Q3 2021 Manitowoc Company Inc Earnings Call
Slide two please.
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 1095 are made based on the company's current assessment of its markets and other factors that affect its business.
Actual results could differ materially from any implied or actual projections due to one or more of the factors. Among others described in the Companys latest SEC filings.
The Manitowoc company does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information future events or other circumstances.
And with that please turn to slide three and I will now turn the call over to Eric.
You Ian and good morning, everyone.
Our third quarter reminds me of a book written by Chuck, causing Chuck was a legendary football coach from Western Pennsylvania.
<unk> 45 year story coaching career, which started at $19 48 and concluded with his induction into the College Hall of Fame.
When Chuck retired he wrote a book about his trials and tribulations titled Nevertheless, The game time, just ran out the.
The title of Chuck's memoir, as a good description of minutes walks third quarter I've, yet to see a quarter, where our team executed so well that came up short of our financial expectations.
I think it was one of the most accomplished quarters. Our team has achieved since I joined the company in March of 2016.
Beginning as always with safety, our journey to a zero harm workplace continues to evolve using the principles of the Manitowoc way internally, we track, our IR or recordable injury rates on a rolling 24 month basis.
During the third quarter, we set a record low for this metric with an average <unk> of 146.
The significant milestone is a testament to the growing maturity of our safety management system and our employees daily hazard observation practice and particular, the national Crane boom truck value stream and Shady Grove recently celebrated one year without any injuries congratulations to Justin Pilgrim and his team on this fantastic achievement.
Also in the quarter, we finalized the acquisition of Aspen equipment, and the HD Crane business for approximately $180 million. This translates to an all in EBITDA multiple of roughly six times. The integration of these acquisitions are progressing as planned and we welcome the Aspen <unk> Crane teams to Manitowoc.
Moving to the Manitowoc way during the quarter, we revitalized a workshop at our factory in yellow, Italy, and integrated the assembly of chassis for self erecting tower cranes, which significantly improves the safety and process flow onsite I look forward to visiting the team in two weeks to see these improvements looking.
Looking at our financial results for the quarter, our orders were $535 million.
Overall markets for our products and aftermarket services remained robust in North America dealer inventory levels are in line with current demand and continues.
Pace.
In Europe, we are beginning to see recovery in the <unk> products in the tower Crane business remains at elevated levels in the Middle East and South America confidence is building as a result of sustained higher commodity prices.
Finally in Asia, while China continues to soften and other key markets, including South Korea, and Australia remained strong I would note. However that we did see a moderate slowdown in orders during September and October. However, it's too early to say whether this was a result of our orders coming in ahead of price increases during July and August or if price elasticity is.
Finally caught up with the increases regardless our sales teams have worked tirelessly to implement price increases to offset inflation.
Until this fall crane demand has proven resilient to rising input costs, only time will tell whether inflation will hinder demand.
Finally, I'd like to discuss our supply chain, although our supply chain and operations teams have never worked so hard to keep the factories rolling we are facing the same supply chain crisis that many of our peers have already reported.
These supply chain constraints are broad based.
Every factory in product line, we have is not only shortages everyday we are confronted with different issues.
As a result of these supply chain disruptions sales in the third quarter were approximately $405 million, which was more than 15% below our expectations. The combination of these lower volumes and the cost of price lag, which we discussed last quarter resulted in an adjusted EBITDA margin of four 9%.
Overall I was extremely proud of how our team executed during the third quarter. Our financial results. However, don't give a complete picture of our progress on safety Esg's strategic initiatives and the overall effort to battle the current supply chain an inflationary environment.
As Chuck Locke, Zane would say time simply ran out on us with that I'll pass it to Dave to provide further details on our financial results Dave.
Thanks, Aaron and good morning, everyone, let's move to slide four.
As Aaron mentioned, our third quarter orders totaled $535 million.
An increase of $145 million or 37% compared to the same period last year.
On a currency neutral basis, Q3 orders were up $143 million.
The increase in orders was mainly driven by a robust European market exacerbated by weak demand in the prior year due to the Covid pandemic.
The Americas region continued at a steady pace and improved year over year, primarily as a result of low order intake in the prior year.
These gains were partly offset by lower orders in EMEA segment.
Our third quarter backlog of $891 million increased 92% over the prior year.
Backlog increased across all of our segments sequentially backlog increased $155 million due to strong Q3 orders coupled with the late shipments due to supply chain issues.
While over 50% of our backlog is scheduled to ship within the year material shortages due to supply chain issues will impact our fourth quarter shipments compared to year end backlog was up 64%.
Net sales in the third quarter were $405 million, an increase of $49 million or 14% from a year ago.
