Q3 2022 Manitowoc Company Inc Earnings Call
It's primarily driven by acquisitions, but the team continues to increase our field service population and expand our territory.
Last month.
Purchased certain assets from fund an equipment company that in Colorado, Wyoming, and Nebraska to our footprint.
Although this investment was relatively small I am excited about the expansion of our direct to customer territory.
It's a great addition to our portfolio with a promising mix of non new machine sales and synergies for our mgs in Aspen businesses.
With the integration of the recent acquisitions completed we have begun to accelerate our implementation of the Manitowoc way at these new businesses.
To that end last month, we completed <unk> on our Aspen equipment location in Bloomington, Minnesota, one of the <unk> was focused on <unk>, while the second kaizen was aimed at increasing productivity and one of the locations truck body offsetting cells.
The team created an action plan that is expected to eliminate approximately 80% of the waste in this upgrading cell and improve its capacity by 30%.
Although we are in the initial stages of implementing lean at Aspen I am proud of the team's receptiveness to the Manitowoc way and I look forward to further success. Please turn to slide five.
Before I hand, the call over to Brian I would like to comment on last month's bomber show in Germany. As most of you know pharma is the largest construction equipment trade show in the world.
It's a phenomenal opportunity to showcase our new products and solutions to celebrate milestones with our customers and to drive the commercial side of our business and it takes a tremendous amount of work to pull it off.
I want to extend a heartfelt. Thank you to the many manitowoc team members, who made the show a big success.
Customers of the show were very impressed with the 12, new cranes, we introduced including a four axle 100 ton altering hybrid concept crane and our first sloughing tower Crane model equipped with Ccs, our crane control system.
We also received good feedback on our recent dealer acquisitions in the U S.
Acquisitions will allow us to get closer to several of the large European based multinational crane operators and.
And importantly, our customers noted that our product quality has improved significantly which is a far cry from my first pharma six five years ago.
Overall feedback from our customers and global partners reinforced that we are on the right track with our strategy.
With that I will turn the call over to Brian to take us through the financials.
Thanks, Erin and good morning, everyone.
Please move to slide six.
Our third quarter orders totaled $472 million, a decrease of 13% from a year ago. The.
The year over year decline was driven by lower demand in our Europe segment, primarily due to softening macroeconomic conditions in the region as mentioned by Alan.
This was partially offset by higher orders in our Americas segment.
Additionally, foreign currency impacted orders unfavorable <unk> by approximately $24 million.
Our September 30 backlog was relatively flat sequentially at $943 million.
And unfavorably impacted by approximately $25 million from changes in foreign currency exchange rates.
Backlog remained elevated with supply chain constraints, continuing to impact our ability to complete and ship cranes.
Net sales in the third quarter of $455 million increased 12% from a year ago.
The year over year increase was driven by the stronger shippable backlog entering the quarter, primarily in the Americas, and Europe regions and incremental sales from acquisitions, which drove higher non new machine sales how's.
However, sales continue to be negatively impacted by supply chain constraints, resulting in shipments shifting to the right.
We estimate this impact to be approximately $45 million adjusted for foreign currency.
Net sales were also unfavorably impacted by $32 million from changes in foreign currency exchange rates.
SG&A expenses increased by approximately $6 million year over year, primarily related to our acquisitions and partially offset by favorable foreign currency exchange rates.
Our adjusted EBITDA for the third quarter was $24 million, an increase of 20% year over year.
As a percentage of sales the adjusted EBITDA margin was five 3% an increase of approximately 40 basis points over the prior year, primarily due to the higher sales volume.
Foreign currency did not have a material impact on adjusted EBITDA during the quarter.
Third quarter, depreciation and amortization of $15 million increased $5 million compared to the prior year, which was driven by the acquisitions.
Moving to income taxes, we had a benefit in the quarter of $300000.
This was driven by the jurisdictional mix of income as a reminder, we have tax valuation allowances established for certain countries and therefore losses in those countries are not available to offset income tax expense in profitable jurisdictions.
Our GAAP diluted income per share in the quarter with seven.
