Q3 2023 The Manitowoc Co Inc Earnings Call
Hello, and welcome to the Manitowoc Company third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We would like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question again press Star one.
I'll now turn the conference over to Ion Warner. Please go ahead.
Good morning, everyone and welcome to the Manitowoc Conference call to review the company's third quarter 2023 financial performance and business update as outlined in last evening's press release.
Today, I'm joined by Aaron Ravenscroft, President and Chief Executive Officer, and Brian Regan Executive Vice President and Chief Financial Officer.
Our call 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 ask that you limit your questions to one and a follow up and return to the queue to ensure everyone has an opportunity.
Fair question.
Let's move to slide two on 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.
However, actual results could differ materially from any implied or actual projections due to one or more of the factors. Among others described in the company's latest SEC filings.
The Manitowoc company does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information future events or other circumstances and with that I will now turn the call over to Eric.
Thank you Ian and good morning, everyone. Please turn to slide three.
Overall I was very pleased with our team's execution during the third quarter. It is typically the most challenging period of the year for our operations in 2023 was no different.
Though part shortages in vessel delays continued to plague us sales for the quarter were $521 million and our adjusted EBITDA was $33 million or six 4% of sales.
Non new machine sales increased 21% year over year to $155 million. Please turn to slide four.
Manitowoc continues to transition from a product driven company to a services oriented business I'd like to highlight a few wins during the third quarter that demonstrate the changing business model under our cranesbill 50 strategy.
To start we recently won an order for Maxim Crane works, the largest crane rental house in North America to rebuild 14, Manitowoc $22 50 crawler cranes.
First two cranes arrived at our facilities in September this.
This multiyear project brings real value to this important customer by lengthening the productive life of their assets.
A key to winning this work was the close collaboration between our <unk> and Manitowoc and aftermarket teams to align the cost and pricing of parts and labor for an acceptable and the end margin to meet the customers' expectations.
This is an excellent example of the synergies we continue to realize from our acquisitions.
A big Thank you to our teams, leading the project and to Maxim for their business.
On the back of this win we recently expanded our <unk> footprint with a new branch in South Carolina and.
In addition to providing more capacity for re manufacturing work. This location will represent our proton and national Crane boom truck product families.
This new this new facility brings our combined <unk> and Aspen footprint to 18 branch locations.
Next in Latin America, we opened a new facility in Lima, Peru. This branch will serve Peru is growing mining industry with local parts warehouse for faster delivery combined with a team of service technicians.
Including this new facility Manitowoc now has five locations throughout Latin America.
Moving to the other side of the world year to date, we've delivered 22 used powertrains to Turkey, Azerbaijan and Georgia.
Since the humanitarian crisis unfolded in Turkey. After the February earthquake Carina, our rugby regional sales manager has worked hard to support the expedited reconstruction efforts in the region.
And I have set a great example of cross regional leadership locating several used cranes from Asia to help meet the short lead time demand in Turkey.
As the same goes for my hands, you Lemons, you make lemonade the crisis in Ukraine forced a complicated exit from our Russian business in 2020 to.
We enjoyed a leading market position there for many years and had some very talented long tenured team members at.
At the time, we get to leave our faith and relocated several of our key team members from Russia to Dubai location.
We didn't need the extra staff, but we wanted to retain as many people as possible.
Sales manager Sergei <unk> was one of those team members since has moved to Dubai. He has reinvigorated our business activity in several countries in Georgia by executing our trains plus 50 strategy and introducing us tower Crane sales.
While they're addressing lead time issues of finding the right train for the project our team in the Middle East has done a great job of using all of their resources to serve our customers.
Well done Carina and Sergei.
<unk> hundred 50 is taking hold in every corner of Manitowoc. After 120 years as a product company I'm extremely proud of how our team is making the transition to become a services oriented business.
Please turn to slide five.
If claims for safety is our engine for growth the Manitowoc way is our fuel.
As I mentioned in recent quarters demand for tower cranes are softening in Europe, while overall business in the middle East is booming.
At our <unk>, Italy factory, we manufacture self erecting tower cranes and rough terrain mobile cranes during the third quarter, we expanded our rough terrain manufacturing footprint to help us serve the growing middle east market, we used lean techniques throughout this process and redeployed our operations team members to optimize the production of mobile cranes, while mitigating the impacts of the powertrain.
Market declines on our local workforce.
