Q2 2019 Earnings Call
Today's conference is being recorded.
And at this time for opening remarks, and introductions I'd like to turn the call over to Mr. Ion Warner Vice President marketing and Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone and welcome to the Manitowoc Conference call to review the company's second quarter 2019 performance and 2019 full year business outlook.
As outlined in last evening's press release.
With me today are Barry Pennypacker, President and Chief Executive Officer, and David Antolik, Senior 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 weren't reserve reserve time for questions and answers after our prepared remarks.
I would like to request that you limit your questions to one and a follow up and return to the queue to ensure everyone has an opportunity to ask their questions.
Please turn to slide two before we begin please note our safe Harbor statement in the materials 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.
Oh differ materially from any implied or actual projections due to one or more of the factors among others as 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.
And with that I will now turn the call would you Barry.
Thanks, I on and welcome everyone.
Our sales growth in the quarter was primarily driven by the North American market due to increased shipments into the commercial construction utility and energy end markets and we benefited from improved pricing.
Our aftermarket business in the Americas remained very strong and contributed to the year over year sales growth.
This quarter marks our ninth consecutive quarter of year over year, adjusted EBITDA margin improvement.
These results were accomplished through strong operational performance and our continued implementation of the Manitowoc way.
We are however, observing a broader softness in global markets as trade disputes and other macro economic factors continue to create uncertainty. Additionally, us and European construction markets are slowing and U.S. rig counts have declined.
All these factors are negatively impacting customer sentiment.
Despite the headwinds we remain steadfast in our efforts to manage what we can control.
Strong cost containment ongoing kaizens to improve our productivity new product development and a growing effort to get closer to our customers in order to increase our aftermarket share.
In spite of these challenging times, we remain committed to the principles of the Manitowoc way to continually improve our financial results.
I'll now turn the call over to David to walk us through the financial results and updated guidance.
Thanks, Barry and good morning, everyone, let's move to slide three.
Net sales were $505 million for the quarter, which represented a $9 million or 2% increase.
On a currency adjusted basis net sales for the quarter increased $23 million were 5% year over year. The increase was driven by higher shipments in North America, partly offset by lower revenue in the middle East.
Our non-GAAP adjusted EBITDA in the quarter was $53 million versus $38 million in the prior year, a 42% increase.
The current quarter adjusted EBITDA includes a $9 million benefit associated with the settlement of a legal matter.
This amount represents a recovery of administrative expenses that were recorded in previous periods as part of adjusted EBITDA.
In addition, global pricing initiatives favorable mix and cost reductions all contributed to the strong second quarter adjusted EBITDA performance.
GAAP net income in the quarter was $46 million or one dollar and 29 cents per diluted share as compared to $10 million or 27 cents per diluted share in the prior year.
Second quarter net income included a 25 million dollar benefit from the settlement of a legal matter.
I, just mentioned $9 million or 26 cents per share was recorded as a benefit in administrative expenses.
The remaining $16 million or 43 cents per share was recorded in other income.
In addition, second quarter 2019, net income included restructuring expenses of $3 million predominantly related to head count reductions in India and Europe .
Adjusting for the $16 million settlement recorded in other income.
Restructuring expenses and the related tax impact non-GAAP adjusted net income for the quarter was $34 million or 94 cents per diluted share an improvement of $20 million or 54 cents per diluted share as compared to the second quarter of 2018.
Cash flows provided by operating activities on a GAAP basis were $32 million for the quarter. The generation of cash in the quarter was driven by strong net income and the receipt of funds from the legal matter previously discussed partially offset by investments in working capital primarily related to the timing of shipments in the quarter and increased inventory levels. We have several initiatives underway to rightsize, our global inventories with current demand Barry will comment on these initiative shortly.
As of June Thirtyth, our total liquidity was $340 million with no borrowings outstanding on our ABL revolver. The net debt to adjusted EBITDA ratio was two times, our capacity and low net debt ratio provides us with ample capital to execute on our growth strategies, while meeting ongoing operational needs.
As we announced last quarter, our board approved a $30 million share repurchase program during the second quarter, we repurchased approximately 473000 shares for $7.4 million.
Our second quarter orders of $372 million Rep resulted in a 14% year over year decline, 12% on a on a currency adjusted basis.
We continue to see our order rates slow, especially in our mature markets, reflecting our customers' cautious approach to uncertain market conditions.
Turning to slide four we have updated our 2019 full year guidance to reflect our first half results and current market conditions as follows.
Revenue of approximately 1.8 billion to $1.92 billion.
Adjusted EBITDA of approximately 140 million to $160 million depreciation of approximately 35 million to $37 million restructuring expenses of approximately $10 million to $12 million.
Interest expense of approximately 29% to $33 million, excluding debt refinancing costs.
Income tax expense of approximately $12 million to $16 million, excluding discrete items and capital expenditures of approximately $35 million.
With that I will now turn the call back to Barry.
Thank you David.
First of all I'd like to thank our team for delivering a very strong first half of the year.
Moving forward, we do have some headwinds.
Orders have started to temper and the second half mix is not as favorable as the first half.
If I had one disappointment in the first half of the year. It was the growth of our working capital, particularly our inventory.
We have three major initiatives in place to reach our year end targets for inventory.
Number one we are aggressively managing our use trade in stock.
That is a cumulated as a result of competitive dynamics in the current market.
Number two.
We are executing our new product introductions that begin to ship in the second half of the year, which will have a dramatic effect on our current inventory levels.
Number three we are adjusting our build schedules and our supply chain to match current market conditions.
As we noted on our last quarter call.
Our new capital structure unlocks exciting new options for long term profitable growth.
To reach our stated goal of becoming the worlds, leading Crane company, we now have the ability and flexibility to pursue acquisitions to grow manitowoc in a number of ways.
As I mentioned last quarter, the acquisition targets need to provide us with the ability to continue to expand our margins, while providing stable recurring revenue streams.
We continue to evaluate opportunities and will remain resolute in our disciplined approach to deploying our capital.
As far as our outlook is concerned while current market conditions and geopolitical activities remain in the forefront of all the thinking we remain resolute in executing on our four strategic initiatives being growth.
Margin expansion innovation and velocity.
I believe over the long term that our future remains bright and we may remain committed to expanding our margins to 10%.
With that Greg Please open up the line for questions.
And ladies and gentlemen, if you do have any questions. Please signal by pressing star one on your telephone keypad.
If you just make sure that your mute function is turned off to allow us to receive that signal.
Once again Thats star one for questions and we'll pause for just a quick moment.
And first from Jefferies, We have Stephen Volkmann.
Hi, good morning, guys.
Good morning, Steve.
Hey, Barry can you just say a little bit more about what you're seeing relative to sort of end markets and we're obviously seeing was fairly broadly, but im curious specifically if there's.
Certain segments that that are kind of more concerning than others or if you actually have any growth still anywhere just any color like that would be great.
Yes, I mean, you know there are a lot of factors that are affecting.
The things that our customer that affect our customers buying decisions.
We continue to hear people thinking about the election.
We hear a lot of talk.
About China any affect China's devaluation of the one is having we hear about tariffs we hear about.
Japan and Korea.
Brexit keeps raising its ugly head so you know.
All of those factors when you put them into a global economy.
Really it's slowing showing signs of slowness and lack of confidence just about everywhere around the globe, but I will say that if you look at our order rates in the quarter Europe by far decelerated the most.
Me at the Middle East.
Continues to.
Virtually be non existant. Although you know there are a lot of programs that are continuing to be discussed.
With within Asia, Pac, where we're doing very well and continue to see growth.
And.
No not only in China, but in places like Vietnam as well as Australia.
Okay. That's helpful. And then just on your build schedules that you said you have adjusted can you just give us a sense of those adjustments and.
In sort of the quantity as we think about the exiting the year.
Yes, so what we do at the beginning of the year for instance, where we're manufacturing our our Eighty's in Germany, we pick a number and say this is the number we are going to manufacture for the year based on our plan and then we get the supply chain geared up we get the plant geared up we get the people geared up and then if we have to take 20 or 30 out of that plan by.
Looking at current.
Market conditions halfway through the year.
We have to we have to adjust the supply chain first to ensure that.
So their shipments to us match, our current needs and the plant, but we also have to adjust the amount of people that we have in the plants operating the machines and doing the assembly.
In order to ensure that our inventory targets for year end are met.
Right. Okay, maybe just can you give us a sense of how much below deliveries you'll be producing.
Just we don't and no we don't we do not intend to.
Built inventory, so I would say that our build rate exiting the year will match, our current levels of demand.
Okay alright, thank you.
You're very welcome.
And moving on we have Jamie Cook with credit Suisse.
Morning, Jamie Hi, Good morning, Hey, good morning, I guess two questions.
One year, how how we should think about the order trajectory for the second half the year just given the weakness that we're seeing.
So if you could talk to that to sort of over the next few quarters and whether we should expect normal seasonality I guess would be my first question and then you also you did mention.
Obviously wanting to reduce inventory.
Not sure if I missed this but can you tell us what the actual target is to reduce inventory by year end. Thank you.
Yeah, So Jamie with regard to the first question seasonality Wise Q4, we want to winter campaign in towers. So we would anticipate normal seasonality, where Q3 orders are going to be.
Lower in Q4 orders will pick up because of the seasonality as well.
With regard to to the inventories.
We don't give particular targets, we kind of look at our inventory turns and internally. We we have internal metrics that you know.
Get better on a year over year basis.
There is no doubt that as Barry mentioned, we will be adjusting our build schedule, which will also affect what I'll say is our factory overhead absorption in the quarter. So what we want to do is we want to come out and match our inventory levels with what I'll say is the is the projected market conditions going into 2020.
So Jamie we expect to take 80 may and we expect to take $80 million out of inventory between now and the end of year.
Okay. That's very helpful. Thank you I'll get back in queue.
You're welcome.
And moving on we have Jerry Revich with Goldman Sachs.
Hi, Good morning, everyone. This is Deborah Don to Jerry.
Good morning, Mike.
Morning. So you guys have had really strong margin expansion year to date around 300, bips year over year and once you into Q.
And your guidance Embeds, let's say about 150 bips of expansion in Threeq to Fourq you I guess two parts can you kind of speak to whats driven the strong expansion in the first half and then can you give us the puts and takes about what's tempering in the back half in terms of mix and other dynamics you're seeing.
Yeah in the first half I mean, we had very strong execution in our plants and we were also very successful in holding on to the pricing that we put into effect.
In the fourth quarter of last year.
We expect to remain disciplined.
In that approach however, it all depends upon how our rational some of the competition comes whether or not we'll be able to hold that but it's certainly our intention.
To hold that is as time goes on.
With regards to the mix in the first half the second half.
Already.
Described that we have an inventory reduction plan of $80 million part of that inventory reduction plan as I said in my prepared remarks includes a a level of.
Used equipment that.
We've accumulated as a result of doing some deals. According to current market conditions, we have to liquidate that over the course of the second half of the year and as you can imagine.
They used cranes that we take in on trade.
We're not going to get the types of margins that we would normally get from a brand new crane.
You have anything to add David yes, depart from that I'd say the only other item is the seasonality associated with the with the sales that were looking at first half second half as well, but very very had all the highlights that that are the main drivers of why we're seeing the difference in the operating margin percentages.
Got it and then on pricing, obviously been a the right point, particularly in aftermarket.
Based on that and what you guys just step through can you kind of give us an idea of.
Where pricing is strong around the globe and maybe in light of of your comments just now Barry.
Where you are seeing maybe some pressures.
Well pricing you know we felt like in the Americas, we were way behind.
What the value we are providing to the marketplace with our new innovation, new innovations our new products.
For the North American market, a substantial portion of what we have developed over the course of the last two and a half years was designated for this market.
Those being our new Rts being our new truck mounted cranes any investment that we put into our boom truck product line.
All of those.
We expect that if we're listening to our customer and providing them with superior value and superior performance over the competition, then we should be able to get a premium for that and that's our philosophy and as long as we continue to try and innovate the industry, which we're doing I mean, we have plans to introduce.
Five to six new cranes in the second half of the year, we'll start shipping some of the innovative products that will get to the market in the second half of the year. So customers can start to see that.
For instance, we will be shipping for the first time in the second half of the year three acts of 165 to NRT.
That's not been done by us in the past, we've resisted that but our customers have asked us for it and now we'll start shipping in the second half of the year. So.
Where we're focused.
We may remain resolute and.
We're going to try to hold on to as much as we possibly can but I will say that most of the pricing activities that we enjoyed in the first half of the year have been in the Americas.
Understood. Thank you.
You're welcome.
And moving on from JP Morgan, we have Ann Duignan.
Yes, hi.
Maybe you can give us a little bit more color on what you are specifically seeing in new outside the Americas in terms of.
How the quarter ended up versus your commentary that customers are becoming increasingly anxious.
Yes, I think the Americas performed below our expectations in the second half of the quarter from an incoming order standpoint.
Hi can directly attribute that to.
The sentiment that exists out there with all the.
Issues surrounding China and.
Harris and.
Oil prices and.
The effect of the Middle East.
On oil prices in the us.
Theres, just a pause I would say.
Because utilization in the Americas remains very strong.
Rates as far as we can tell our our our remaining.
There.
Cranes are working.
And in a normal cycle, we would expect that in the second half of the year, we see a rebound in that.
But I think you're saying now that just sit here in early August .
We're not in a normal environment when unlikely.
I think they're probably worse today than they were a month or two ago.
I would say from a customer sentiment about pulling the trigger on making investment I agree with you 100% from the underlying market conditions and demand for cranes I don't believe thats degraded at all in the quarter.
Okay. That's helpful and then.
On the used equipment inventory liquidation.
Is there a risk that you will have to take a loss on those sales and if you would they be material or there are so few of them it's not important.
Yes, so and typically on use will have they'll they'll be at lower margins than we enjoy fruit for new products, but I wouldnt, so you're going to have the mix issue that we've talked about.
And the Greens, but you know we market to them. So that it's a market value machine. So no. We don't expect losing money on those used equipment. It's just that we will not enjoy the typical margins that we have and most of that most of our inventory and use it within Europe .
And again Thats currently reflected in our guidance.
Correct.
Okay perfect. Thank you and if I can just one final quick one.
Hey, Barry were protein.
Vocal and pretty bullish on an imminent type acquisition last quarter you. Even described what kind of mix you are lucky par et cetera, et cetera could you just update us on you know are we still looking at something imminent or did something disappeared during the quarter.
I guess when you're doing an acquisition it should be very careful about using the word imminent because theres nothing really that where it is.
Like today right.
And I should have known better to say the word eminent because quite frankly I know it takes a while to.
Negotiates and fully understand.
What the.
Potential acquisition is going to do to your your overall business and the answer to that question is we are actively pursuing multiple targets.
We.
Our negotiating with multiple targets and I am looking so forward to being able to release that press release at some point at the end of the day, saying that we've done our first one.
But I remain resolute and I remain very disciplined and the approach that we're having with regards to capital and where we get the best return is where we will deploy our capital.
Well never call them and until the deal is done and I won't imminent was not a good word I admit that I was a little over aggressive, but you know just to I am.
Yeah.
Well I think Thats, a fair call. So I will leave it there. Thank you.
You're welcome.
And next from RBC capital markets, we have Seth Weber.
Yes.
Hey, guys.
Good morning satellite where you live.
Okay. So just.
Morning.
Out of town.
[laughter].
I'm very sorry are asking that.
Dear.
Okay.
Yeah, we are here, but we're having a very difficult time hearing you guys coming out.
Now I can.
Hi.
Is that better sorry, yes.
Much better. Thank you, okay, sorry about that.
Yeah, sorry, Barry so nice job on the margins in the quarter.
My question is really.
In a scenario where are where revenue is call. It flat to down next year do you think you could still get 100 call. It 100 basis points improvement in EBITDA margin next year.
Absolutely.
You do okay.
And then I guess, you know I notice the the restructuring expense number for this year came down a little bit and I'm just.
Given all the kind of the description that.
Puts and takes on the end markets I'm curious was that just a timing hiccup or.
How are you thinking about.
You know needs to restructure further.
Given given the market dynamics. Thanks.
Yes, so sad.
Our guidance on the restructuring cost has come down because from a cost standpoint, our execution on restructuring has been less costly than we anticipated.
So that benefit is now rolled into the into the guidance.
Okay, but we have there we have not changed anything on our restructuring programs the truck programs around change okay.
Right and it really relates to social programs out because most of this stuff takes place outside the U.S.
Right, Okay, if I could I just slide another one in on the aftermarket growth you guys talked about can you just.
You know size that for us how big of a percentage of the business is it today and kind of how fast is it growing.
Yeah. So I mean, obviously you know we've always been around that 20% category.
I'd say our growth in the aftermarket has been in North America, I'd say, our European and Asia bit Asia Pac business has been.
Flat, however, I think that overall, we've we've been able to increase our margins in the aftermarket products as well.
Okay is it so that's growing I don't know does is it high single to low double digits kind of either in aggregate or is that a fair way to think about it.
Yes, I mean, we you know we we look at it and when a full year because you're gonna have puts and takes with large orders in the parts business, but so we we look at it.
18% to 20% typically in but we are up on a year over year basis.
You know in both in both our margins and in our dollars.
Great. Okay. Thank you very much guys appreciate it.
Thank you welcome.
And ladies and gentlemen, as another quick reminder, that star one to join the queue. If you have any questions.
Next we have Steven Fisher from Us.
Thanks, Good morning, guys.
Can I wanted to talk a little bit more about Europe , what you saw.
Happened in the quarter as it unfolds because it sounded like Bakken may things are pretty good coming out of the bauma.
So kind of where did you see the fall off and maybe if you could talk a little bit about sort of by product category is it more weakness in towers.
All strains would you differentiate between vertical and horizontal construction or what you're seeing there. Thanks.
Yeah, I mean in in Europe , it it really truly boils down to France.
France was extremely strong.
Slow.
Because of.
Just a number of political factors that have that have happened.
We are continuing.
This quarter to monitor that very closely.
But I will say this you know.
Our orders in the quarter for Europe , although they decelerated.
Were in line with our expectations.
And as far as particular categories are concerned.
I will tell you that.
That from a towers perspective.
That continues to be where we.
As expected and maybe a little higher than we expected.
Especially going into the season that we are going into.
With regards to large vacation times.
I will say that I thought mobile was a little light a little softer than what we had expected, particularly with the new products that we introduced at Bauma.
So we have to watch that very closely.
That's helpful. So as you think about sort of the second half of the year in Europe , and you're anticipating that orders would be up year over year down or flat.
Flat to up.
The same in Derby.
And then I guess similarly in North America is there any differentiation that you would make in terms of public sector versus private sector in terms of that.
Now I assume that the hesitation and trigger pulling is more on sort of private markets, but just wondering what you would differentiate there if anything.
Yes, I mean I think.
Our dealer inventory.
It continues to be healthy.
And we're in a good position to capitalize when.
The market conditions.
Become more salient.
So I think we're in we're in pretty good shape in North America, we still have.
Great backlog that we have to execute on in the second half of the year.
But.
We just have to watch very carefully.
Okay. Thanks, a lot.
You're very welcome.
Okay next we have Mig dobre with Baird.
Hello.
Yeah.
Hello.
Maybe if you can hear US you may be on mute were.
We're unable to hear me now.
Yes, now we can hear you.
Oh my goodness.
Alright, great. Good morning, just wanted a little more color on North America. Barry If you would you know how demand has been progressing there through the quarter and up you know what are you hearing from your customers going forward.
Well as I mentioned, you know dealer inventory is healthy and there.
Well positioned.
For.
You know the inevitable.
Confidence coming back.
I think as you look at utilization.
It's extremely high.
And continuing to improve quarter over quarter.
So.
The customers I talked to just say that they have this feeling.
You know in or got that they need to hold off from pulling the trigger until some of these other issues get worked out.
It is I think the unmet the fundamental underlying market conditions, particularly in North America remained very strong for cranes.
Okay. That's helpful.
And then.
Maybe going back to that question that was asked on margin I am.
I'm trying to sort of understand the moving pieces here.
I presume that your input costs are coming down you are talking about good pricing that you're getting.
In a market still.
So on that comment that you are able to Ics you expect to be able to expand margins even in a more lackluster environment.
What are some of the things that.
You can control and that you expect to be doing into next year that could add maybe a little more confidence to us that that margin target margin goal of yours is is achievable if you would.
But what is one of the things that we've really stepped up our effort on and we havent really talked too much about as low country sourcing.
We have we have a dedicated team.
That is.
Is working extremely hard.
To allow us to.
Source things in a much more effective manner than we have in the past.
That continues to provide me.
Great confidence about the future.
Also as I continue to visit all of our plants on a global basis, we still have many many many triggers the pool with regards to the Manitowoc way to improve our overall throughput and our overall production capabilities that remains.
No confidence of mine.
And I'm sure David has a few more things he'd like debt yeah. So Mig I think generally speaking.
Barry hit the big one on on the on the inventory costs, obviously commodity prices regarding steel have come down, albeit.
In the last week or so they've spiked up at different levels.
We buy steel based upon a variety of methods.
Rolling averages in arrears and some of the steel we bias is priced fixed for a period of time as we have order. So there's a number of dynamics in that.
In that approach, but at this point in time, we do believe that we've covered everything for the year and we believe that we can can make continual efforts going into 2020.
Good thank you.
Youre very welcome.
And ladies and gentlemen, one more reminder, Thats star one if you have any questions.
Okay, all right and it appears that we have no further questions from the audience I would like to turn the floor back to ion Warner for any additional or closing remarks.
Thank you Greg before we conclude today's call. Please note that a replay of our second quarter 2019 conference call will be available later this morning by accessing the Investor Relations section on our website at Www Dot Manitowoc dotcom.
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 have a good day everyone.
Once again, ladies gentlemen that concludes our call for today, we thank you for joining US you may now disconnect.