Manitowoc's Management Presents at RBC Capital Markets Global Industrials Conference (Transcript)

Sep.11.13 | About: Manitowoc Company, (MTW)

Manitowoc Co Inc (NYSE:MTW)

RBC Capital Markets Global Industrials Conference

September 10, 2013 5:30 p.m. ET

Executives

Carl Laurino – SVP and CFO

Steve Khail – Director of Investor Relations

Unidentified Speaker

CFO, Carl Laurino, Director of Investor Relations, Steve Khail. So gentlemen, welcome.

Just 60 seconds, real quickly, I think most of the Company has two fairly distinct businesses. There's a construction and crane business, where a lot of the end market exposure is tied to energy projects and other commercial construction. And then, there is a food service equipment business. And today, on the top line, they're fairly close. But going forward, we think we're – kind of our view of the story is the crane business should be at the early stages of a recovery.

So, with that, maybe Carl or Steve, if you could just give us any directional view of kind of where you think we are in the crane cycle, recovery. I think coming out of the second quarter, we felt like orders were okay. You had some fits and starts at the beginning part of the year around the big trade show in Germany, but maybe just give us your current thoughts about the crane cycle.

Carl Laurino

Sure. The cycle, as we look at it, is very much in line with what you described; that tends to be a long cycle business. We started expanding off of the track year in 2011 over 2010 and saw similar types of growth in 2012 and thus far this year.

Our guidance this year is, for high single-digit growth, a percentage growth in cranes, mid-single-digit in food service. And I think the things that have been strong in the business – energy and infrastructure around the world – are poised to continue to stay that way.

I would say if you look over the last couple of years, there seemed to be a little bit of a summer swoon in cranes, none of which gave us a crisis in confidence about that overall motion in that crane cycle. This cycle will probably last a long time.

The things we look at, obviously, besides just our order flow and our results to give us a little bit of a gut check on that would be the utilization rates of the crane rental companies, which represents about three-quarters of our customer base. The rental rates that are reflective of those utilization rates, obviously correlated to that – the condition of the end markets; some of the long lead-time project flow; E&C backlogs; things of that nature that give you some pretty decent visibility.

And as we take all of that together and we look at how this cycle is played out, we certainly would call out some pretty stark differences from what we've seen in previous cycles, whereas in former cycles, you tended to see residential and non-residential construction lead you out of a low ebb of the business. Those end markets continue to date to be pretty lackluster, and where we've seen the strength in the business has been in energy and infrastructure around the world.

And again, I think that that as we look at it, it probably would be a driver of the business. If you look at the supply demand characteristics demographics around the world and the need to use lifting equipment just about any way you'd bring on additional supply, not to mention some of the maintenance work that goes along with existing facilities, you need to have heavy lift equipment for that, so we think that's got some legs.

Unidentified Speaker

Would you say that the pace of the business is – you mentioned the summer swoon that usually stays. Would you say the pace of the business is different from that? Is it softer than you might – has it slowed down more than you would have thought over the summer? Or is it kind of tracking like you might think? Europe is obviously not good.

Carl Laurino

No surprise there. Yes, that's a region of the world that we've got a fairly pessimistic view about. I don't think we feel as though there's much risk that there's going to be contraction from, where we are given how far it's fallen, but certainly not a lot of optimism that we're going to see near-term growth in that part of the world.

As it relates to the way things played out this summer versus our expectations, we, I think, were fairly pessimistic, at least as you look at previous cycles with where we are in this one that we were going to see some kind of huge inflection point on the slope of the growth level. I think we were pretty realistic about that. And by virtue of that, I think some of the caution flags that we saw out there are playing out within a reasonable range according to what we expected.

Maybe some incremental weakness, but overall, I think the things that we expected to be good, continue, and where we thought we might have some upside opportunity really isn't coming to fruition just given that overall cautious view that's being driven by the same types of things that you see when you pick up a paper every day.

