Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Manitowoc Company, Inc. (NYSE:MTW)

Q1 2009 Earnings Call

May 01, 2009 10:00 AM ET

Executives

Steven C. Khail - Director of Investor Relations and Corporate Communications

Carl J. Laurino - Senior Vice President and Chief Financial Officer

Glen E. Tellock - President and Chief Executive Officer

Eric Etchart - Senior Vice President, The Manitowoc Company, Inc., President and General Manager, Crane Group

Analysts

Meridith Taylor - Barclays Capital

Henry Kirn - UBS

Charles Brady - BMO Capital Markets

Charles Rentschler - Wall Street Access

Matt McConnell - Robert W. Baird & Company

Operator

Good day everyone and welcome to this Manitowoc Company, Incorporated First 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 first quarter earnings conference call. Participating in today's call will be Glen Tellock, our Chairman, President and Chief Executive Officer; and Carl Laurino, Senior Vice President and Chief Financial Officer.

Carl will lead of today's call with a review of our financial condition and first quarter results. Following the financial review, Glen will give review to the outlook for the business. Because of the need to take more time in this quarter to discuss financial matters, we will depart from normal practice and not have formal remarks by our segment presidents. However, Eric Etchart, President of Manitowoc Cranes, and Mike Kachmer, President of Manitowoc Foodservice are also with us and will be available for our question-and-answer session.

For anyone who is not able to stay online for today's entire call, a reply will be available beginning at 12 noon, Central Time today until 12 midnight Central Time on May 8. The number to dial for the reply is area code 719-457-0820. Please use confirmation code 4627780. You may also access an archived version of today's call by visiting the Investor Relations section of our corporate website at www.manitowoc.com.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 Carl begins his financial commentary, I would like to review our Safe Harbor statement. This call is taking place on May 1, 2009. During the course of today's call, our remarks will include 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 take 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 Carl.

Carl J. Laurino

Thanks, Steve. And good morning everyone. Last night we reported net sales of $1.03 billion, an increase of 4% from $989 million in the first quarter of 2008.

The increase is due primarily to the acquisition of Enodis in October. Net of acquisition and the divested Marine business sales declined approximately 24 % from the first quarter of 2008 to $745 million. The year-over-year decline in financial results was driven by one of the sharpest declines in crane demand in our history and by severe constraints in global credit availability.

The company operating earnings, before special charges declined by approximately 53% to $63 million from $133 million in the prior year's quarter. There were a number of components contributing to this result, including a decline of $78 million in the Crane segment, an increase of $15 million in the Foodservice segment and the impact of restructuring, integration and higher amortization expenses.

On a GAAP basis, we had a net loss for the quarter of $656 million or $5.04 per share, compared with $103 million or $0.78 per diluted share in 2008. Obviously, this decline was due mainly to the $700 million non-cash goodwill and other intangibles impairment charges.

As you know, we have acquired a number of companies in recent years, including Enodis that have generated goodwill and other intangible assets on our books. GAAP accounting rules require us to test the fair value of these intangible assets on a regular basis. Based on our analysis, we recognized a write-down in the Foodservice segment of $700 million in the quarter, out of a total of $2.9 billion of goodwill and other intangibles.

In addition due to the price that we are receiving for the sale of the Enodis ice machine business, we recognized the previously announced $29 million impairment charge in discontinued operations in the first quarter. These are all non-cash expenses that do not affect covenants, cash flow or our liquidity metrics.

The quarters result also include approvals for restructuring and severance costs related to the actions we're taking across the enterprise to reduce costs and increase efficiency. Reductions have been made at every major manufacturing facility worldwide. This resulted in expenses booked during the quarter to reduce capacity and redistribute our global crane production as well as to integrate the Enodis acquisition.

Excluding the asset write-downs as well as the accruals for restructuring, severance cost and the integration, adjusted earnings per diluted share were $0.18 compared with adjusted earnings of $0.72 per share in the first quarter of 2008.

Looking at our segment results, Crane segment sales for the quarter declined 24% to $673 million from $884 million in 2008.

Operating earnings were $57 million, down 58% from $135 million in the first quarter of 2008. This resulted in Crane segment operating margins of 8.4% versus 15.2% in the first quarter last year. Since we were operating at essentially full capacity in the first quarter of 2008, the Q1, 2009 sales declining frames had a significant impact on margins. Loss absorption coupled with unfavorable year-over-year cost of materials as well as pricing pressure in product mix all contributed to the severe operating margin decline.