Led by Diego Marabouts other transformation was completed in August during the summer shutdown I'd like to congratulate this group on great teamwork.
Last month during my visit to Williams hub in Germany facility I had the opportunity to see how the team increased our capacity on the booth paint line by 70%.
With a little capital a little creativity, and some elbow grease the team separated the return line to make shop blast and paint two distinct lines. They improve the unloading of parks renewed the control system and implemented an ultra solid paint formula for a great Hello cylinders a year ago. This was our number one bottleneck in the factory not anymore.
Good <unk> to the Williams Houghton team.
Please move to slide six.
Turning to my market update the positive trend in the United States continued during the third quarter. A few key dealers placed initial orders for 2024 to guarantee their build slots rental rates are holding up and utilization remains high a crane rental houses.
Finally dealer inventories remain at sufficient levels to support the current retail pull through.
Similar to last quarter, we remain cautious in the short term about the U S market, we still have a lot of cranes to deliver to our dealers before year end, which could lead to excess inventory in the channel if the economy pulls back never.
Nevertheless, we maintain a positive long term outlook on the U S market at.
At this point, we're still waiting for the infrastructure and chip sales to come to fruition.
Europe, However remains a different story as previously discussed inflation and the subsequent increases in interest rates has significantly curb activity in the residential construction market, which has negatively impacted tower crane demand power.
Powertrain machine orders for the quarter were down 55% year over year.
Please move to slide seven.
As of August housing permits were down 37% in France, and 34% in Germany year over year.
I recently visited several French dealers and customers and their sentiment confirmed the market statistics.
Utilization is down rental rates have dropped and everyone is waiting for the government to intervene.
At the moment rental math is upside down it's tough for a rental house to justify growing the rental fleet when rental rates are declining in interest rates and crane prices have risen.
The majority of the demand that we see is from customers that are proactively managing their long term fleet renewal strategy. Many fleets on average are over 15 years old and the owners cannot afford to let the fleet's age much longer I expect this environment to continue into 2024.
Please move to slide eight.
Fortunately the European mobile cranes business is not as impacted by the soft residential construction market as tower cranes.
Although there are plenty of headwinds in the mobile cranes market the impact varies throughout Europe.
There are many the single largest all terrain market in the EU has slowed in the Scandinavian countries are being adversely impacted by FX and.
In addition, in France, and Benelux showed the first signs of weakness in the quarter demand in the U K, Italy, and Iberia continue to hold up.
As I stated last quarter, our efforts to improve quality grow our service and launch new products have helped buoy our business.
The upcoming launch of two new for OXXO altering cranes will help us maintain our momentum.
In the Middle East in contrast to Europe demand continues to grow at a rapid pace, our orders increased 57% year over year during the quarter, Saudi Arabia sweeping efforts to modernize have lifted the entire region.
Lastly, the Asia Pacific market remained mix, but slow overall, China remains very soft and the sentiment is starting to spread outside of the country. Moreover, the purchasing behaviors for cranes in the region are pretty similar to those in Europe. Generally speaking powertrains are clearly in a down cycle, while mobile cranes and appear to be holding up.
On the positive side the Indian market continues to be strong in South Korea. There has been some progress mainly with mobile cranes and the Samsung's next Big project is moving forward, which is good news for the powertrain business.
And finally, Australia remains a bright spot with that I will turn the call over to Brian.
Thanks, Aaron and good morning, everyone. Please move to slide nine.
Let's start with orders during the quarter, we had orders of $531 million, an increase of 13% from a year ago exceeding our expectations.
Year over year increase was driven by higher orders in our Europe and EMEA segments in the Americas segment orders were slightly lower year over year. The increase in <unk> was primarily driven by mobile crane orders, which more than offset the significant decline in tower orders.
EMEA App as expected demand in Saudi continues to drive the order increase foreign currency favorably impacted orders by $14 million.
Our September 30 backlog was flat sequentially at $1 $28 million and increased 9% year over year. The makeup of our backlog is consistent with the second quarter, it's predominantly in the Americas.
Net sales in the third quarter were $521 million and increased 15% from a year ago.
The year over year increase was driven by pricing in response to inflationary pressures higher crane shipments and higher non new machine sales as a result of executing on our cranes plus 50 strategy non.
Non new machine sales increased 21% year over year to $155 million from a trailing 12 month perspective, non new machine sales exceeded $600 million for the first time, reflecting great progress by the team on cranes plus 50.