Unidentified Speaker

One of the things that I think you’ve – we've heard from Manitowoc and some of your peers and some of the rental companies has been an improvement in some of the – in the mix shift – in the mix towards bigger, heavier crawlers. I mean, the tower crane market is obviously very soft, but the crawler business for the last couple quarters sounds like it's been getting better, both from an inquiry level and an order level. Has that continued? Are you still seeing that progress like you would have thought?

Carl Laurino

Yes, it has. I think that's part of the comment that I make on the strength and energy. That's a business that tends to rationalize later than our late-cycle business, and the way it's playing out in this upturn is very similar to how it has in other up cycles. And I would say for us versus our expectations, I think we actually are seeing it a little bit sooner as it relates to the throughput in the P&L. We saw some incremental positive mix that came from better crawler activity in Q2. And I think that that probably continues as we finish out the year.

Unidentified Speaker

That's both in the order book and the production?

Carl Laurino

Correct.

Unidentified Speaker

Okay. Because the margins in the second quarter were surprisingly good, and I think that that's one of the things that people are kind of watching as a – the margins and the top line as well. So, if the top line is maybe a little softer, can you make it up on margin I guess is what people are trying to figure out?

Carl Laurino

Yes. But I would caution that that's not necessarily due to mix benefit. I think, obviously, some of the things that we've done to generate some efficiencies within the operation are more important as it relates to that. I would say that we're also getting, as you look at it year-on-year, a price cost benefit that's driven. At least this is the expectation, driven by more on the cost side than on the price side this year.

Unidentified Speaker

I mean, how would you characterize the pricing environment?

Carl Laurino

Again, when you've got caution, you've got, I think, challenge in getting probably as much as you'd like to get from a pricing perspective. And I go back – obviously, we're fortunate in that we've got a value proposition that's associated with use of our equipment and the total cost of ownership in buying Manitowoc that enables you to commend a premium, but there's a tolerance for that. And when there's maybe a little less robust up cycle, you don't have the same opportunities that you have when it's a little bit stronger.

Unidentified Speaker

Is there an inventory issue? Are any of your competitors building extra inventory, or it's just really demand?

Carl Laurino

Not that I've observed. It's more of the macro that creates, I think, a little bit of a constraint to get some better leverage on that side.

Unidentified Speaker

Okay. And just in your discussions with rental companies, I mean, is there a utilization threshold that they're waiting to see that's different than past periods, or do you feel like it's just they're just – I mean, because we've talked – companies like the E&C companies and the energy projects and whatnot seem to be out there, so are people just holding onto their CapEx tighter this cycle versus last cycle?

Carl Laurino

Yes, and I think it's – in part, you could go all the way back to the financial crisis. I mean, when you get hit that hard in – on just about all fronts as abrupt and unexpected as it seemed to kind of finish out at the end it creates a lot of caution on the other side of that. And I think versus what we've seen in previous cycles, when you get to the second and third year of a recovery, I think you tended to see a little bit more speculative type of procurement that would take place by the customers that say…

Unidentified Speaker

Right.

Carl Laurino

“Okay. I might not necessarily have a specific crane that I need to have at this specific project at this specific time, but I do know that I've got a fleet that doesn't contain this capacity void. I need to make sure that I have it, or I'm going to lose out on forward opportunities that I might not necessarily have in hand.”

That has occurred a bit, but not to the extent that I think we've seen in previous cycles. I think it's just the cautious tone that's driving that. And therefore, what we've seen by and large in this up cycle is essentially need-driven project work that's driving the procurement.

Now, you don't get that if you don't have a certain amount of utilization rate and a requisite type of return from the rental environment from a pricing standpoint that you're in. But you – and those metrics are in pretty solid footing.

And so we're seeing it, and I think the good news that we expressed also on the last conference call is that we're starting to see a little bit more of that willingness to speculate, at least a bit, which is the first time we've seen it since the crisis.

