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Executives

Steven C. Khail – Director of IR & Corporate Communications

Glen E. Tellock – President and CEO

Carl J. Laurino – Senior Vice President and CFO

Eric Etchart – President, Manitowoc Cranes

Michael J. Kachmer – President, Manitowoc Food Service

Analysts

Henry Kirn – UBS

Ann Duignan – JP Morgan

Charles Brady – BMO Capital Markets

Nigel Coe – Deutsche Bank

Paul Bodnar – Longbow Research

Charles Rentschler – Wall Street Access

Matt Vitorioso - Barclays

Michael Boam – BlueBay Asset Management

Matt McConnell - Robert W. Baird & Company

[Ben Nowius] - Stir 90

Manitowoc Company, Inc. (MTW) Q4 2008 Earnings Call January 29, 2009 10:00 AM ET

Operator

Please standby. Good day everyone and welcome to this Manitowoc Company Fourth Quarter Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Khail. Please go ahead, sir.

Steven C. Khail

Good morning everyone and thank you for joining Manitowoc's fourth quarter earnings conference call. Participating in today's call will be Glen Tellock, our President and Chief Executive Officer, Carl Laurino, Senior Vice President and Chief Financial Officer, Eric Etchart, President of Manitowoc Cranes, and Mike Kachmer, President of Manitowoc Food Service.

Glen will open today's call by reviewing our key accomplishments in 2008. Carl will discuss our financial results for the fourth quarter and full year and our segment presidents will offer insights into their operations and outlooks for 2009. Following our prepared remarks, we will address your questions.

For anyone who is not able to stay on line for today's entire call, a replay will be available beginning at 12:00 noon, Central Time today until 12:00 midnight, Central Time on February 5. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 2143476. You may also access an archived version of today's call by visiting the investor relations section of our corporate website at www.manitowoc.com.

Before Glen begins his commentary, I would like to review our Safe Harbor statement. This call is taking place on January 29, 2009. During the course of today's call we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on the company's current assessment of its markets and other factors that affect our business. Actual results could differ materially from any implied projections due to one or more of the factors explained in Manitowoc's filings with the Securities and Exchange Commission, which are also available on our website. The company does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or other circumstances.

With that, I'll now turn the call over to Glen.

Glen E. Tellock

Thanks, Steve, and good morning everyone. Before we review the specific details of the financial results that we released last night, I'd like to make a few comments on the overall progress that we made during 2008 as well as our plans for 2009. In spite of deteriorating economic conditions brought on by the global financial crisis, 2008 was another record year for revenue and operating earnings.

From an operational perspective, 2008 was actually the culmination of the business strategy that we put into place several years ago to build the Crane and Food Service Equipment businesses into market leaders. As we move forward, we will devote our full attention to the continued growth and development of our two business segments, both of which enjoy leading positions in their respective markets.

Of course, our most strategic accomplishment in 2008 was the acquisition of Enodis. We are now working diligently on integrating Enodis with our Legacy Food Service Equipment business. Mike Kachmer will give you an update on that progress shortly. However, let me remind you that we have considerable experience at integrating acquisitions of all sizes from both an operational and a financial perspective. We have selected experienced leaders from both teams to manage the integration process following our proven integration model which is focused primarily on creating customer and shareholder value. Not only are the teams making a smooth transition for our customers. They are also combining the deep expertise within both companies to make a leap forward in product innovation and customer service.

Another major accomplishment in 2008 was the sale of our Marine segment which was completed as planned on December 31st. This sale frees up management and financial resources that can be applied to our two core business segments. Let me add that we wish all the best to our former Marine employees in their exciting future as part of Fincantieri.

In the Crane segment, we had our strongest year ever and are clearly benefiting from the strategic acquisitions made earlier in the decade to broaden our product line and expand globally. Demand in our Crane business was very strong during the first half of 2008. In fact, it stretched beyond our capacity and we were unable to capture all the potential sales opportunities.

As you've seen throughout the global construction industry, the cycle has turned sooner and more dramatically than everyone expected. We are taking the necessary steps to adjust our production and our business focus to match the current levels of demand. We have been managing through one of the most difficult financial markets the modern world has ever experienced.

In spite of the recent market meltdown, we succeeded in financing our acquisition of Enodis and fully syndicated our credit agreement. We are now proceeding to use our strong cash flow as well as certain asset sales to reduce our debt level as we have done following previous acquisitions.

On this point, let me emphasize that we run our business by setting measurable goals many of which we share with you such as our $1 billion dollar debt reduction target. All such guidance is based on a variety of underlying assumptions. We hold ourselves accountable to control what we can and to make appropriate adjustments to our business for issues outside of our control.

Let me conclude my remarks by saying that we enter 2009 with confidence in our ability to weather this storm. We will adapt to market conditions with appropriate adjustments to our operations, adjustments that will improve our product offerings and operational efficiencies and, therefore, our competitive position. Even in challenging times, we will continue to drive innovation across the company. We'll be more selective about where we place our available resources, but these resources and focus will be placed to build long-term shareholder value.