Net sales were favorably impacted by $15 million from changes in foreign currency exchange rates.
SG&A expenses were $12 million higher year over year at $77 million, primarily due to higher employee related costs.
Foreign currency exchange rates contributed $2 million to the year over year increase.
As a percentage of sales <unk>.
G&A expenses were 15% relatively flat year over year.
Our adjusted EBITDA for the quarter was $33 million, an increase of $9 million or 39% year over year.
Adjusted EBITDA margin was six 4% an increase of 110 basis points over the prior year.
As a reminder, the third quarter is generally our slowest quarter due to the summer shutdowns in Europe.
Flow through on the year over year incremental sales was 14%.
This illustrates the impact of the slower tower Crane business.
Third quarter, depreciation and amortization of $14 million decreased $1 million compared to the prior year.
Our provision for income taxes in the quarter after adjusting for the favorable settlement of a tax matter was $3 million or 29% over adjusted pre tax 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.
Addictions.
Our adjusted EPS in the quarter was 22 and.
An increase of 12 from the prior year.
Please move to slide 10.
Our networking capital increased year over year by $57 million or $51 million on a currency neutral basis.
This increase was driven by inflation and supply chain and logistics constraints and higher backlog in the Americas as.
As a percentage of trailing 12 month sales net working capital was 22% slightly favorable year over year.
On our last call, we targeted a $75 million reduction to our inventory balance by the end of the year during the quarter. We made some progress to this goal we are still committed to achieving an additional $70 million of inventory reduction by the end of the year.
Moving to cash flows we generated $26 million of cash from operating activities in the quarter capital expenditures were $23 million of which $15 million was for the rental fleet.
As a result, our free cash flows in the quarter were $3 million.
Due to the timing of receivables, we are likely to be at the low end of our free cash flow range, which is 30% to $50 million.
We ended the quarter with a cash balance of $40 million, which was an increase of $14 million sequentially.
Total outstanding borrowings under our ABL decreased $12 million, resulting in $70 million outstanding at quarter end.
Other debt increased $24 million, bringing our total liquidity to $256 million.
Due to the continued strong adjusted EBITDA, our net leverage ratio was one nine times at the end of the quarter well under our target of three times.
In October our board of directors approved a $35 million share repurchase program, which will be primarily used to buy back our share creep, replacing the prior authorization. Please.
Please turn to slide 11.
Given the strong performance in the quarter, we are updating our full year guidance as follows net sales to $1 75 billion to two to two 5 billion.
And adjusted EBITDA of $160 million to $180 million.
With that I'll now turn the call back to Aaron.
Thank you Brian Please turn to slide 12.
Although we continue to manage the economic ripples created by the Covid crisis Manitowoc has made great strides on our strategy throughout this period.
We have a lot of work to do to close out 2023, but we are well positioned to deliver a strong performance for the year.
For 2024, its still too early to provide any concrete guidance, but as I read the terra cards today, our business in the U S should be supported by our strong backlog and increased aftermarket focus.
Europe is going to be tough as we have very difficult comparisons in the first half.
The middle East continues to strengthen although it's still a smaller part of our business in Asia Pacific will be flattish at best.
Overall, I believe that our 2024 results will be determined by a resilience of the U S economy, and a contentious election year and B how quickly the EU governments react to address the escalating housing crisis.
Long term I remain optimistic with the Crane Renaissance is on the horizon.
First and foremost the majority of large rental fleets around the world are getting long in the tooth.
Many of them are 15 years old on average this simply isn't sustainable.
For example, there is no doubt that a crawler crane can work 30 to 40 years, but most of those late years are spent on projects, where the OE demand is quite minimal.
A small bridge project in the middle of Wisconsin.
These old trains are not accepted a new stadium or semiconductor projects.
Several drivers will contribute to the much needed fleet refresh, including Saudi vision 2030 major programs in Europe that are aimed at overhauling their energy strategy, such as offshore wind farms and nuclear power plants in the U S infrastructure and chips Bill and.
In addition for electrification in the U S to succeed production of electricity needs to increase by some threefold with massive investments in distribution.
Please move to slide 13.
To reflect this view combined with the learnings that we've taken from our recent acquisitions, we are updating our long term aspirations.
We are increasing our sales target from $2 5 billion to $3 billion, we expect the split between organic growth and acquisitions to be more or less equal.