The year over year increase resulted from a combination of entering the quarter with a higher shippable backlog and a low prior year comparable due to COVID-19 and.
In spite of the year over year increase we estimate that our net sales were negatively impacted by approximately 16% due to the supply chain issues and labor constraints.
Third quarter engineering, selling and administrative expenses increased by approximately $10 million year over year. The increase was primarily driven by higher employee related costs inclusive of short term incentive compensation expense and acquisition related costs.
Our adjusted EBITDA for the third quarter of $20 million decreased approximately $5 million year over year as a percentage of sales adjusted EBITDA margin declined to four 9% 210 basis points lower than the prior year.
As has been the theme with most industrial manufacturers our financial results for the quarter were substantially impacted by supply chain issues material cost increases logistics and labor constraints.
Third quarter depreciation of $10 million was flat compared to the prior year, our benefit for income taxes in the third quarter was $1 million.
Primarily related to a refund in Europe from a prior year tax audit.
GAAP diluted net loss per share in the quarter was one <unk>.
On an adjusted basis diluted net earnings per share of <unk> declined by <unk> <unk> from the prior year.
Moving to liquidity, we generated $18 million of cash from operating activities in the quarter compared to a cash generation of $28 million in the prior year.
Capital spending in the quarter amounted to $7 million.
Resulting in free cash flow of approximately $12 million.
Year to date, we have generated $46 million of free cash flow. We ended the quarter with a cash balance of $222 million, which included $100 million from borrowings under our ABL facility for the acquisition of the <unk> Crane business on October one.
During the quarter, we spent approximately $51 million for the purchase of Aspen equipment.
Our total liquidity as of September 30 was $389 million.
Turning to slide five.
As a result of the previously discussed market dynamics, we are updating our 2021 full year guidance, which now includes the acquisitions of Aspen equipment, and <unk> and the <unk> Crane business. The guidance is as follows.
Revenue approximately $1 75 to one 775 billion.
Adjusted EBITDA, approximately $100 million to $110 million depreciation approximately $40 million to $45 million intra.
Interest expense approximately $28 million to $30 million.
Income tax expense of approximately 10 million to $14 million, excluding discrete items and capital expenditures approximately $40 million with that I will now turn the call back to Eric.
Thanks, Dave.
Although the clock ran out on us in the third quarter, we are still fighting to achieve the low end of our previous full year EBITDA guidance of 105 to $1 15.
Clearly given our new guidance, we're concerned that we haven't seen the worst of the parts shortages, we have four major headwinds supply chain transportation inflation in labor as I constantly preach to our team on competitors face the same issues as during the tough times like these that great companies and earn the trust of our customers and gain market share. We have made this our focus.
Whether it is safety productivity quality, new product development acquisitions or ESG. The Manitowoc way is our family recipe for solving problems and driving continuous improvements.
The truth that estimate to this is how we are able to make progress on our four strategic initiatives. During this difficult environment with that please turn to slide six and let's take a moment to review our progress on each initiative.
Number one our European tower Crane rental fleet strategy continues to progress as planned since we embarked on the strategic initiative 18 months ago, we have doubled the size of our rental fleet and maintained a very high asset utilization rates.
<unk>, we continue to make inroads by serving key accounts with our new larger capacity top slowing tower cranes.
Our strategy of growing our rental fleet also improves our flexibility when pursuing new sales. For example, we recently won an order for an MDT 569 on the Hs to high speed train project in the UK, where we were able to offer a buyback option.
This provides the customer with flexibility on the project and an opportunity when exercised for us to utilize this claim in our rental fleet.
As another example, we recently won four cranes and assemble on a canal project to relieve the boat traffic on the Bosphorus with the use of a buyback option and the rental of additional mass sections, we've been able to position our cranes on these projects in the initial phases, which we expect to give us an advantage as the projects mature.
Moving to number two we're making meaningful progress on our Chinese tower Crane business by locally engineering and producing models to effectively compete in the belt and road region last month, we launched six new model designed by our China team since 2019.
Photon MCT 38 five.
I'm continually impressed by our team's ability to quickly translate the voice of the customer and bring to market highly productive cranes that serve the unique needs of customers and development Road markets.
In spite of the Chinese market softening, we are seeing strong adoption of these new models and several other key markets.
As the middle East and Russia.
Number three on our all terrain Crane business, our five year strategy to expand our product line is on track with the public introductions of our new models scheduled for next fall at the <unk> trade show last month, we hosted over 180 customers at our factory in <unk>, Germany as a special voice of the customer event.