Unidentified Speaker

Has that gone up – so it was there. Has that been sustained through the – through…

Carl Laurino

Yes. It's not as if it was kind of across the board…

Unidentified Speaker

Right, right.

Carl Laurino

To say you don't want to necessarily say that a few transactions represent a trend, but that's – and we've certainly seen some sizable procurement that I would say reflects what we talked about at the outset; the belief that this is going to be a nice long-term up cycle for the crane business than what we've seen historically.

Unidentified Speaker

So over the course of this cycle, do you feel like you could get back to past peak revenue, past peak margins? Your margin – I think it’s peak was in the mid- to high-14% range. You're about half that level today. Is that still something that you think is doable? Or you think that the business has structurally changed and would prevent that?

Carl Laurino

I don't know that there's necessarily anything that would preclude us from getting to the revenue levels. Obviously, there's going to be a question mark as to what is the mix characteristic the tower crane portion of the business driven by those end markets that rely more upon tower cranes than any other type of lift equipment. Residential, non-residential construction have been essentially depressed; haven't recovered much at all. And with towers, we do have better-than-average margins, among the best from an OEM standpoint for the product line – for the whole good product line, I should say.

And that's – it's going to depend upon degree. I mean, we certainly would expect under a multi-year scenario that you're going to see recovery in those end markets. It's a question of what's the delta between the last peak and that peak and how much can you earn through it based upon other things that you've done in the business, and we've done a lot.

I think the comment – and thank you for the comment – about the second-quarter margin performance in cranes – I mean, that was driven in large measure by some of those things we've done to try to optimize the business at relatively modest levels of demand that have been effective in helping us drive a little bit of margin. So – and that, obviously, should be sustainable. It's a question of what are the takes that you have to put in order to overcome whatever the characteristics might be down the road?

Steve Khail

Yes, I'd also add too that as you go back to the prior peak in 2008, obviously it was truncated because of the global financial crisis, but we were still driving towards that ultimate peak margin with a variety of Six Sigma and Lean manufacturing initiates that we had under way, that when the market turned down. We continued to push through and complete those projects, and we should certainly benefit from that in this current up cycle as we realize better mix and improved volumes.

Carl Laurino

But our fixed-cost structure is not likely to be appreciably different than what it was back then. And, obviously, we added Brazil. That's a single factory that you would presume within a reasonable range would contribute, based upon what we think is going to happen with the Latin American market. But other than that, there really hasn't been – we had the JV, which to date has not been successful that we're working on.

Unidentified Speaker

China.

Carl Laurino

Yes, exactly – that we think has got opportunity for us to certainly improve that picture. India may be a bit of a question mark in terms of what we need from an infrastructure, depending upon how that economy develops. We've certainly been pleased with the investment that we've made there. We mentioned on the second quarter call that we've seen growth there. That I think comes on that front, as well as some share retake, if you will, that's been driven by our, I think, ability to demonstrate value for the life of the equipment and the efficiency of the equipment, drive that advantage.

Unidentified Speaker

Has the China JV been – the new JV been finalized?

Carl Laurino

That will be a, I think, significant enough finalized agreement, that we'll make a public announcement when that occurs. So, the answer is no.

Unidentified Speaker

And then in your second quarter, you had – there were a couple things. There was a little bit of a production hiccup that caused some deliveries to not occur, and I think there was an order that got held up that may – and you had talked about that potentially occurring in the third quarter. Can you just update us on whether those shipments have happened in the third quarter and if there's anything you can share about that one order that was out there?

Carl Laurino

Sure. I mean, the – we didn't quantify it, other than to say it was meaningful enough to mention. Obviously, we had the same thing happen last year…

Unidentified Speaker

Right, right.

Carl Laurino

That we did quantify. That was $120 million that, if things would have gone exactly as we expected them to, we would have seen in the third quarter instead of the fourth last year. It wasn't anywhere near that size, but, again, meaningful enough to mention. Our visibility is if it hasn't shipped yet it will ship this quarter.