This impact was offset by year-over-year $23 million reduction in SG&A, which equated to a 60 basis point drop in SG&A margins despite the sales decline. Our commodity prices have been coming down in recent months. During the first quarter we were still working primarily from raw materials purchased at higher prices. We do expect to see a benefit from lower commodity prices, especially during the second half of this year. We expect Crane sales to continue to decline throughout 2009, which will put further pressure on segment margins and operating earnings.

However, we continue to expect to significantly out performed trough margins in the last downturn, due to our global manufacturing base, broader product lines and emerging market opportunities, as well as cost savings and restructuring initiatives.

Crane backlog as of March 31 was $1.4 billion, down from $1.9 billion at the end of 2008. The backlog declined for the third consecutive quarter. However, the negative order flow, driven by backlog cancellations has recently stabilized to net positive orders.

There are some pockets of relative stability on the heavy lift (ph) side of our product line, most notably in China and in South America, which are up over the prior year. However, in most products and regions demand continues to be soft.

Moving to the Foodservice segment, sales increased to $355 million from $104 million in the first quarter of 2008. This excludes the Enodis ice business that is being sold and is categorized as a discontinued operation. Excluding Enodis, Foodservice revenue on a same store basis for the quarter was $81 million, down about 22 % from the prior year period. This has been driven by a contraction in capital spending in the industry, that has now lasted for more than 16 months.

On a pro forma basis for the continuing Foodservice operations currency adjusted sales declined a more modest 15%. Operating earnings excluding the special items were $28 million, compared with $12.3 million in the first quarter of 2008. This resulted in Foodservice segment operating margins of 7.7% versus the 11.9% in 2008.

Moving on to cash flow. We did have negative cash from operations in the quarter, due mainly to a settlement from the previously disclosed legacy Enodis legal matter, that has now have been fully resolved. The negative impact on cash from this resolution was $58 million in the first quarter and the final payment of $14 million will be paid in the second quarter of this year.

Excluding the cash outflow for the one time legal settlement, we generated $41 million in cash from operations, the best first quarter cash flow in the history of the company. For the full year, we still expect to generate significant cash flow from our operations and we're intensely focused on debt reduction.

Overall, we've reduced our capital spending budget by approximately $50 million in 2009, which is down 40% from 2008. And we've generated revenue and expense synergies of nearly $30 million with further progress expected in the second quarter.

Maximizing cash flow is our number one focus and priority. Given the speed and magnitude of the downturn in Cranes, we have significant opportunities to reduce working capital. The most significant portion of this opportunity is inventory management. While we have made significant progress in raw material and work-in-process efficiencies, the high rate of order cancellations have thus far constrained progress in finished goods inventory reduction.

We also have a very manageable distribution of loan maturities, most of which are several years out. The first is term loan X, which matures in April of 2010. Proceeds of approximately $150 million from the sale Enodis Ice business, which will close later this month, will leave a balance of approximately $30 million on this loan. It will be paid in full in the second half of 2009 with cash from operations. The next nearest maturity is 2013.

As we have previously disclosed, we've set a debt reduction target of $700 million for 2009. The lower than expected price for the sale of the Enodis ice business, which we disclosed in our March 30 press release, coupled with the significant decline in Crane demand has made that goal a significant stretch.

Although we have not lost sight of our $700 million debt reduction target, we expect minimum debt reduction to be $450 million in 2009. We have also previously disclosed that the lower price for the Enodis ice machine business, combined with the substantial decline in Manitowoc sales, due to the global recession has made it likely that we'll need to renegotiate certain debt covenants by mid-year.

We have been discussing this issue with our agent bank and have had informal update meetings and calls with multiple members of our bank group. We are preparing to embark on a formal request in the very near future and we anticipate that revised and mutually agreeable amendment, with a requisite covenant release will be completed during the second quarter.

I would characterize the tone of the informal discussions we have had thus far as cooperative, and reflective of the fact that in light of the severe global slowdown, about 180 companies have obtained amendments to their creditor agreements, since the beginning of the year. Our request will certainly not be unique.