We are also raising our non new machine sales target from 675 million to $1 billion.
Although we cannot time them, we have assumed a few acquisitions.
In terms of profitability, we are increasing our adjusted EBITDA margin target from 10% to 12%.
If you recall, we weren't far off the 10% Mark in 2019, and when we look out over the next five years, we expect to see the benefits of additional volume and improved mix as we grow our non new machine sales.
In closing to borrow a line from Berkshire Hathaway's 1968 annual shareholders letter our goal is to obtain a reasonably stable and substantial level of earnings power commensurate with the capital employed in the business. We've come a long way since 2016 and Im looking forward to seeing what our team can achieve over the next several years.
With that operator, please open the line for questions.
Thank you if you ask a question. Please press star one on your telephone keypad, if you wish to remove yourself from Q simply press Star One again one moment. Please for your first question.
Your first question comes from the line of Stanley Elliott of Stifel. Your line is open.
Good morning, Stanley and Stanley <unk>, Hey, good morning, everybody. Thank you all for the question.
I guess for starters, it sounds like the middle East business.
It sounded very positive I was curious if youre seeing any sort of an impact or any sort of discussion with with kind of the war that's going on over there.
As it relates to your business.
Yeah, I mean, I think everyone's talking about it but we haven't seen it impact the business.
Israel has a long way from Saudi and the Saudis continued execute Saudi vision 2030, so from a project standpoint, everything is still very active I would say no impact.
And I guess.
Switch to the aspirational targets, so raising on the non machine piece.
That's a pretty good size jump I mean is it that the re manufacturing pieces going better.
Is it better parts better service just more of an expanded footprint I'd love to see kind of what are some of the drivers are to get you from that $675 billion to $1 billion.
Yes, I mean, the core of it is always around getting more locations and getting more service techs because that really is what drives the rest of the business.
The component of that is we have to continue to get better at the used business I think we had a great year in terms of us this year.
Given the fact that we've had so much increases in prices that business has been hot but theres still a lot more activity for us doing more trade ins coming out of Europe to move those users in the United States. There's a lot more activity like that that we need to continue to get better at.
There is no doubt that we'll need some acquisitions to get to that number as well.
And then lastly for me kind of as it relates to the updated guide in the fourth quarter.
Is there anything that we should be aware of on a year over year basis.
<unk> I mean, it would seem like that the business with the order rate and the non machine sales would be tracking at least at the high end of the revenue guidance, if not if not better than that.
EBITDA pieces.
Then.
Tracking quite well too so just curious any color that.
We should be aware of on that.
Yes, theres sort of three components when we look at it versus the powertrain business. If you compare year over year, we're up $15 million below EBITDA and when the tower business.
Our first big headwind for us or so then we have mix and we've been cautious around the vessel issues a lot of them.
Range, we've got going on vessels in the North sea and its always hard to predict how late December is going to play out.
Thank you. Your next question comes from the line of Jerry Revich of Goldman Sachs. Your line is open.
Hey.
Hey, this is clay on for Jamie.
Quick question.
How are the lead times, how are lead times for new orders as we've seen some normalization in the supply chain.
Lead times, they are still extended.
It just depends product to product I would say in those areas powertrain business, where demand has softened up where lead times are back to normal, but we still have some product lines with lead times are pretty strong.
Thanks.
Quick follow up can you give some quick color on what youre seeing in the M&A pipeline. It sounds like Thats, a bigger portion of things to come in in the future.
We're active and we have a full funnel, but you can never predict timing on deals so I'd say it's.
No real change for us, we just keep working at it.
Thank you and again, if you would like to ask a question press star and the number one on your telephone keypad. Your next question comes from the line of.
Mig <unk> of Baird. Your line is open.
Good morning Mig.
Yes, good morning. Thanks.
Congrats on a good quarter here.
I want to go to Stan Lee's question from a moment ago.
On the guidance.
I mean.
I appreciate the fact that you have to have a little bit of room to maneuver, but.
$20 million range on.
Just the fourth quarter left on EBITDA I mean, you can drive a truck through that.
Can you maybe.
Help us put a finer point on that.
Yes.
As you know mix is a huge component for us so $20 million, we narrowed it down.
<unk> raised the bottom end 10 million.
This quarter.
So yes, I think we feel comfortable that the $20 million is a reasonable range on the $50 million of revenue spread.