Customers saw our two most recent product launches and a few of our latest technology innovations. We received excellent feedback on our new product development roadmap.
Lastly, and number four regarding our strategic initiatives to grow aftermarket activities in North America I would like to express my Sincerest gratitude to the project teams upon closing the acquisition of Aspen equipment, and the HD Crane business as part of the HD Crane acquisition, we created a new business called <unk> equipment services. Additionally, we implemented a new ERP.
System prior to closing in order to support the new business. The new ERP system went live on October one with minimal disruptions, Jim Glen Wright and his team did a fantastic job working cross functionally to map out the new ERP system to include lean processes. We will continue with a disciplined approach in our north American aftermarket strategy through organic.
And inorganic growth opportunities.
In closing <unk>.
As the saying goes tough times don't last tough teams do the current environment is not easy our supply chain teams and shop for supervisors are experiencing unprecedented challenges.
I'm inspired by the resiliency and passion they bring to work each day.
Our passion is pervasive in Manitowoc, where we're all motivated by the opportunity to transition the business from a low margin crane manufacturer riding the crane cycle to a dynamic company that is customer driven focus on aftermarket and is able to thrive even during the tough times.
This is how we will bring greater value to our customers and drive the long term value of our enterprise.
With that operator, please open the line for questions.
Thank you if you'd like to ask a question. Please signify pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off Tonight your signal to reach our equipment.
That is star one if you'd like to ask a question.
We'll take our first question from Jami Rubin with Goldman Sachs.
Hi, This is a showcase of them I'll hand on for Jerry Revich I'm wondering can you provide some details on what the cadence of your pricing actions have been so far this year and at this point on new orders coming in are you able to match price with Lockton steel and component costs.
Good morning, Chuck.
So first of all as I start to look at this is just looking at commodity pricing and it's really starting to flatten out during the last couple of months. So when I look at the way we've increased prices we've done it three years or four times, depending on product lines over the last six months. So right now we feel like we're in good shape that the last price increase that we're on top of it and we're matched up with just a question of.
Working through our backlog now.
As Dave said in his opening remarks.
More than 50% of shippable during the fourth quarter, but in all likelihood with the supply chain issues that we have some of that obviously a lot of it is going to fall into next year or two so we still have.
Two more quarters to work through the backlog that's got the tougher pricing.
Okay got it and can you describe how your M&A pipeline looks today, how much runway do you have to continue to make the types of acquisitions like the HMA Crane business.
Yes, I feel really good about our funnel right now our focus right now is just to keep the funnel going but it's really our internal focuses on the integration of the two deals. We did we want to make sure that they are good and well extended before we move on to the next acquisition.
Understood. Thank you.
Thank you.
Thank you, we'll now take our next question from Stephen Volkmann with Jefferies.
Hey, Good morning, guys, Aaron Youre Little story reminds me of saying you might remember from your earlier days, where the sell side were never wrong. We're only early.
So.
Okay.
To us as well.
Ken can I just.
Ask you about this pricing just sort of the mechanisms I mean, it seems like steel has maybe started to rollover. If it continues to go down do you get to keep the pricing you put in so maybe second half of 'twenty two you could see some real margin expansion.
Yes, so I think part of the trick here is how we buy this deal because we buy it in some cases six months out right. So obviously three months ago, when we were buying.
This dilemma over through.
We historically have really never done surcharges in the crane industry have always been price increases.
So that does give us a little bit of buffer, but it's really too early to tell how sticky are these price increase is going to be if we really see a massive reductions deal.
Okay, Alright fair enough.
And then can you just talk a little bit about I guess, maybe more <unk>. If you want as you kind of are starting to integrate these things.
How does that sort of fitting in with your expectations and I guess, specifically I'm trying to think about how we should sort of model these things coming into the business through 'twenty two.
Yes, so it sounds like your question is really a financial question.
Yeah, So Steve Great question so.
Correct the impact for Aspen in the quarter was minimal right. So it didn't have any any any material impact on our third quarter results. However, we will get to see the impact in the fourth quarter and for full year 'twenty, two and as Aaron indicated.
For both companies were approximately $180 million of acquisition price and our expectations are that that will be a six EBITDA multiple so you can do the math of what we expect in 2022 on that.
And as a reminder.
As both Aspen, and <unk>, where customers of Manitowoc. So during the first quarter of ownership, which is the fourth quarter, we have to eliminate intercompany profit and ending inventory as we as we move the equipment from a manitowoc location to an 18 year Aspen equipment and as a result, our net EBITDA impact in the fourth quarter is going to be minimal roughly.
About $3 million, but from a top line point of view, we think that acquisitions are going to add about $30 million in the fourth quarter.
