wish it was more favorable relative to why did we not see stronger demand. I think that's largely driven by the interest rate environment in the last 12 months. So longer term, there's still lots of these big projects that have not been executed. I mean, it's taking forever to get permitting for these big projects.

Speaker 6

And if you look overall, rental, the fleet age still remains in that mid teens at all the major large crane rental houses. So at some point, that has to be addressed.

Speaker 4

And we've said in the past that our customers buy on confidence. And we had crane days during the quarter, and the sentiment was very positive. As Aaron mentioned, we visited a customer in the Northeast, and there was huge positivity coming out of it about these projects and really the extent of what they see as demand. So you can look at all the data. And as Aaron mentioned, we don't have any we've not seen any correlation between our order rates and that data.

Speaker 4

But it's really about customer confidence and we see it as pretty darn positive.

Speaker 7

Okay. Thank you very much and good luck.

Speaker 6

Thanks, Mig.

Operator

Your next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Speaker 6

Good morning, Jerry. Hi, Jerry.

Speaker 9

Hi, this is Clay on for Jerry. Quick question on the rent to purchase options. How high are those relative to normal levels? And then what are the typical conversion rates around the rent to purchase? That is interesting to see if the levels are higher there than normal, if we can those can improve on the conversions once we get past the election or if interest rates change.

Speaker 6

Yes, that's much more anecdotal in terms of having data to specifically answer your question. But I mean, in a normal course, there are certain crane rental houses that just like to do RPOs as part of their financing. So that normal has changed where you've got a lot of folks who normally just buy the cranes that are actually asking for RPOs. I'd say it's a discussion that comes up almost every single day or single orders.

Speaker 4

Yes. Even with some of our dealers, we know that they do RPOs

Speaker 6

as well.

Speaker 4

And we again, anecdotally, we just equate it to the fact that they don't want to commit to a purchase if they feel like interest rates are going down and it feels like interest rates are going down. So I would anticipate kind of in line with the election cycle that post election, there should be more free purchases than rent to own.

Speaker 9

Thanks. And as a separately, how big of an impact were the part shortages you called out in the quarter? And what could non new machine sales have been assuming a normal supply?

Speaker 4

Yes, I'd say I listed out about the 4 different impacts to our quarter based on where we forecasted. And when you look at across book to bill, commercial logistics and execution with part shortages being part of execution, it's about 25, 25, 25, 25. So it's sort of even. And our internal miss during the quarter was just under $100,000,000

Speaker 9

Thanks. I'll pass it on.

Operator

Your next question comes from the line of Steven Fisher with UBS. Your line is open.

Speaker 2

Good morning, Steve. Thanks. Good morning.

Speaker 8

Just to follow-up on the last question there about some of the parts shortages and other operational challenges that you mentioned. What kind of visibility do you have to any improvements in those areas?

Speaker 6

Yes, I mean the commercial items and the financing is something that we always it's something we always have to manage through because there are big credit, big expensive pieces of assets and that's a process. It's just gotten worse. And I think that will continue probably the remainder of the year that we'll continue to battle getting make sure we have all the paperwork because of course the banks are also asking for more information than they had in the past. In terms of part shortages, I mean, 6,000 parts on a GM case and only takes one to stop the crane and we still have as many shortages as we had a year ago, I'd say.

Speaker 4

And we're still seeing for certain for our boom trucks, some chassis issues and things like that. So that's an area where demand has continued to be strong, yet there's issues with parts and chassis.

Speaker 8

Okay. That's helpful. And then just a couple of quick clarifications. Did you have any order cancellations or deferrals during the quarter? And from a pricing perspective, are you expecting any pricing declines year over year in the second half of the year?

Speaker 8

Thank you.

Speaker 6

Yes, we had one crane that was canceled, but it was I wouldn't say that was abnormal. That happens from time to time. So I'm not too concerned around cancellations. And in terms of pricing, I mean, I think where we compete with the Chinese will continue to be aggressive. But in terms of the core product lines in the West, I don't expect any degradation in near term.

Speaker 8

Terrific. Thank you very much.

Speaker 6

Thanks, Steve.

Operator

Your next question comes from the line of Tami Zakaria of JPMorgan. Your line is open.

Speaker 6

Good morning, Tammy.

Speaker 10

Hi. Good morning. Hi, how are you? So, two quick questions. One is, I think I remember last year, you in one of the calls you mentioned that cranes are now, call it 20% plus more expensive because of cost inflation and then you add on the increase in interest rates.

Speaker 10

So that whole cost burden sort of dampened demand relative to the prices we've seen for cranes pre pandemic. So I was wondering, can you update us where we are now in terms of pricing, including the financing costs for cranes? What I'm trying to understand is what degree of rate cuts is needed for cranes to see a pickup in demand again?

Speaker 6

Yes. I mean, I would say it hasn't really changed from a pricing standpoint. I mean, you have to do the math. I mean, you had 0% to 1% interest rates a couple of years back and now you're talking 5%, 6%. So

Speaker 4

Yes, I'd have to go back to when we actually said it and update the model. But like over the last year, I mean, you could look at what interest rates have done and do the math. But I think part of it is just that expectation that interest rates are going to come down. So why would you do it? I mean, when we talked about the U.

Speaker 4

S. In particular, we were surprised to see order rates stay as strong as they were because of those interest rates and because of those dynamics.

Speaker 6

I think the much bigger issue we have right now is certainty. I mean, the election has turned into the election situation and the wars continue in Ukraine and the Middle East. So until we get some certainty around those items and even the interest rates, we don't really know where we're headed.

Speaker 10

Got it. That's helpful. And then the other question is non new machine sales. I think I heard you say it was down a bit in the second quarter. How did that trend versus your original expectation?

Speaker 10

And do you expect non new machine sales to stay down for the rest of the year?

Speaker 4

Yes. I think we're pretty proud of where we are from a non new machine sales perspective, in particular with the tower crane business where it is. There are definitely down in tower cranes, but not as far down as where you'd expect it relative to where the new machines are. So I think it's around where we expected a little bit shorter really based on some timing on some used machines. But year over year, the down is really related to our towers business.

Speaker 10

Understood. Thank you.

Speaker 6

Thanks, Tammy.

Operator

There are no further questions at this time. Mr. Warner, I turn the call back over to you.

Speaker 11

Thank you. Before we conclude today's call, please note that a replay of our Q2 2024 conference call will be available later this morning by accessing the Investor Relations section of our website at manitowoc.com. Thank you for everyone for joining us today and for your continuing interest in the Manitowoc Company. We look forward to speaking with you again next quarter.

Operator

This concludes today's conference call. You may now disconnect.

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