As of the end of the quarter, our total debt to EBITA covenant was 3.7 times, compared to the current requirement of four times and our interest coverage covenant was seven times, compared to the current requirement of 2.5 times.

Trailing 12 months EBITDA, as calculated for compliance purposes was $740 million. We do continue to have substantial liquidity available for working capital and other operational needs. This includes more than $156 million of cash and investments as well as nearly $350 million available on our bank lines of credits.

Looking ahead for the rest of 2009, as previously announced we are suspending specific earnings guidance. Generally we expect Crane sales in 2009 to be worse than the 20% decline we previously expected. We expect Foodservice revenues to be seasonally higher in the second and third quarters then they were in the first quarter this year as is typical in our business.

We will continue to provide updates on the underlying trends of our business as they materialize.

I'll now turn the call over to Glen for his prepared remarks, prior to our Q&A. Glen?

Glen E. Tellock

Thanks, Carl for that update and good morning everyone. Obviously, we continue to face a very difficult economic environment at a time when we have a significant level of debt. But we have acted early and decisively to deal with the global recession.

So, what I'd like to do today is to outline some of the steps we are taking to address these challenges. However, I want to be clear that these initiatives are intended to improve our long term competitiveness and financial strength. They are not short-term fixes.

The reputation of Manitowoc and our industry leading brands are key drivers of our long term growth. It is our responsibility to strengthen our brands and reputation, especially in difficult times. That is what customers remember and that is what guides our decision as we manage through the recession.

We have taken swift and aggressive steps to reduce costs and improve the efficiency of our production in every area of our business. This includes staff reductions and related employee costs, including salary freezes as well as reductions in other SG&A expenses.

Of course this has been tempered somewhat by our desire to maintain the first rate talent that we have throughout the business. This core team will be essential to future growth when the economy begin recover.

We have made permanent cost structure changes to manufacturing and supply chain costs, such as realigning and redeploying certain manufacturing operations.

Overall we have reduced our cost structure by approximately $200 million in the Crane segment, $60 million in the Foodservice segment and $10 million in corporate expense.

We will continue to identify and implement other opportunities that will make us stronger coming out of the downturn. This includes investing in new product development and production efficiencies, while leveraging our industry leading after-market support.

We are confident that this is the right approach. Both of our business segments focus on core areas of the world's economy that are certain to grow over the long term. Our cranes are an essential tool of economic growth, doing the heavy lifting that builds infrastructure, expands industry and delivers energy and other vital resources to developed countries as well as the emerging markets.

Our customers are intently focused on doing more with less and we continue to introduce new products that will improve productivity and expand capabilities while delivering the best possible end result.

Last week we demonstrated four new products at the Intermat Trade Show in Paris. One of the highlights was Crane STAR, which uses state-of-the-art communications technology to monitor a crane's location and provide operational and performance data for fleet management, system diagnostics and ongoing maintenance any where in the world.

Of course innovation is equally important in the Foodservice segment. These customers rely on constant innovation to stay ahead of consumer trend. They rely on us for innovation to support and enable their menu changes, as well as to make our operations more efficient, faster and safer.

Foodservice is a huge global market supplied by a mostly fragmented set of equipment manufacturers. We continue to see substantial opportunities to lead this worldwide market by capitalizing on economies of scale, unavailable to most of our competitors. And the Enodis acquisition is already enabling these scale pursuits.

The integration of Enodis is proceeding ahead of plan, which demonstrates great execution during a difficult business environment. You witnessed our success resulting from product line expansions, the ability to integrate acquisitions and the globalization of our Crane business.

The Enodis acquisition is a continuation of that proven strategy for our Foodservice business. We've now aligned our enterprise in to two segments, and we will continue to execute our strategy to be the global leaders in both of them.

In fact, the Enodis acquisition is already working as planned. It is providing greater stability at a time when demand for cranes has dropped significantly and has expanded our global manufacturing capabilities, worldwide procurement and distribution network. This is exactly what was intended to do. We expect this strategy to continue to generate sustainable growth and deliver value to our shareholders.

So, looking ahead I would like to briefly outline the near term business objectives that we have set for ourselves. First, as Carl discussed, we are working aggressively to generate cash and reduce debt. This objective is top priority across the company.

Second, we are aggressively integrating the Enodis business and remain on target to deliver $29 million in synergies in 2009. We are now finalizing plans to realize a total of $77 million of synergies in 2010, which includes the annual run rate of $45 million from 2009.