Unidentified Speaker

And the order – that bigger order that was kind of out there, has that been secured?

Carl Laurino

It has.

Unidentified Speaker

Okay.

Carl Laurino

I think you're talking about the Middle East.

Unidentified Speaker

Yes.

Carl Laurino

Yes.

Unidentified Speaker

Okay. Maybe we could skip to the food service business.

Carl Laurino

Sure.

Unidentified Speaker

Well, it's a big part of your business.

Carl Laurino

It's a bigger part of the profitability right now.

Unidentified Speaker

Right. Frankly, that business has been a little bit disappointing relative to my expectations for the last two to four quarters, the top line, particularly. I think you had talked about some CapEx deferrals, or I can't remember the terminology you used, but have those deferrals turned back into orders? Are you seeing any improvement in that business? And I know you have a lot of margin initiatives that are designed to improve the profitability next year. Maybe just update us on what's going on there.

Carl Laurino

Sure. Yes, I think those – yes, I think the same types of things that are creating caution on the crane side of our business are relevant. So, in food service, it's an industry that is pretty high correlated to consumer confidence. So, when you have some disruptions, whether it's unemployment rates, gas prices, some of those things that are driving the mortgage market in terms of interest rate increases; those types of things that are incrementally harmful to consumer confidence, obviously it affects our customer base. And, therefore, the food service equipment industry. That's something to keep an eye on.

But as it relates to the specific customer opportunities, driven by things that were specific in terms of new product rollouts as well as the pacing and the calendarization of some of the larger customers' type of CapEx that were more modest in the first half of the year than they thought they would be and that we expected them to be those opportunities are still there and we expect them to come to fruition.

Unidentified Speaker

And the margin initiatives – I know there's been some production in Mexico. You've relocated some of your US capacity to Mexico. Is it possible to quantify what kind of payback you expect on the – how much have you spent on those initiatives and maybe how we should be thinking about the payback of those?

Carl Laurino

Well, you've got two things going on in Mexico in food service. You've got the beverage consolidation. That's essentially complete, and that is a function of that kind of capacity shift. In large measure, what's going on in Monterey is essentially a greenfield that we have now completed. That's much more predicated upon the opportunity to produce for that market where we feel we're under-penetrated and create a product category that can fill a void in the product array that we have.

The factory is done, it's gorgeous, and we did a great job with that on schedule and on budget pretty much, and it's early. Obviously, we're essentially in tests without a lot of production at this point in time.

Now, the other thing that you're alluding to as it relates to our manufacturing is the obvious consolidation that's ongoing, that we expect to get done this year. All those things together, as we look at the margin expectations, obviously they create costs when you're going through them. That will go away, but then also the efficiency benefits we should get when they're fully implemented. And as we look at our margin guidance for food service, the fact that we've lost margins year-to-date, we think gets normalized with the benefit that we should see at essentially the end of this year. The fourth quarter benefit will enable us to get to essentially flat, from a food service margin standpoint, full year.

And then it becomes a pathway also, as you're essentially exiting at what's a reasonable expectation for your run rate in 2014. You get a little bit more of a – kind of an incremental opportunity to start bridging our pathway to what we've targeted in food service, ultimate margins in the high teens, which is – that's what we believe we can do with this business.

Unidentified Speaker

Right. So one of your competitors is up in the – frankly, higher than your margin. I mean, is there something structurally different than the two – you have fairly similar – a number of products overlap.

Carl Laurino

Yes.

Unidentified Speaker

I mean, is there anything that you've seen competitively that they do differently that precludes you from getting up to that higher margin level?

Carl Laurino

Yes. I think the – you – certainly, if you look at the similar products, we've got a much broader – at least as it relates to the commercial food service equipment. They have product lines that we're not in on the consumer side that they recently acquired on the food processing side.