Based on the mix changes and and as Aaron pointed out.
There's still a lot of uncertainty around the vessels going into the fourth quarter. So no.
Contributing to some of the.
Concern or guiding to the low end on our on our free cash flow numbers unless I mean, we essentially have no backlog in current earnings.
Hand them out.
And that contributes.
One of our highest margin businesses, especially when you consider the one.
Underutilization is happening.
From a from a price cost standpoint or.
Really all the other items that you guys have to manage on the on the cost side. How are you looking at what's been happening here through the year is that.
Positive because I'm presuming as positive price cost gap, starting to narrow or was that a factor into Q4.
Whereas adjustment.
Okay.
Yes, I would say that has no impact in the fourth quarter, we might comment on cost price in.
Generally normalize.
Interesting because sort of the conversations have shifted now the conversations are more about the.
Dollar is so strong and we have competitors coming from areas, where they are we currency like the yen versus housing businesses build supercomputing because demand low.
Aggressive Chinese competition in place like Middle East So as I say that I think we're past that now for the most part.
Back to having more normal conversations around how do we how do we get prices.
Your next question comes from the line of Tami Zakaria of Jpmorgan. Your line is open.
Good morning, Jamie.
Hi, Good morning. This is Kyle on for Tom. Thank you for taking our questions.
Your first question can you provide a little bit more color on your backlog.
And maybe if you could talk about how they're trending by region or by product.
As we mentioned the majority of our backlog is in the U S.
So that hasnt changed from last quarter, and we don't give.
Backlog by product by region.
Okay got it. Thank you and then just a quick follow up.
What are the key areas, where you continually even most cost completion.
Okay.
Most cost inflation I mean labor is still a.
Challenging are concerned, especially with some of the news you've seen in the United States.
So we see it through a lot of the fabricated parts, where our suppliers are adding value.
Labour plays into that so that's still.
But the biggest piece I think the other thing I would add a lot of folks look at the normal steel pricing on Bloomberg and say hey, its way down the biggest challenge that we have is a lot of our steel is really high end high strength steel that comes from a couple of specialty suppliers in Europe and right now they've got a lot of demand because everyone building military equipment.
Have not seen those prices go down the way you have seen.
Yoga.
Thank you we have a follow up question from the line of Mcdole Gary of Baird. Your line is open.
Well I've got to say you guys are very tight on enforcing the one question and one follow up rule. So I got back in the queue, because I had a couple of more thanks for that.
Okay.
So given.
Given the way you're talking about the fourth quarter guide and an implied margin right and I. Appreciate the fact that the tower cranes backlog.
Is extremely low as you said.
What's the implication here for margin in the front half of 'twenty four right because the comparisons it would strike me as being relatively difficult versus versus 2023.
Yes.
It's a very fair comment.
Our concern about 'twenty four is that the comps in the first half related to towers and then how does the U S holdup.
Yes.
Where do we end the year with our with our dealer inventory in.
In particular on the on the operating side, but yes.
Exactly are concerned.
Okay well.
I appreciate that but I mean is the fourth quarter implied margins sort of indicative of the kind of run rate that we should be thinking for the front half of 'twenty four.
<unk> remains similar.
Normally that's fair.
And I'd also add we're.
Right in the middle of the budget process is not possible for us really give you all an answer that you're looking for.
Thanks.
Okay.
And then I guess my final question.
Is on.
Kind of a general question on pricing.
You already touched a little bit on what's happening from an FX standpoint, that's something that we've been wondering about quite a bit given the weakness in the yen.
As you look at model year 2020 for cranes.
Is there.
Some sort of color that you can provide as to how you see pricing. Thank you.
In every year.
Normally we're going after a couple of points in pricing and I don't think this should be different I do think though when you look at where the yen is it on in Opus 150 to 151 the day NASA.
<unk> advantage for our competition so.
So it's a tough fight.
And the euro bounced around as well so.
We do buy from ourselves from from our plants in Europe to the U S. But.
<unk>.
So.
No I think.
We've got competitors, though that are shipping product that they're building in Europe.
We build in the U S. So it's the euro as well as the.
That's playing into that.
There are no further questions at this time I will now turn the call over to ion Warner for closing remarks.
Before we conclude today's call. Please note that a replay of our third quarter 2023 conference call will be available later this morning by accessing the Investor Relations section of our website at <unk> 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.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
Yes.