Third, we are taking many significant actions to drive operational excellence within the Crane segment. This includes adjusting production capacity around the world to reduce our cost structure and accelerate innovation. The recession provides the opportunity to introduce many of these changes, without impacting the customer delivery.

Manitowoc is a strong company with substantial resources, industry leading innovative products, state-of-the-art technology, unparalleled after market service and support, plus highly motivated employees. We will continue to drive innovation in the Crane and Foodservice industries. We'll continue to generate cash. We've been through these downturns before. And we will emerge even stronger when the global economy improves as we know it will.

So let me now open up the call for your questions, Lisa?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from Meridith Taylor with Barclays Capital. Please go ahead.

Meridith Taylor - Barclays Capital

Hi, good morning. First I'm wondering if you can talk a little bit about the crane orders. Clearly you talked about a positive swing in net orders. Could you talk a little bit about what the gross orders might have been, how much the swing had -- for the factor their. And then maybe if you could dig a little bit into what you're seeing on an end market-by-end market basis and expectations going forward?

Glen Tellock

I have one question, do you say that we have seen growth orders?

Meridith Taylor - Barclays Capital

In that gross order, sorry. So taking growth order as suppose to net, which includes cancellations.

Glen Tellock

Sure. Go ahead.

Carl Laurino

The gross orders for us in the quarter were $115 million.

Meridith Taylor - Barclays Capital

Okay. And then how would this compare with the last two quarters. I realize that cancellations were a big swing factor last quarter?

Glen Tellock

It's pretty comparable. I think we are seeing a net -- what we talk about the stabilization of it's really the -- that is the cancellations in the November, December timeframe and actually in the January, February. I think when you look at some of it, I would put a little bit of that in early part of this year, the North American dealer network. That was -- there, the opportunity that confirmed their orders and that was late in the quarter. So, I think when you see that it's actually, it's encouraging, it's certainly not good but, I think it's encouraging to get to that net positive outflow.

Meridith Taylor - Barclays Capital

Okay. And then just any color on an end market-by end market basis?

Glen Tellock

Well. I think that if you just look at the product lines by themselves, the tower cranes are probably the hardest yet. And that's the three biggest markets there, France, Spain, Italy very difficult markets. There is the high end of all the products on the large tower cranes. The large Crawler cranes and the larger cranes (ph) continue to hold pretty well. I think you've seen that.

And as we talked about and in Carl's comments, I think we are seeing some positive signs coming out of China, with some other stimulus packages they've had and I think you've seen a little bit of that in South America. That's the probably the two bright spots you see around the world. But other than I think it's pretty similar to the rest of product lines.

Meridith Taylor - Barclays Capital

Okay, got it. And then just as a follow-up, maybe if you could help us to think a little bit more about the decremental margins for Cranes going forward. Clearly that 200 million of cost savings that you talked about, could you talk about the timing of when you expect to see that, and then maybe talk a little bit about the pricing pressure you saw in the first quarter and then how you anticipate that the efforts to work through the inventory of finished goods, that you have in Cranes could impact the business over the balance of the year?

Glen Tellock

Well, I think we look at -- again this is very similar to 2003, when you look at the finished goods inventory, that's really just that's a timing impact. Some people are canceling orders, some people are basically, if you look at as a deferral, I still look at it as cancellations.

But I think as the credit availability comes back, the beauty you have (ph) is the projects are still out there. I will give an example of that and that's why it's so hard to give any guidance and we don't want do it, as because, what is the timing of some other things that we're doing? I think the first quarter had some benefits of some of actions we've taken already Meredith. And so it's the impact we have quarter-by-quarter.

In the Middle East, they look at some of the just recent developments you've had from a political standpoint where they said, hey, we're going pay for it. We're finishing some of the projects already started. It doesn't do much for new shipments, but it's certainly does things for the parts orders, it does things for the finished goods inventory. It's really else we're going to do to generate cash from our business.

So, I think that's one of the reasons to stay away from the guidance outlook. And also what the impact of many of the changes we're making. But I would tell you that if you go back a couple of years, we will be making some of these investments in our areas of cranes. And even Foodservice, the acquisition of Enodis. It was to take advantage the next time we had a slow down as we do right now to emerge from this and make some of the changes you wouldn't necessarily make when we are running at a 100 % capacity.