But if you look at some of the hot side products, which is what they have in the commercial kitchens, and you just compare both product lines, it would be much closer.

Unidentified Speaker

Right.

Carl Laurino

I think the other element is that we're making some investments to try to get what strategically for us. We feel that we have the opportunity to do and to essentially create this solutions approach for customers. That probably creates a little bit of infrastructure to try to satisfy that aim.

Unidentified Speaker

Okay.

Carl Laurino

That will only be – will only come to a benefit at the point in time that we gain better traction than, quite frankly, we have on that front.

Unidentified Speaker

Right.

Carl Laurino

So, we think that with what we have and the approach we're taking to it, we'll get there, but we're not there yet.

And, oh, by the way, I think that the performance that we have had relative to the margins, if you go all the way back to acquisition date from a legacy and order standpoint, obviously we're seeing year-over-year erosion this year, but it's coming from, obviously, a much lower level and selling into a much worse market, essentially…

Unidentified Speaker

Right.

Carl Laurino

The hardest hit we've seen to the industry in 2009 over 2008. That started to normalize in 2010, but in that environment, to be able to drive the margins that we have in food service I think is a tribute to what the team did there.

Unidentified Speaker

Do we have any questions from this audience?

Question-and-Answer Session

Unidentified Speaker

[Indiscernible]

Carl Laurino

Yes. I think that there's – you're always going to have a certain amount that's roll on-roll off from a year-over-year comparable, but quite frankly, I've been impressed with what they've been able to do on that front while they maintained strong margins, and that's something I think we need to essentially gain some traction with some of the initiatives that we're working on to exploit the opportunity that we have in that space.

And the other thing that I think is relevant is where you do have some specific customers that have maybe curtailed what they are doing on the CapEx side in certain geographies, that can definitely play into the comparison where there are probably differences in the level of penetration into some of the emerging markets.

Unidentified Speaker

Do you see following McDonald’s – Yum! Brands to China or emerging market growth as really the big next step for the food service business? Or is it just new product introduction here in North America?

Carl Laurino

No. I think it's a significant step, but not the only one. As we think about this notion of really having an ability with the breadth of product that we have and essentially trying to create ROI initiatives for the customer base and really solving some of the things that they're trying to get through, whether it's new menu, whether it's energy efficiency, the efficiency of this kitchen layout, having some common controls that can help them with training costs, things of that nature, that we need to have resonate with the customer base and have that coupled with the international growth opportunity. That's probably more compelling than the developed markets, and gain some traction on that ground as well in food service to grow faster than the industry.

Unidentified Speaker

Just maybe touching on your capital structure, you have a $200-million debt reduction target out there for this year. I mean, obviously it's been an ongoing process for Manitowoc since you did the notice transaction to try and knock away at that. Is that – are you still fairly comfortable with that kind of number? Would you still act – you probably don't want to answer the question, but is an equity sale something you would consider to help fix the balance sheet…

Carl Laurino

Well, I think the thing to look at it is essentially the performance and what we've done with the debt reduction, even going into 2009, 2010, when food service and crane troughed, respectively, I think is a characteristic of the Company, where we have been able to generate cash and free cash flow even when the markets are extremely tough. So, that's a plus. Obviously, we've taken out a turn – we took out a turn of leverage last year. We've guided that we're going to do the same with the debt reduction and the EBITDA that we're taking into 2013.

If you translate that to a debt-to-EBITDA metric, we go from close to 7 times leverage at the peak down to roughly 3.5 at the end of this year. How many shares do you need to generate in order to accelerate that? And what does it really do for you? It'd be a huge question mark in my mind, as to the effectiveness of doing that. So it's – I don't see a strong rationale to making that type of decision.

Unidentified Speaker

Fair enough.

Carl Laurino

Looks like we're over time. That went fast.

Unidentified Speaker

Thank you very much, Carl, Steve. Thank you.

Steve Khail

Welcome.

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