On an adjusted basis diluted income per share was <unk> 10.
An increase of <unk> <unk> from the prior year.
Our net operating working capital year over year increased $112 million $156 million on a currency neutral basis, primarily due to the acquisitions increased volume supply chain disruptions and inflation.
Year over year, approximately $75 million of the increase was attributable to the acquisitions on.
On a sequential basis net operating working capital was up $18 million, primarily due to higher inventory as a result of miss shipments in the quarter and lower accounts payable as a result of adjustments to our build schedules.
Sequentially foreign currency exchange rates favorably impacted net working capital $18 million.
Moving to cash flow, we had a use of $6 million of cash from operating activities in the quarter, primarily due to the continued working capital challenges previously discussed.
Capital spending was $15 million of which $8 million was for the rental fleet as.
As a result, our free cash flow in the quarter was a use of $21 million.
We ended the quarter with a cash balance of $43 million.
Which was flat sequentially.
Total outstanding borrowings under our ABL increased during the quarter by $24 million to $104 million and total liquidity remained strong at $245 million.
Our net leverage ratio remained under three times as of September 32020.
As we enter the fourth quarter, our elevated shippable backlog and inventory levels support achieving the low end of our revenue and adjusted EBITDA guidance for the full year.
As it relates to free cash flow, we have line of sight to achieving breakeven. However, we remain vulnerable to part shortages and vessel availability with that I'll now turn the call back to Aaron.
Thank you Brian .
When I assess the current environment, it's a tale of contradictions on one hand high oil prices significant infrastructure spending good crane utilization and a large backlog are usually signs of a strong green cycle.
On the other hand, we faced an unprecedented supply chain and logistics crisis.
Highest inflation in 40 years and exceptionally strong dollar rising interest rates and an unpredictable geopolitical situation on the back door of the EU.
While this plays out the Manitowoc team remains focused on generating cash and executing our four breakthrough initiatives.
As I learned 20 years ago from <unk>, the former CEO of American standard when it's right, it's hard to see the dark and when it's dark it's hard to see the light at.
At the moment there is no shortage of darkness that being said crane fleets continue to age and at the moment are clocking plenty of hours every major greenhouse that I speak with recognizes the need to refresh their fleets the longer the pending train replacement cycle has delayed the stronger the next cycle will be.
While we wait for better times, we will drive internal continuous improvement with the Manitowoc way.
Executing our cranes plus 50 strategy.
As part of this journey, we will continue to strengthen our product offerings and build out our aftermarket footprint fueling our long term growth and driving shareholder value.
With that operator, please open the lines for questions.
Your first question comes from the line.
Jamie.
Great.
So April .
Your line is now open.
Good morning, Jamie.
Hi, Jenny Hi, this is zach on for Jamie Thanks for taking my question.
So my first question is on the fourth quarter I think the sandals and the margins are implied sequentially now.
I was just curious if you could talk a little bit about what gives you confidence in the quarter the Red tag.
You could comment on supply chain.
It would be great.
Yes, so I mean.
Looking at it sequentially the third quarter is always our weakest quarter because of all the shutdowns that being said of course, we do have fewer days because of the holidays, but no I think theres a couple of things that we look at first off internally, we reduced our forecasts similarly to the Mrs. We've had the last couple of quarters. So we have tilda pulled that back in terms of our internal forecasts.
The thing I'd add is to remember that when you look at the historical we've added.
$120 million in annual revenue from the acquisition, so that will help get us to the big number that's out there and then the last piece is just around what we've been fighting with the majority of the year I was just in Williams.
For an example, and we had 45 finished cranes sitting in the yard where we're trying to get them on vessels.
Okay customers that come take their machines. So there is that's a combination of battling the the part shortages as well as getting units on the vessels that are going to make the difference, but we've got the backlog. We've got the inventory associates at this stage most of those machines are nearly complete I mean typically for us it was about a month lag.
Anish the machines and then there is a lot of work to be done in terms of final configurations and load testing and those sorts of things, but the manufacturing is pretty.