Okay, great. Thank you guys.
Thank you. Thank you do you think.
Thank you, we'll hear next from Jamie Cook with credit Suisse.
Hi, good morning.
Good morning, just a couple of questions. I think you noted that the cadence of orders slowed throughout the quarter. So if you could just give a little more color on the cadence and sort of what youre seeing.
Post the quarter close.
My second question sort of what's the level that steel prices need to be at for you guys to generate.
Solid margin.
Given the price increases that you have.
So I guess and then last I guess you made some commentary on 2022 is still going to be sort of challenged from a cost margin perspective, if you could just give any more color.
On that thank you.
Yes, so when I look at the backlog call. It it's roughly $900 million. So from my point of view the last month of the quarter. We had all the price increases and it's roughly $100 million. So thats completely covered with price increases.
Probably $200 million of that is from now four five months ago, which is not very well covered and then you've got the met the rest. That's covered so my view is that yes fourth quarters can be top of the first quarter is going to talk about when I really look at next year. My bigger concern is our supply chain, we know will work through the backlog.
<unk>.
Maybe some will drag into the second quarter, but we've got a lot of coverage on the outstanding backlog that will pick up between here and there.
I think your second question was relative to steel prices.
Yes.
Okay.
Yes, so as far as material input costs, we believe that effectively in September our price cost.
Dynamic is covered for 2022, so when we look at order intake from September forward, we think that we're in a good position for all those orders.
Aaron indicated really the issue is going to be not only the.
Supply chain, but also the labor constraints that that not only us but everybody is facing at this point in time as well. So the 2022 dynamic while we're not ready to talk about anything financially. We were just looking at how that backlog is going to.
Impact 2022.
Because theres a lot of dynamics that will happen between now and when we start the next year.
I'm sorry, what was your third question Jamie.
Just.
Sorry, the cadence of orders.
Oh, Okay, yeah. So.
Head of the price increases we saw a lot of orders. So normally we have our winter campaign and this quarter. It would appear that some of that winter campaign came before the price increases.
So September and October have been lighter than what we've seen in the.
Prior few months and we just really need to look out over the next couple of months to see how it plays out to be honest with you.
Okay. Thanks, I'll get back in queue.
Thanks, Jamie.
Thank you once again Thats star one if you would like to ask a question will your next from Mig <unk> with Baird.
Good morning, Mike Thanks, Good morning Mick.
Hello.
The color on the cadence of pricing and what's in the backlog.
If we were to stay reach price cost parity sometime in the second quarter of 'twenty two.
What will the core incremental margins.
Sure.
I'm, leaving out the acquisitions here what was the core incremental margins look like based on what.
Yeah.
Cost structure.
Yes, so I mean because of the way the backlog price when I think about 2022, I really think that it's the inverse of 2021, where we have these lower margins in the first half, but then we get back to more normalized margins and contribution margins in the second half.
But that I do understand I'm, just curious on the magnitude of what incremental margins should look like on the bottom line.
I'd say, it's always in a normal $20 to 25%.
Thanks Jay.
And then.
My follow up.
Has to do with <unk>.
China.
You talked about demand getting a little bit softer here I'm curious if you can size this business for us.
And I'm also wondering in North America.
It doesn't seem I mean, you call demand.
Steady so I'm sort of trying to understand as to what that means does that mean, it's growing at a low rate does that mean that it's flattish.
Based on what Youre hearing from your customers. How do you think demand in North America can progress going forward, I mean oil and gas seems to be getting better and obviously infrastructure seems to be pending so thoughts on that I would appreciate.
Okay, so with respect to China.
It's our smallest region by far so I'd say it's.
It's pretty minimal in terms of the overall performance of the company and its somewhat offset by strength in other belt and road countries like Russia, and Korea, So im not overly stressed out about the situation there is tough and getting tougher, especially getting payment terms correct.
With respect to North America.
First of all dealer inventories, we feel really good about they are back to normal, which we plan said for two years now and.
I was just at a big industry event last week and the sentiment was very positive for the exact reasons that you mentioned.
There is still an infrastructure program out there that might get passed and oil prices are now looking sustainable above $80.
Even when I often follow up copper prices too because that helps drive us down on Latin America, and some of the other mining countries like Australia. So.
If we can get through these this inflationary period.
I think there is reason to be optimistic out there, but we're.
We're not there yet.
Great. Thanks.
Thank you.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to management for any additional or closing remarks.
Thank you before we conclude today's call. Please note that a replay of our third quarter 2021 conference call will be available later this morning by accessing the Investor Relations section of our website at Www Dot Manitowoc Dot 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.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
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