With that let me turn the call over to Carl, to discuss our 2008 financial results and outlook for 2009. Carl?

Carl J. Laurino

Thanks, Glen and good morning everyone. For the full year on a GAAP basis, the Manitowoc Company reported net sales of $4.5 billion and operating earnings of $520 million. Net sales increased 22% while operating earnings increased 9.2%. Earnings per diluted share were $1.32 compared to $2.64 per share in 2007.

2008 results included yearend adjustments for the Enodis acquisition and the related hedging loss of $247 million net of tax or $1.87 per diluted share as well as the Marine divestiture and certain accruals for restructuring and severance cost. Excluding these special items earnings per diluted share were $3.10 compared with earnings of $2.68 per share in 2007. The shortfall versus prior guidance is due to acceleration of Crane's December restructuring plan and the after-tax impact it had on EPS before special items.

Moving on to our segment results, 2008 Crane segment sales totaled $3.9 billion, an approximate 20% increase from $3.2 billion in 2007. Operating earnings were $556 million, up 18% from $471 million in 2007. This resulted in Crane segment operating margins of 14.3%, down slightly from 14.5% in 2007.

With the severe pressures of the economic environment, the fourth quarter is a different story. As you can see from the quarterly results included in our press release, I won't go through them all in detail, but the net result was that Crane operating margins declined in the fourth quarter to 12.2% compared to 15% in the fourth quarter of 2007. Crane backlog at yearend was $1.9 billion, 34% lower than at the end of 2007. Eric will provide additional comments about the Crane segment backlog during his remarks.

In the Food Service segment, 2008 sales totaled $620 million, a 42% increase from $438 million in 2007. Obviously, this increase was driven by the acquisition of Enodis. Operating earnings were $56.8 million versus $61.4 in 2007, with operating margins of 9.2% in 2008 versus 14% in 2007. The year-over-year margin decline was primarily driven by the impact of Enodis and a one-time purchase accounting inventory charge.

The Food Service segment also turned down in the fourth quarter. Excluding Enodis on a like-for-like (ph) basis, revenue for the quarter was down 6%.

The Marine segment which was sold on December 31st and two month's of the Enodis ice business generated total sales of $415 million and operating earnings of $53 million in 2008.

Moving on to cash flow, we had another strong year with cash from operations of $323 million, up 32% from 2007. This was highlighted by the strong $173 million of cash from operations generated in the fourth quarter. We also had a solid increase in EVA which totaled $231 million for the full year, up 12% versus 2007.

Looking ahead to 2009, we are forecasting consolidated revenue of approximately $4.9 billion. This is based on estimated revenue of $3.2 billion in the Crane segment and $1.7 billion in the Food Service segment excluding the Enodis ice business which is being held for sale. Correspondingly, we are forecasting Crane and Food Service operating margins in the low double-digit range. Based on these assumptions, we expect earnings per share in the range of $1.35 to $1.60 per share excluding potential special items such as further restructuring costs.

Other financial expectations for 2009 include capital expenditures not to exceed $120 million, depreciation and amortization of $135 million and an effective tax rate in the mid-20% range. We have also set a yearend debt reduction target of $1 billion since funding the Enodis acquisition in November of last year.

Our next speaker is Eric Etchart who will share his thoughts on 2008 results and the outlook for our Crane business in 2009. Eric?

Eric Etchart

Thank you, Carl. As Glen mentioned, 2008 was our best year ever in the Crane segment with very strong demand in the first half of the year followed by an accelerated decline in demand during the second half. The worst markets are in Western and Southern Europe where cancellations have directly impacted our lines of self-erecting and top slewing tower cranes and more recently, our mobile hydraulic product line, but to a much lesser extent.

Our total Crane backlog in Europe has declined by almost 80% compared to the same period last year. This reduction in backlog has left us with orders having shorter-built (inaudible) and the need to right size our employment levels.

We are taking actions to adjust our cost structures in all regions. This includes workforce reduction in France, Portugal, China, India, and our Shady Grove facility in Pennsylvania. In total, we are reducing our workforce by approximately 22%.

The state of the global economy and the rapid decline that occurred in the fourth quarter of 2008 has caused the change in the dynamics of our customers' orders. Customers have consciously (ph) shortened their purchasing decisions to take advantage of the available industry capacity. As a result, they are now timing the placement of their orders much closer to the actual time this equipment is needed on the project site. This is not a new phenomenon as we have seen similar order patterns in other downturns where the backlog represent a shorter revenue period.

Of course, every challenge brings opportunities. For example, we see opportunities driven by energy and power generation projects. Globally, we enjoy a strong position in wind projects where our (inaudible) cranes are very popular and complemented by our large mobile telescopic cranes. We also have a number of GTK now in operation. (Inaudible) used this innovative technology 18 months ago specifically for the wind turbine market and it is continuing to enhance our strong position in this promising high-growth end market.