Pretty well close by the time you in November so.
I think all those things considered you can get a little luck in terms of the supply chain than we normally do in the fourth quarter more so than some of the previous quarters.
That it's doable I agree it's.
It's going to be a tough stretch.
We've got everything in place to do it.
Okay. That's helpful. Thanks. My second question is on 2023 the top line.
Joe I was just wondering if it's fair to assume that 2023 is most likely going to be down given the demand trends but.
To your point.
Even the fleet age and millennial Christians.
Government stimulus demand faster with a lot of tailwind in 2023 as well. So I just wanted to get your thoughts on how to think about how you think about 2023 topline.
We haven't given any guidance in terms of 23, all all I would say is that we really have good backlog and we've been tracking at about 150, a month in terms of orders and then a little bit stronger than that in October so.
I don't think that it will necessarily be down, but again, we haven't rolled out any guidance.
At this stage formerly.
But again I think.
There are some positives out there two assuming we don't have some deep down recession.
Okay. Thank you.
Your next question comes from the line of Seth Weber with Wells Fargo Securities. Your line is now open good.
Good morning, Sam.
Hey, guys good morning.
I wanted to ask about the backlog in price cost.
You feel like that you've largely worked through.
Lower priced backlog at this point or do you think thats, a fourth quarter event kind of.
Big push here in the fourth quarter, and then just how youre handling.
<unk> for orders that you're taking for 2023.
Yes, so we haven't worked through it yet in the third quarter is probably an impact of $10 million to $12 million.
Which is better than what we sort of indicated on the last quarter.
Realistically, it's probably not until the second half of 2023 before we really get through all of that out of our backlog and that being said it's still.
Assuming that theres not more inflation than right now I'd say, we're our biggest concerns around wage increases medical increases I mean, theres a lot of.
Downstream increases that are starting to come through even though commodity prices are tempered so.
I would say second half of 'twenty three.
Okay.
You are writing contract. When you are right. When you are taking orders for next year that you have firm pricing or is there some sort of provisional pricing or yes.
We don't use surcharges, but we do have provisional pricing and we've limited.
The lead time in terms of which would take an order. So we firm it up as we get within three basically six months I guess.
It's six months.
And when.
When you look at.
Our pricing like Eric said, it is provisional pricing, so anything thats in our backlog is fixed price.
Yes, so it doesn't move from there.
Provisional to backlog until it actually gets locked in so.
The biggest advantage there just given our dealers the visibility that they got union units on the order board without nailing down the price just yet.
Got it okay.
Helpful. Thank you and then just on the the aftermarket business is there any.
Swag for how we should think about how you guys are thinking about that.
And that business over time is that in your mind sort of a mid single digit grower.
On the aftermarket side, just going forward, yes, I mean thats licenses.
Next just said as we got the acquisitions added swing the numbers pretty heavily and enhanced so far this year and so I mean, it is heavily acquisition driven but we've been slowly investing and getting more service tax we've added a little bit more population. So I think.
That's probably a fair number that youre looking at there.
But it's something that we're constantly talking about looking forward in terms of how do we keep them number growing to get to our end all beyond the goal because you can.
You can see that a lot of our investment has been in that in that area with the rental fleet. So.
Expectation is that the ticket size.
<unk> and.
Incremental growth in that area.
Got it okay. Thank you very much guys I appreciate it.
Thanks Seth.
Okay.
Your next question comes from the line of Hammerle Elliot.
Stifel. Your line is now open.
Good morning, Dan morning, guys.
Good morning, everybody. Thank you guys for taking the question.
I apologize I got on a little bit late but.
Sounded like October was better from an order standpoint curious to hear a little bit more about some of the success you guys had a bomber with the 12 cranes and maybe.
How do we think about orders coming out of the show from that.
Yes, So first thing I would say, it's our first bomber and the fall and then it lines up with our winter campaign and some of the other normal trends we have seen.
We had different than normal I mean normally we project that we're going to be in that sort of $50 to $75 million range.
It's always hard to say what comes out of bundle because all the other activities that are happening either before or after.