Operator

Our next question comes from Henry Kirn with UBS.

Henry Kirn - UBS

Hey, good morning guys.

Glen Tellock

Good morning Henry.

Carl Laurino

Good morning Henry.

Henry Kirn - UBS

I was wondering if you could talk a little bit about pricing discipline in the market today. How you see that, if there is anybody chasing? And maybe a little bit about what you're seeing in the used market and the fast pressure in there (ph)?

Glen Tellock

I'll let Eric talk to that little bit.

Eric Etchart

Well obviously, we seen some aggressivity in the marketplace, but I should say, we haven't -- we've seen a sudden degree of discipline being maintained by the primary competition. Obviously, the used cranes market, there are some tensions because used cranes are becoming more and more available. But overall, I mean we've not seen anything substantial or any unusual terms by the primary competition.

Glen Tellock

Henry, I would add to that, when you looked at some of the used pricing, 18 even 12 to 18 months ago, whether you looked at auctions or just what was being sold. I mean some people were paying some high very prices just because of availability. They needed the cranes, so that drilled pricing up. I think the used cranes prices are -- while they are falling because of that, I mean they are still relatively decent pricing when you go back to historical levels.

Henry Kirn - UBS

Great, that's fair. Is it possible also to talk a little about the impact of the global recession on the financial health of your dealer network and on your customers?

Glen Tellock

Yeah, we can. I think that's certainly a concern any time this happens. When you look at it regionally, I think, again we just had the tradeshow in Paris at Intermat and I think that that's the question I was asked quite a bit. I think we feel pretty comfortable of what's happened in Europe.

I think when you look at -- again it wasn't -- it seems long ago but, personally it definitely wasn't that long ago, 2002 and 2003. I think you had a shake-up of many of those customers that thought this was the place to be in and are no longer in this business. So you have a much healthier customer base because of what happened in 2002-2003.

When you look at our dealer base in North America, I think it's pretty solid. I feel very good about it. So it means, we go about the rest of world. I think it's when customers need financing we can use Manitowoc Finance or they can use credit that they have available to them, but that number of financing alternatives is smaller and smaller. And so that's more of a concern than just the customer themselves.

Henry Kirn - UBS

That's helpful. Thanks a lot.

Glen Tellock

Okay.

Operator

Our next question comes from Charlie Brady with BMO Capital Markets.

Charles Brady - BMO Capital Markets

Hey, thanks. Good morning guys

Glen Tellock

Hey, Charlie.

Carl Laurino

Hey, Charlie.

Charles Brady - BMO Capital Markets

Hey, with respect to the Crane segment margins, can you give us the impact of the in the Q1 the raw material, you say you're still working with some of that higher cost raw material, which ought to get a little bit better as you go forward in '09. But what's kind of the margin impact that we're seeing in Q1, that may be might mitigate somewhat going forward.

Carl Laurino

Probably, it is probably on the order of 2% hit to the margin, just for materials in the first quarter.

Charles Brady - BMO Capital Markets

And that's -- you expect that to steadily improve through '09 or how does that workout, was it more of a back half?

Carl Laurino

It's more of a back half because you do have the existing inventory, that has a fairly long tail on it at this point in time and go back to the higher cost period. So it's mostly a second half benefit.

Charles Brady - BMO Capital Markets

Okay. And could you just talk a little bit about cancellations. I mean they were some cancellations in the quarter, yes?

Glen Tellock

Yes.

Charles Brady - BMO Capital Markets

And where -- can you give some granularity on where those are coming from or what you think is driving some of the cancellations? Is it customers having financing troubles or is it their products has been pushed out or what's sort of the underlying driver for some of those cancellations?

Glen Tellock

Yeah Charlie, I think you answered your own question. It is both of those and I would say, it's not as much in the tower crane any more, I think those have washed themselves through.

In the current quarter it was probably -- I would say generally it's on the AT side of the business, more than anything else, but not significantly different, but it is the financing. Some people get it and all of a sudden, the financing they had is no longer available to them, just because of the bank availability and the bank credit themselves, not because of the customer. And that's one of the things that we're trying to push through.