We continue to see sustained demand for large all-terrain cranes, large rough terrain cranes and crawler cranes. Our backlog is holding firm on these large models while smaller capacity cranes are suffering from declining utilization rates as reported by many crane rental operations in North America.

Asian growth is slowing and we will take aggressive steps to downsize certain production cranes in certain production areas. Specifically, the China market is slowing down despite the stimulus package financed by the Chinese government which will take time to have a positive impact for the crane industry. That said, China and other countries in Asia are still showing positive growth leading to continuing long-term opportunities for us in the region.

We continue to see sustained demand for our after-market support services. Our Crane Care business is superior to any competitive service by offering the most comprehensive after-market support in the industry. Crane Care is a significant competitive advantage especially in an economic downturn when there is an intensified focus on minimizing total cost of ownership. Manitowoc finance will also play a key role in this challenging market, helping our customers to secure much needed financing despite the ongoing effects of a credit crunch.

Let me summarize by saying that although we are currently estimating a 20% revenue decline in 2009, we will emerge from the downturn in the stronger competitive positions by the actions that are underway across the Crane segment. We will maintain tight control on SG&A and material cost. Equally important, we will keep our focus on customers and our bottom line.

We are a world-leading source of lifting solutions with some of the most recognized brands and the broadest footprint in the industry in a time of increased and sustained demand for more than (ph) infrastructure. We have a resilient business with a large inflow base complemented by the best and the most experienced dealers and users in the market. As a result, we will not only weather the current market, but at the same time prepare for the next up cycle when growth returns to the world's economies.

I will now turn the call over to Mike Kachmer for an update on the Food Service segment. Mike?

Michael J. Kachmer

Thank you, Eric. For those of you who attended our analyst conference earlier this month, you saw first hand that the Enodis acquisition has transformed our food service business. We are now a leading player in the food service equipment market with innovative products on both the hot and cold sides of the business. Simply put, we are now in a position to offer food service customers a (inaudible) total kitchen solution. And our customers include many of the fastest growing, most innovative companies in the world. We now serve five continents and more than 100 countries and we will continue to expand. Our manufacturing operations, our service sites and our sales offices work with customers worldwide whether those customers are local businesses or global companies.

Obviously our efforts are now focused on a successful integration of the two companies without losing the entrepreneurial energy that has resulted in the great success of these companies and brands for many years. We're absolutely committed to bringing these companies together successfully; the people, the culture, the brands, the channel partners and the end-user customers. It's a comprehensive effort that's off to a great start. We have an excellent integration team in place as Glen mentioned and our employees are very excited about the opportunities that the combined business will offer. The benefits are readily apparent.

By 2011, I expect us to exceed the $80 million in synergies that we used to model the acquisition. We will also realize over a third of those synergies in 2009 and that's not just a rough estimate. We've developed very specific project plans that have individual accountability, project teams in place, tracking mechanisms that are following the right metrics and a business plan that incorporates the savings. Accountability is clear, results are predictable. About 70% of the synergies will be cost reductions such as the consolidation of administrative functions, scale economies driven by procurement opportunities, the consolidation of certain manufacturing facilities, and so on. We also see opportunities to achieve meaningful synergies on the revenue side through the bundling of products creating growth opportunities that otherwise didn't exist.

Our 2009 sales are estimated to be approximately $1.7 billion after adjusting for the required divesture of certain ice-making assets. But we've not only acquired a substantial revenue, we've acquired a number of brands, operations and internal distribution companies that create an outstanding platform for growth in the future. We've connected 35 brands, all of them leading in just about every category.

For our customers, this acquisition offers an even greater potential for the innovative new products that they made such as our high-performance kitchen, a concept that combines technologies, equipment, applications and people which we demonstrated at a recent analyst meeting. These concepts enable restaurants to increase productivity and output within a limited footprint. Our customers are working hard everyday to find ways to get people in the door and better satisfy them. We work with them at a senior level across the globe to meet these needs.

Of course the food service industry is also being affected by the economic downturn. Looking forward, we think 2009 will be a challenging year as was 2008. However, we will make adjustments to our cost structure as necessary to align the business with market realities, but I would re-emphasize, this is still a very solid market driven by strong fundamental trends. Our position with many of the large restaurant chains gives us a great opportunity to grow along with our international expansion. In many cases, we are their supplier of choice and their innovator of choice. These customers are constantly looking for ways to innovate their menus. We are at the forefront of that innovation.

Another significant part of our Food Service business is replacement equipment sales which continue to grow with our large embedded base of installed equipment. And keep in mind that we compete in the large market with stable growth demonstrated over an extended period of time. We estimate the market to be about $28 billion and we now participate in most segments.

In summary, our brands are well-positioned leaders that span nearly all major categories and our team is unbelievably passionate about this combined business and the opportunities that lie in front of us. We are building a sustainable business for the long-term and the long-term future looks bright.