When we looked at October we've been tracking at $150 million of orders each month for the last eight or nine months in October we were just over $200 million. So I think thats a good sign that we've seen some of that come through.
For the fourth quarter orders should be north of 500 million. So I think that's all.
Pretty good sign of it was a good bomber.
The dialogue was excellent a lot of good activity a lot of discussions I mean, theres a lot of uncertainty, especially with the price increases and the higher interest rates and some of the things are going on Europe , but I mean, if you look at really the conversations that will be enhanced folks are optimistic. So we just we need to get through some of these geopolitical issues or at least find some.
More certainty I think it would be real positive for us.
And all of.
The North American market, you talked about kind of stable private public investment you've also done a lot to change the distribution how do you go into market.
How much of the improvement there do you think is that strategy to be closer to the customer.
Versus.
People trying to add fleet, just curious kind of what some of the dynamics are here in North America.
I don't want to say that the dynamics have changed much even with the acquisitions relative to sort of order trends I mean, it's still the struggle of.
Lead times dealers getting on the build schedule and then managing that relative to the to the price increases. So I wouldn't say that there's been too much of an effect in terms of just general order dynamics.
Brian you were using.
I think we do have about $90 million of networking capital on our balance sheet related to the acquisitions at the end of September . So there is a delay just based on the nature of the distribution business versus selling to our dealers. So theres a little bit of that that plays into timing of sales but.
I don't think it changes anything other than that.
Great guys. Thanks for the color and best of luck.
Thank you Stanley.
Your next question comes from the line of Tami Zakaria with Jpmorgan.
Morning, Jamie.
Right. Good morning, Thank you so much.
I may have missed it I apologize if I'm asking the same question again, but.
I think last quarter you said.
Expected about.
Yeah.
Sure.
Manufacturing cost headwind for the year has that view changed.
We exited the third quarter.
No I mean, the view Hasnt changed.
Asps have come down.
Yes, no the views the view of that hasn't changed I mean, it was lower in the third quarter, but we also had lower shipments in the third quarter and lower seat so but I would tell you that number is probably a reasonable number for the full year.
The $60 million was the inflation impact not just the manufacturing.
Yes.
Got it okay.
And then Jeff just going back to the third quarter top line.
And the second quarter I think you said.
Shipment missed by about $40 million.
And then in the first quarter it was 35 million.
Did you quantify how much of <unk> shipments.
The fourth quarter and and what gives me the confidence that you can.
We'll achieve the low end of the EBITDA guide for the year.
And then does that.
It seemed like you had sort of catch up on all the missed shipments in the fourth quarter and we get some sort of normalized basin, how should we basically think about achieving.
Achieving the low end of EBITDA guidance.
Yes, so I mean, we missed we pushed and that's against internal forecasts $45 million from the third to the fourth in terms of our forecast I mean, we had an even bigger number of expected in the fourth quarter.
We face the same challenges that everybody else does that all your other calls if everyone's we'd get a couple of parts to go our way in vessels Galloway, we can hit it we've got the inventory.
When I say inventory I mean, no empty chassis I mean nearly completed machines.
They are waiting for vessels so.
This is the ongoing challenge we've had now I would say if you look back at our fourth quarter of last year with a similar situation, where we were pretty conservative at the analyst meeting and then we actually beat the numbers that we had projected down too.
<unk> is normally go our way as everyone's trying to get all their shipments out in the fourth quarter. So I think we're in a position as long as vessels keep going whether it's decent on the north sea.
And parts and.
Parts come in even I would say that the current level, which hasnt been great. So I think that's a long way of saying we got a lot of machines that are nearly completed whether it be with our finished goods.
And we have adjusted our internal.
Forecast down and that's reflected in the guide to the low end of the guidance.
We want to be as accurate as possible to not overstate the number.
Thanks, and as a follow up can you give us more color on how utilization rates trended in the quarter based on what Youre hearing from your customers. Thanks.
Okay.
It would be that the grand Prairie as projects are southern come off.
Good morning.
Okay.