If you few think about it, on the mobile hydraulic side, it doesn't necessarily have to be project specific because the thing is on wheel. I mean these people are pulling their inventory, they are investing their fleet. That's we're trying to help out whether it's Manitowoc Finance or anybody else. I would say financing in some of the bigger projects that are been pushed out. But again a little bit different than what we did see in 2002-2003. There are projects out there. It's just a matter when do people want to start spending money on it.

Charles Brady - BMO Capital Markets

Thanks. I'll hop back in the queue.

Operator

Our next question comes from Charles Rentschler with Wall Street Access

Charles Rentschler - Wall Street Access

Hi, Good morning everybody. My focus is really entirely on the balance sheet. You said in your comments, I think Glenn that or maybe Carl, but 700 million of debt reduction would be significant stretch, but you thought you could do at least 450 million of debt reduction. I mean what is your goal here for debt reduction?

Glen Tellock

Well, my goal is 700 and I put that out there, Charlie because it's a stated goal that we set at the beginning of the year and it certainly -- if it's not one of my -- if it's not my top objective, it's one of my top two.

And I don't want our people to lose sight of that on our revised objective. Now, we're very comfortable. You got to remember we thought we'd have a different price on the sale of the Enodis assets.

Charles Rentschler - Wall Street Access

Right.

Glen Tellock

The ice assets and the when we put the $700 million out there, we didn't think the crane market, again we've forecasted a 20% decline in Crane. And it's a different number than that.

So I think it's a matter of how do we adjust accordingly and what are some other things that we have opportunities that we didn't necessarily look at, at the beginning of the year that might make up for some of those shortfall. So, I think we're very comfortable saying it's 450 million. I can tell you that we still have that stretch of 700. So I want to do everything I can that to chip away at that number.

Charles Rentschler - Wall Street Access

Well, its seems to me the most intractable number on --certainly in the asset classes, as inventories and you didn't -- you obviously couldn't make a lot of head way in the first quarter. I'm sure you tried mightily but, can you give us your thoughts on where you think you can drive inventory by the end of the year, from the 9.16 at the end of March?

Carl Laurino

One comment to that, Charlie is that I think, I think it's fair to say that it's difficult to make as much headway as you'd like to, given the speed and magnitude of some of the cancellations on finished goods.

Charles Rentschler - Wall Street Access

Sure.

Carl Laurino

But as it relates to the some of the cost saving measures that we've taken and essentially, taken the opportunity or the need if you will to rationalize the manufacturing base and lower our cost structure. I mean that goes to what we are doing from an inventory management standpoint, that affects the raw material requirements of those facilities, as well as the work-in-process they utilize.

So, those metrics have certainly improved, every bit is as strong as we expected them to be. And that the finished goods part of that is one of that's it takes you to time, it's got a little bit of time to try to reconfigure some of those finished goods for new customer names in order to achieve some of the reductions on that front.

Charles Rentschler - Wall Street Access

But, do you think you could get 250 million out of inventory by December 31st?

Carl Laurino

Well, that again keeping with the forward guidance issue, we're putting the minimum of 450 out there as a way for people to make a determination as they how much of that might come from cash and profits, how much will come from inventory, but I can tell you a significant part is going to come out of working capital and the biggest part of that being inventory reduction.

Charles Rentschler - Wall Street Access

And one more comments about -- a question about working capital. Are your suppliers pretty well working with you on the accounts payable aspect of things?

Glen Tellock

I would say relatively, yes. I mean there are some new things in Europe there are some laws that are a little different and timing of payment of suppliers, customers, vice versa. But I think, for the most part it's -- our people have a pretty good relationship with most suppliers.

Carl Laurino

Do you certainly have the, -- I mean obviously cash is king for everyone these days and those are individual discussions that are taking place with the suppliers. And I think to Glen's point it needs to be remembered on all fronts that it's a relationship. And that relationship has got to work for both sides. And I would say overall as it relates to those relationships and what it means from a working capital metric standpoint that we'll stay relatively even as far as the working capital dynamics or trade payable dynamics of working capital.

Charles Rentschler - Wall Street Access

And one last thing, the 350 million bank line of credit, there is no strings attached to that, where they can be a pull back. I mean you have access to that, that's something you can count on?

Glen Tellock

Yes.

Charles Rentschler - Wall Street Access

Okay, thank you.

Operator

Our next question comes from Matt McConnell with Robert Baird.