So with that, I will turn the call back to Glen for the question-and-answer portion of the call.

Glen E. Tellock

Thanks, Mike. Our two segment presidents have given you a good review of their businesses. It should be clear that despite our challenging market, we are taking responsive and decisive actions and we're prepared to take further actions if circumstances warrant.

We will build on this throughout 2009 and we will take advantage of other opportunities created by the economic downturn to strengthen our leadership position. In difficult times customers turn to strong market leaders with brands that they trust – brands that offer state of the art technology, product innovation, plus unparalleled after-market service and support.

Manitowoc delivers on all of these fronts. In 2009 we will also be focused on the integration of a notice in making solid progress toward achieving our achieving our $80 million synergy target. We also intent to achieve our debt reduction goal of $1 billion by year end.

Lastly, as you know Terry Growcock retired as Chairman on December 31. I would like to take this opportunity to express my thanks and appreciation to Terry for his dedication to the success of Manitowoc.

This concludes our prepared remarks. Lisa, let’s now open the call for questions.

Operator

Thank you, sir. The question and answer session will be conducted electronically

Question-and-Answer Session

Operator

(Operator instructions) And we’ll take our first question from Henry Kirn with UBS. Please go ahead, sir.

Henry Kirn – UBS

Good morning, guys.

Glen Tellock

Good morning

Carl Laurino

Hi, Henry.

Steven Khail

Good morning.

Henry Kirn – UBS

Can you talk a little bit about pricing in the crane market and maybe dovetailing with that what you’re seeing in the used market, if that’s providing any pressure to new pricing?

Glen Tellock

Well, Henry, I think when you look at some of the prices in the used side they still have held relatively okay. I think you’re seeking just where our weakness is on the smaller capacity cranes. That’s what you’re going to see on the lower capacity units and a good benchmark of that in the United States may be the auction here in Orlando, the Ritchie Brothers auction here in February. But I would say the pricing for our products there were some things that we didn’t do in the middle of last year where our customers recognized our commitment to them. We have gone out with pricing this year and it is an issue that I think some people are looking at and I think people want to take that opportunity to go back but I can tell you when you look at the material cost input that certainly hasn’t come down in any respect, so I think the pricing that we have is certainly an opportunity for us to maintain that pricing that we didn’t let out last year.

Henry Kirn – UBS

Okay, and on your cost base, how long do you think it’ll take to right size the business? I’m thinking here as your margins progress through the year.

Glen Tellock

I think some of these actions were taken in the latter part of 2008 and many of them are taking part as we speak and then obviously within the fist quarter or first couple of months of 2009. Carl do you want to talk about the …

Carl Laurino

Yes. I would say that there’s certainly some benefit that we’ve already seen from some of the actions we did take in 2008 to Glen’s point. I would say the biggest pressure because of the inventory runoff issue and just the dynamic in the supply and pricing. You know we see the biggest pressure certainly on our margins in the fist quarter of this year, so I think that that’s in place.

I would say for some of the actions that we have announced and talked about, and are part of the restructuring charges that we actually accelerated, we don’t get the full benefit of that until the third quarter for some of the European restructuring just because of the timing of doing those things.

Operator

And our next question comes from Ann Duignan with JP Morgan.

Ann Duignan – JP Morgan

Hi, good morning everybody.

Glen Tellock

Hey Ann.

Carl Laurino

Hi Ann.

Steven Khail

Hey Ann.

Ann Duignan – JP Morgan

Hi. Can we talk the balance sheet and your debt? Can you walk us through just building on what you just said the difficulty that we see is the fact that it’s going to take some time to work through those inventories that you have either in raw materials or work in process?

Can you walk us through what your expectation is for cash from operations in Q1, for free cash and then your billion dollar debt pay down? Should we look at that? Should our expectation be $250 million per quarter or how should we think about that? I guess that’s the biggest risk in our view is not necessarily the P&L at this point, but you know the balance sheet and finally just what is your debt-to-capital coming out of ’08?

Carl Laurino

Well, Ann, I would say the first quarter expectations for cash from operations to your point relative to you know the inventory runoff issue – and this is not unusual for us in the first quarter of the year. It’s usually modest cash generation from operations in that first quarter.

The billion dollar debt reduction target that we have in place is certainly something that is articulated very widely and everybody is focused on it internally to make sure that we achieve that metric. So as we would look at the opportunities between the cash profitability that we expect as well as the working capital opportunities that we’ve demonstrated an ability to realize in similar times in the past that is in front of all of us to make that happen.

Obviously inherent in that billion dollar debt reduction expectation is the sale of the most significant asset sale that we would expect would be the European ice business or the Enodis ice business and that we’ve been stating that we would expect that to occur by the end of March.

I think at this stage we could say that’s probably going to be an April issue as we would look at it right now, and that unfortunately we’re not in a position to really talk about dollars from that particular sale, but certainly it would be inherent in our overall expectations and target to be able to achieve that billion dollars in debt reduction.

As far as the year end debt to cap in 2008, 65%.

Ann Duignan – JP Morgan

You lost 65. Okay. And I thought that ice making machine had to be sold by the end of March per the European directive?

Carl Laurino

No, it actually stands into the second quarter is the deadline.

Ann Duignan – JP Morgan

Okay, so again your confidence in delivering positive cash from operations in Q1, I know you said in normal circumstances Q1 is generally modestly cash flow positive. Are you concerned that you know given the rapid decline in cranes that it’s going to be a tough haul in the first quarter.

Carl Laurino

Well I would alter your reiteration of what I tried to say about the first quarter. We actually typically are a user of cash in the first quarter. In this environment I think there’s potentially some opportunities that wouldn’t normally be a case that could help us on that front, but usually that first quarter we would be a user of cash and my expectation for the calendarization of the cash from operations is that it’s certainly going to be skewed to those latter three quarters of the year.

Operator

And our next question comes from Charlie Brady with BMO Capital Markets

Charles Brady – BMO Capital Markets

Hey thanks. Good morning. Could you help me square something on the map in terms of your expectations for crane revenues of $3.2 billion and the other comment of down 20% in ’09? That map doesn’t really square. And then could you comment on what your expectation is on currency drag in 2009?

Steven Khail

Go ahead, Carl.

Carl Laurino

Well as far as the 20% obviously we’re pegging a specific number relative to the ’09 expectations at 20% to your point with the 2008 at $3.2 billion is actually about 18% decline, I believe from the ending revenue level at 2008. So that’s the order of magnitude of the difference there. From a currency standpoint, we would expect probably somewhere in that 3% to 5% headwind.

Charles Brady – BMO Capital Markets

And can you give us what it was in the fourth quarter? I don’t know if I saw that.

Carl Laurino

About $0.02 from an EPS standpoint.

Charles Brady – BMO Capital Markets

Do you have from a revenue what the revenue drag would be?

Carl Laurino

I'll circle back on that. Actually it's right around $50 million on the top line.

Operator

And our next question comes from Nigel Coe with Deutsche Bank.

Nigel Coe – Deutsche Bank

Thanks, good morning. On the crane backlog, looks like you're at cancellations in excess of orders in the quarter. Could you maybe just address how confident are you in that $1.9 million backlog at the end of December?

Glen Tellock

Well Nigel, as comfortable as we can be. People have made their decisions as they went into their year-end planning and that kind of thing. What you saw, you remember at the end of the third quarter, September 15th is when many of the things started happening with Lehman, the banks. I think as deteriorated rapidly in October and November, that's when people are backing out saying "Okay, I'm going to take a look at this and get out of queue." And so I think a good portion of that has happened.

We track obviously the orders and cancellations on a monthly basis. What we have at the end of December, we certainly feel very comfortable with. But I would say what's different now than what I think we've seen with the past is – and Eric and I have had this conversation – the projects are still there. This is a credit issue with many of these people. And so as I think Eric said in his notes, like many other times that we've had the slowdowns, you see people waiting longer in their decision-making process because it's not a nine or a ten or an eleven month wait, it's a three and four or a two and a three and a four month.

And so their decision-making can be a lot closer to when they actually get award the contract. Are we surprised by some of the cancellations? Yes, maybe to the level it was because of how fast it happened with the financial markets and the credit issues, but I think we're pretty comfortable where we're at right now.

Nigel Coe – Deutsche Bank

Okay, and then one for Carl. On the crane margin, these two knot points of margin compression, was that all inflation, or was there some mix or maybe some bottom deleveraging in that number as well?

Carl Laurino

You mentioned that are in place, but there's also the commodity issue as you're looking at it year-over-year, which is pretty significant as well. I would say mix in commodities would probably be the vast majority.

Glen Tellock

Nigel, again mentioning on the commodity side, just recently in the Wall Street Journal, I think it was Monday or Tuesday, you look at some of the steel companies and you look at the price of – just take the hot rolled steel, the prices have not retreated below where they started this same time last year. And there was a pretty significant ramp-up in 2008.

And without them retreating back to the levels of even this time last year, it is an issue when it comes to the gross margins. That's what we're finding against and it's typical that's what we do. But just because of what's happening in the markets, I don't think that everybody should believe that steel costs have come way down.

Operator

Our next question comes from Paul Bodnar with Longbow Research.

Paul Bodnar – Longbow Research

Just another question here to kind of follow that one up, sound likes that in your projections of this 20% decline and saying you have some of these projects are still there, there's just credit issues, are you kind of looking at the second half, that maybe credit improves and some of these projects decide to move forward? Are you kind of placing some of the bet of just the 20% decline on that?

Glen Tellock

No, I don't think we're doing that. I think the best we can do is listen to some of the customers that know where their projects are at and know what they're heading. I think when you talk too many of the customers, and let's just keep to the U.S. for right now, you look at the heavier capacity side of the business that Eric talked about, those are the projects that have continued to go. It's in the energy side of our markets.

And so I don't think that we're going to be too aggressive in putting in upsides for stimulus packages or credit into the market. I think that can be a dangerous assumption.

Paul Bodnar – Longbow Research

So your forecast right now doesn't really assume any real changes in the credit market or anything like that going forward?

Glen Tellock

No.

Paul Bodnar – Longbow Research

Okay, and then just another question here, on the backlog, what percent of the decline or what number – I don't know if you guys already gave it – was due to currency of those cancellations. It looks like about 456 million or so at least came out of there--

Carl Laurino

Yes, it was probably roughly $100 million.

Paul Bodnar – Longbow Research

And then one last question just in terms of the decline here in crane, what do you think you now in terms of – I don't want to say trough margins – but just incremental maybe due to process here. And let's say you have a peak-to-trough volume decline of 50%, any kind of comments on where you think that would take your operating margins in that business now?

Carl Laurino

When you're in the transition year, that's when you're in the toughest period because you've got the mix issue that has worked against us, the commodity issue, the inventory runoff. That's what experienced especially given how robust 2008 was all the way until the latter part of the year, and then the market turning as dramatically as it has. We need to work on those procurement opportunities that we have that can help drive better performance as we would move forward in this environment. But the all-in expectations for that low double-digit in cranes, have all of those kind of workout issues inclusive.

Glen Tellock

But I would also add to that, that kind of floats right into what the strategy that we've been talking about since 2001 and 2002 with acquiring Potain and Grove. We go in and we acquire these companies, we can manage them through the upside. We did manage them to start through the downturn, knowing that as those grew, we wanted to expand the food service side of our business.

So when you look at what's happening now with the acquisition of Enodis, of course it adds leverage to our balance sheet but long-term, as you've put the cranes and food service together, you have a different margin in the trough of the crane business because you have a much greater piece of the pie on the food service. If you go back to 2002 and 2003, you're only looking at a contribution in operating earnings from food service of $48 and $56 million. That's a much different number as we're going through a downturn in the crane side this time.

And I think that as Carl said, it'll take some time to get all those synergies, get everything baked in, and that changes that Mike is making. But I think it's going to be substantially different than what you see in the past on a consolidated basis, which again is what we were trying to do with our strategies.

Operator

And our next question comes from Charlie Rentschler with Wall Street Access.

Charles Rentschler – Wall Street Access

I had a couple of questions. First of all on working capital at year-end inventory and accounts receivable were about $1.5 billion. Can you give us some sense of where you think inventory and receivables will be at the end of the year, please?

Carl Laurino

Well inherent in that $1 billion debt reduction target, Charlie, is obviously getting some better turn characteristics out of the trading assets, so we would expect to have a pretty good contribution from working capital in 2009. As you would take that $1 billion target for debt reduction from the closing of the Enodis acquisition, there will be a meaningful contribution in cash from working capital.

Charles Rentschler – Wall Street Access

Okay, and then my follow-up has to do with capital expenditures. You're estimating, you said, not to exceed $120 million. Can you give us some sense of what the split might be between the crane segment and the food service segment and possibly what one or two of the biggest projects might consist of?

Carl Laurino

Well easily the largest project that we have is the ERP project that we have in cranes that has been ongoing. It would be about a 60/40 split between cranes and food service, and most of the balance would be CapEx for our manufacturing initiatives and efficiencies.

Glen Tellock

Charlie, that's one of those areas where there's certain things that we're in the process of completing, whether it's capacity or initiatives investment we made decisions on in the middle and early part of last year, there is some carryover but I can tell you that obviously given our focus on cash for 2009, yes we've put the brakes on some things.

But there's also you know strategically you have to look at where you can slow down or where you put your foot on the gas. And that's exactly what we're doing right now. So I think you know it's anything we can do that's going to basically improve the efficiencies in our business whether it be from the service side of the business or whether it be in the equipment and the manufacturing side.

And you know looking I know it's difficult to look at near-term but you got to remember that there's some things that we have to do that are going to help our business in the next 2010 through 2015 time frame.

Charles Rentschler – Wall Street Access

Okay. Can I sneak in one last teeny little question? Really I guess it's for Eric. How much bigger in thinking about the parts and service business, how much has – are your business expanded, in other words the number of cranes out there, say versus when the company went into recession back in '02 whenever it was. Can you give us a feel for you know how big this universe is its generating parts and service and crane after care?

Eric Etchart

Charlie we've been pretty steady in kind of a 10%, 11% run rate for our after market business. So what I would say is that you don't tend to see declines in that business even when the whole goods declined. Obviously, we've been seeing 30%, 40% increases in our top line in cranes for the last few years.

You know the after market; it has kept pace with that not growing as a percentage of the overall business. In this environment the actual dollars should remain relatively stable and therefore that percentage of the business should increase.

Charles Rentschler – Wall Street Access

Thank you.

Operator

And our next question comes from Matt Vitorioso with Barclays.

Matt Vitorioso – Barclays

Good morning. I was wondering if you could give us an idea of where you stand on your credit agreement covenants, the leverage and coverage, just giving all the moving parts here. Could you update us on that?

Carl Laurino

Sure. The key financial covenant that we have is that the total leverage, the total debt to EBITDA and you know we expect the covenant requirement is four times leverage currently and it drops down to 3.75 as of the end of the year.

And based upon our expectations today we expect to end the year at about 3 1/4 in terms of leverage.

Matt Vitorioso – Barclays

Do you have that calculation as of today? Where we are today? Just because you know there are a lot of moving parts of the acquisition, divestitures et cetera.

Carl Laurino

Yes. We're probably in right around the 320 level today.

Matt Vitorioso – Barclays

Okay. And then just quickly, generically on the food service business for modeling purposes, I think your guidance was $1.7 billion of revenue. Is that spread pretty evenly throughout the year? Is there any seasonality in that business with the addition of Enodis or should we just think about that pretty evenly throughout the year?

Carl Laurino

There is seasonality in the food service business. It's pretty similar with the two businesses between the Legacy Enodis business and Legacy Manitowoc business. You get a little stronger top line in the second and the third quarters versus the first and fourth.

Operator

And our next question comes from Michael Boam with BlueBay Asset Management

Michael Boam – BlueBay Asset Management

Hi. I have a few more than two questions but they should be very quick to answer. In terms of the billion that you stated you’ll pay down from the time of acquisition, just to be clear can you tell us how much you have to pay down during the fourth quarter of the billion?

Glen Tellock

It’s been about $300 million.

Michael Boam – BlueBay Asset Management

So $700 million to come in 2009?

Glen Tellock

Correct.

Michael Boam – BlueBay Asset Management

Can you tell me what you expect central costs to be this year. I mean the way you break out the P&L obviously of a divisional earnings with a central expense or a corporate expense running through there it was $51 million I think in 2008. Obviously with a notice that number should be higher. What sort of number should I be looking at?

Carl Laurino

Actually we think it will actually be lower in 2009.

Operator

And we have a question from Ann Duignan with JP Morgan.

Ann Duignan – JP Morgan

Hi, I’ve just got a couple of little follow up questions. The first one is what is your assumption for organic growth on the food service side for ’09? And could you talk a little bit about those end markets geographically?

Carl Laurino

I mean on the growth side its going to be essentially flat to modest growth organically as you look at the two business, the Manitowoc is actually if you look at that same store next year it’s down a bit. Do you want talk about the end market?

Glen Tellock

Yes. The end markets in you know we would see you now stronger pressures downward in the Americas and in Europe that are behaving about the same, offset by probably more opportunities in the Asia Pacific areas that we participate in. Remembering that our revenue split is roughly 70/30 with the Americas and Europe versus Asia.

Ann Duignan – JP Morgan

So why wouldn’t we expect that then to be down. I mean I think you said the industry was down in fourth quarter?

Glen Tellock

Yes. We are offsetting it with other programs, though. You know the general market is down, but programs that we have either on the new product development side or the bundling side is offsetting those general market pressures.

Operator

And our next question comes from Robert McCarthy with Robert W. Barrett & Company

Matt McConnell - Robert W. Baird & Company

Good morning this is Matt McConnell and Farab. A follow up to an earlier question you mentioned that cancellations were strongest earlier in the quarter does that imply that they were net neutral with orders towards December and they continued into January?

Glen Tellock

No. Matt, what I said was that with what was happening in September if you follow the trail of our conversations, we mention that in the second quarter conference call of last year we started to see a little bit of a slow down in Western Europe.

And that that kind of accelerated – maybe that’s not the right word – but it trended throughout the summer and I think when you saw what happened with the credit facilities and the credit issues in the October-November time frame, yes I think you look to the early and the middle part of the quarter as probably being extremely heavy and then but I think because people shored up what they were going to do and trying to figure out their 2009 plans.

There was still some in December but I don’t know that it was strongest towards the end of the quarter. And the other thing is as you saw some of the currencies devalue throughout the quarter, that impacted it also. So I mean I would say typically it was that October and then November was I think certainly a month that a lot of people were making those types of decisions.

Matt McConnell - Robert W. Baird & Company

Okay great. Thanks. And if I could ask a quick modeling question. You called out a $0.24 impact from your notice. Could you split that out between operating income and inventory step up charges and then the associated interest expense?

Carl Laurino

I’ve got the inventory step up off the top of my head. It’s a little over $10 million.

Matt McConnell - Robert W. Baird & Company

Okay.

Carl Laurino

You know interest expense and amortization about $35 million.

Operator

And our next question comes from Ben Nowius with Stir 90 (ph 00:59:20). Please go ahead

[Ben Nowius - Stir 90]

Thank you Carl. I have a question regarding the interest coverage ratio – the calculation of EBITDA and wondering if you’ve done any sensitivity analysis in that. Are you just using the operating income from both segments as well as the corporate expense and adding D&A into that for the EBITDA calculation because I’m still looking out to the end of the year if grain is indeed down a little more than 20 and their margins trend a little lower than anticipated, you're pretty much on the threshold of this covenant. I was just wondering if we have the right calculation here.

Carl Laurino

Well I think there's certainly some one-time expense that would be excluded for covenant calculation purposes that you may not be capturing. I'm not exactly sure what you're using for an effective interest rate assumption. I think we had provided some previous guidance on effective interest rate that actually is a bit higher than what we will realize given what's happened to market rates and what we were able to accomplish in the markets.

And I can tell you as we look at it, the reason why I said (inaudible) covenant is really because it's the leverage covenant that is more stringent as we would look at the way 2009 lays out.

[Ben Nowius - Stir 90]

Okay, so the steering of the analysts, they give us guidance of I think 119 million for interest, but that also included about $30 million for amortization and other fees. Is that still accurate?

Carl Laurino

Yes.

Operator

And our next question comes from Nigel Coe - Deutsche Bank.

Nigel Coe - Deutsche Bank

Yes. I called. I've just got a couple of (inaudible) questions here for you. Do you just want to confirm that the guidance you've given excludes the notice where integration and accounting are considered in the segments? And if that's the case, can you just give some visibility on those and to one key or maybe the full year?

Carl Laurino

I don't know if I can give you breakdown for the full year. It's roughly $10 million for the full year 2009.

Nigel Coe - Deutsche Bank

For the integration costs?

Carl Laurino

Correct.

Nigel Coe - Deutsche Bank

Okay. And these segment items that were out at back this quarter is that now done?

Carl Laurino

Say again, Nigel.

Nigel Coe - Deutsche Bank

The inventory step-ups and other items within the segment, are those now done?

Carl Laurino

Yes.

Nigel Coe - Deutsche Bank

Okay. And then one more. Would you expect the ice machine sale to be one transaction or two?

Carl Laurino

One.

Nigel Coe - Deutsche Bank

One transaction. Okay.

Carl Laurino

Just one other comment, Nigel, that probably is in the same vein of what you're asking about. We announce and our analysts say 30 – an expectation for 35 million in restructuring costs. Some of what we were anticipating at that point was that a lot of that in cranes was not going to be realized until 2009 that actually were realized in 2008 to the tune of about 20 million of that 35 million that we talked about a few weeks ago.

Nigel Coe - Deutsche Bank

Okay. So that implies another 15 in 2009?

Carl Laurino

Correct.

Operator

And we have time for one additional question. We'll take our next question from Michael Boam – BlueBay Asset Management.

Nigel Coe - Deutsche Bank

Hi. Sorry, I since got cut off. I just wanted to check a few more numbers if that's possible. So you said the central costs will be less than 50 million in 2009?

Carl Laurino

Yes.

Nigel Coe - Deutsche Bank

Okay. Cash restructuring – did I – sorry, did I just hear that you expect to spend 35 million for the full year?

Carl Laurino

That was an expectation that we had a few weeks ago. We looked at the total actions that we had on the table for restructuring. What I (inaudible) was that we accelerated some of those actions in cranes and took on about 20 of that 35 in 2008. So its 15 remaining in those types of restructuring expected at this stage in 2009.

Nigel Coe - Deutsche Bank

Okay. And finally, to be – tell us what pro forma EBITDA was for transactions through December 31 in terms of if you like to bank covenant compliant purposes.

Carl Laurino

It was a little less than 800 million; EBITDA pro forma.

Nigel Coe - Deutsche Bank

Does that take into account the move – obviously, there has been a significant move on dollar sterling since this transaction. I know you've taken a loss on that. But in terms of the move, the underlying natural earnings of a notice will be better this year than last if I'm correct, purely on an FX basis.

Carl Laurino

Well we provided some expectations relative to FX earlier in the call, somewhere in the 3% to 5%, that would be included – including a notice.

Nigel Coe - Deutsche Bank

Okay. So the pro forma was around $800 million?

Carl Laurino

Correct.

Operator

And that concludes the question and answer portion of today's call. I would like to turn the call back over to Mr. Kachmer for any additional or closing remarks.

Mike Kachmer

Before we conclude today's call, I'd like to remind everyone that a replay of our call will be available beginning at 12:00 noon central time today until 12:00 midnight central time on February 5. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 2143476. You may also access an archive version of today's call on our Web site at www.manitowoc.com.

Thanks again for joining us, everyone. Have a good day.

Operator

And that concludes today's teleconference. Thank you for your participation. Have a good day.

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Source: Manitowoc Company, Inc. Q4 2008 Earnings Call Transcript
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