Matt McConnell - Robert W. Baird & Company

Good morning. Glen you mentioned other opportunities that weren't included in the outlook before that could help you reach the $700 million, that reduction target. Would that be other asset divestitures beyond Scotsman or is there something else that is being considered now that wasn't before?

Glen Tellock

Well, yeah, I think first one will be just we talked about finished goods. I mean when you have one number that you are out there versus the sale of cranes, yeah, that's certainly one. I think you take a look at other assets that you have on our balance sheet and what can be monetized, whether it's -- say a piece of property, we got with Enodis, that's just land that was been held for whatever. We look at land we have with the legacy Manitowoc businesses.

I mean it's all those types of things, that now that we're in a different period than we were before, you take a harder at them. Those are the opportunities that may not have been in that $700 million number originally. And as you can, what I say it's other divestitures, I mean we don't talk about those things, but you certainly have to look at if they come along.

Matt McConnell - Robert W. Baird & Company

Okay. Thanks, that's helpful. And then of the $260 million cost reductions, is that -- do you have a target for what that could reach by the end of the year, or it's...?

Carl Laurino

Actually Matt, that 260 is -- as of the actions that we've taken right now, that is the annual run rate for the -- 260 between Foodservice and Crane and in corporate. That's the annual run rate and that translates to about 205 million realized in 2009, just to clarify.

Matt McConnell - Robert W. Baird & Company

Okay, are there additional actions being contemplated that would take the run rate above 260?

Carl Laurino

Everyday.

Matt McConnell - Robert W. Baird & Company

Is there any kind of target there?

Glen Tellock

No, I think the target is when we look at our operating margins and that's -- we look at what we are doing in Foodservice, you look at Cranes, I think you -- basically it's -- when you look at the last trough we were in cranes we've said we certainly we have long term commitments. So we would exceed any other margins from the prior troughs and that's the goal.

Matt McConnell - Robert W. Baird & Company

Okay, thank you very much.

Operator

Our next question comes from Alexander Brandell with Zingosis (ph).

Unidentified Analyst

On the raw material, costs did come down quite a bit. You haven't been able to pass that along to profits so far. Do you expect them to go down further as time goes on?

Glen Tellock

Well I think you have -- you have different areas of opportunity. I don't want to speculate on some of the commodities of copper or steel or some of those type of things. But I think there is always opportunity within our cost to be driving in this type of a market. And may be it's not so much of a commodity as let's say it's logistics or we've consolidated some of our Crane Care aftermarket parts, those will come into play later in the year. So there is always opportunity.

I always expect our costs to come down.

Unidentified Analyst

I am not just speaking of costs, I am talking the steel cost for example, which have been reduced. But you're still delivering higher cost steel.

Glen Tellock

But then if you go back to right now, if you look at the steel prices in some of the products that we purchased, it's no lower than it was at the beginning, right now it's no lower than it was at the beginning of 2008.

So you had a huge ramp up in 2008, which we couldn't pass along some of that. So we are trying to work through that. We couldn't pass on pricing. And so we are working on that. So I think there is opportunity in this environment. And I also think if we look out say two-three years I think there are other suppliers that may come on line for let's use steel as an example, since you bring it up.

I think there will be more suppliers in this as we look around to low cost countries longer term. So where it goes from today, perhaps I mean you can see -- you read all about the U.S. steel and some of these others that are in very difficult times, it depends how long this lasts.

Unidentified Analyst

Well, I guess what I am trying to get at is, you mentioned that at the moment you would get a 2% benefit on margins if you were able to use the current price of raw materials as your cost. But you can't because you paid more for what you are delivering.

What I am saying is between now and let's say the end of this year, do you expect those raw material prices that are currently evolved (ph) to be lower so that you could get an additional amount beyond the 2%?

Glen Tellock

Yeah.

Unidentified Analyst

How much do you think? I mean if you take all that into your process or do you -- how are your contracts written? Do you have to pass along some savings or not?

Glen Tellock

Well, we didn't have for long the upside in the middle of the year, last year.

Unidentified Analyst

Yes.

Glen Tellock

The costs were rising, we could not pass along any additional benefits to our customers. So if just come down to last year's level, we get a benefit from there. And that's what Carl was talking about, the 2%. If it comes down even further than that, you're going to start in the back half of '09 and you will see in the first part of 2010.

Unidentified Analyst

Okay.

Glen Tellock

Because pricing has pretty much stabilized. And we worked with our customers as best we can. But obviously pricing is very difficult in this environment.

Unidentified Analyst

Okay, thank you.

Glen Tellock

Yup.

Carl Laurino

Just to clarify on that also. The issue with the higher costs, it's probably because of the ramp-up that Glen described. It's partly because of the overhang in the inventory that we have to extinguish to get through to fund that higher cost level. But the accounting treatment of the inventory, it's not really driven by the fact that we've got long term contracts with suppliers that we're still are honoring.

Unidentified Analyst

Okay, thank you.

Operator

Our next question comes from Barry Hanks with Stage Asset Management (ph). Please go ahead.

Unidentified Analyst

Hi, good morning. I wonder if you can give us a little bit more color on what's going on in the crane rental channel in the U.S. First in terms of the ordering pattern. But also just in terms of used crane pricing and run rates that, that might be seen, all in terms indicative of the sense from the market. Thank you.

Glen Tellock

Fine, go ahead.

Eric Etchart

Yeah, well, obviously since the beginning of the financial crisis you've seen the rental rates going down in the U.S., and you've seen obviously -- especially in the low end market, the 30 ton, the 50 ton hydraulic cranes, you see the occupancy of course dropping. We followed that and track this. But the average utilization was about 90% and it's fair to say in the low-end that capacity that is probably around the 60, 65% right now.

So consequently, the used cranes market in that segment on the low capacity that pricings are going down.

In terms of renal rates, if you see high-end, high capacity cranes, the pricing are holding well. And we expect that it should continue, because the utilization rates on the high capacity crane is still pretty good for our North American dealers.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). Our next question comes from Barry Henry (ph) with Siemens Financial Services Incorporated.

Unidentified Analyst

Thank you good morning gentlemen. Just want a clarification to the extent you can, with regard to the Crane segment and order cancellations, given Glen your affirmation or reaffirmation essentially that the infrastructure needs in developing countries have not gone away. Those projects have been tabled temporarily, rather than disappearing necessarily.

But and your sense of the proportion of cancellations that you've seen in the last several months that are really deferrals. If you can give us I am not looking for specific percentage per se, but to the extend could you give us an perspective on the reality that a fair portion of those orders, you think will re-emerge whether it be late '09 or early '10, or indeed do you see them as cancellations nearly (ph) completely replacement?

Glen Tellock

That's the million dollar question. And I wish I had a good answer for you, but from where we're sitting and the stage (ph) where we are at. I think we are looking at them as basically cancellations.

Unidentified Analyst

Okay

Glen Tellock

I think, this is -- again, I want to go back to what I said. If there was financing availability from the credit markets, many of these people would be able to take some of these equipments and they would sit on it. I think that's the base of that's the customer base that's out there. But the problem is that you'll get into 30 days from this crane being delivered and all of a sudden the people that had the financing, it's no longer there.

So we track -- we watched what's financing, what's cancellations, that kind of thing. But I can't give you a great answer that is, is it a deferral cancellation. All we know is that they are not taking the crane. And then what we can do is just stay close to them as to what projects they may have had for that or what they were anticipating.

I would say that I still think as my comments were, there are projects out there which is different from before, may be not the same number of projects. I think people were may be a little over zealous. But that doesn't mean that there aren't projects, when you look at Middle East, you look at China, look at what's going to happen in the United States.

Again I think credit availability, Russia for instance, I think if China or the U.S. or Europe start lending money back to Russia, I mean that's a big impetus. But for me to predict that, the way I see things right now it would be very difficult and that's again why guidance is so difficult.

Unidentified Analyst

Okay, fair enough, thank you.

Operator

(Operator Instructions). And there are no further questions. I would like to turn the conference back over to Mr. Carl for any additional or closing remarks.

Carl Laurino

Thank you, Lisa. Before we conclude today's call, I'd like to remind everyone that a replay of this call will be available beginning at 12 noon Central Time today until 12 midnight Central Time on May 8.

The number to dial for the replay is area code 719-457-0820. Please use confirmation code 4627780. You may also access an archived version of today's call on our website 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.

Glen Tellock

Thanks Lisa.

Operator

You are welcome. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Manitowoc Company Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts