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The Manitowoc Company Inc. (NYSE:MTW)

Q4 2009 Earnings Call

February 03, 2010; 10:00 am ET

Executives

Glen Tellock - Chairman & Chief Executive Officer

Carl Laurino - Senior Vice President & Chief Financial Officer

Eric Etchart - President of Manitowoc Cranes

Mike Kachmer - President of Manitowoc Foodservice

Steven Khail - Director of Investor Relations & Corporate Communications

Analysts

Charles Brady - BMO Capital Markets

Henry Kirn - UBS

Nigel Coe - Deutsche Bank

Meredith Taylor - Barclays Capital

Ann Duignan - JP Morgan

David Wells - Thompson Research Group

Seth Weber - RBC Capital

Ben Elias - Sterne Agee

Operator

Good day everyone and welcome to this Manitowoc Company Inc. 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 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 Chairman and Chief Executive Officer and Carl Laurino, Senior Vice President and Chief Financial Officer. Eric Etchart, President of Manitowoc Cranes and Mike Kachmer, President of Manitowoc Foodservice.

Glen will open today’s call by reviewing our 2009 accomplishments, Carl will discuss our financial results for the fourth quarter and full year and our segment presidents will offer incites in to their market conditions and outlooks for 2010. For anyone who is not able to listen to today’s entire call, an archived version of this call will be available later this morning. Please visit the Investor Relations section of our corporate website at www.manitowoc.com to access the replay.

Before Glen begins his commentary, I would like to review our Safe Harbor statement. This call is taking place on February 3, 2010. During the course of today’s call, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 will be made during each speaker’s remarks and during our question-and-answer session. Such statements are based on the company’s current assessment of its markets and other factors that affect its business.

However, actual results could differ materially from any implied projections due to one of more of the factors explained in Manitowoc’s filings with the Securities & 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 will now turn the call over to Glen.

Glen Tellock

Thanks, Steve, and good morning, everyone. As we look back on 2009, there’s no question that it was one of the most difficult business environments that we have faced in our 107 year history, from both a financial and operational perspective. However, I believe we can look back on 2009 with pride in the manner that Manitowoc has met the challenges of this deep recession.

It is during such difficult times that a good team must come together and step up to the challenges, and I’m very pleased with the way our entire Manitowoc team performed over the past year. We executed well an identifying and solving many difficult issues. For example, we began the year in the midst of a global credit crisis that prevented many of our customers from purchasing cranes and foodservice equipment causing did demand to drop dramatically, virtually over night.

Our ability to respond quickly with appropriate actions enabled us to navigate our way through those difficult times. In fact, our actions throughout there 2009 have set the foundation for profitable growth as the economy gradually recovers.

During 2009, we focused our mission of three priorities, first to have a flawless integration of a notice in to our Foodservice business, second to position our Crane operations for optimal performance when the economic recovery begins, and third, to optimize cash generation and achieve our adjusted debt reduction objective of $450 million.

We are maximizing the benefits of the Enodis acquisition. We continue to expect synergies of at least $80 million. More importantly, the revenue and long term growth opportunities from this acquisition will continue to play out in the years ahead as we move forward as one unified business.

We expect to emerge from the global recession with a solid, innovative workforce in an extremely efficient foodservice operation. We are market a leader with excellent base of global customer, and arguably the best products in the industry. This is an ideal formula for growth.

In the Crane segment, we have built a very efficient and quality-focused infrastructure. We have greatly reduced our SG&A and operating expenses, but actions that included large scale workforce reductions throughout there the business. Those are remained did their part with wage and benefit reductions. Wherever it made sense, we reduced outsourcing, streamlined in house processes, and accelerated our efforts in lean manufacturing.

It is important to note our expense and investment decisions were not intended to simply cut costs in the short term, but to create long term competitive advantages and our research and development efforts continues to drive innovative solutions that will help us to maintain our industry-leading positions.

Turning to our debt reduction goals, we exceeded our target of $450 million by more than $20 million. These certain certainly among the most satisfying achievements we realized in 2009. Also of note, since completing the Enodis acquisition just 15 months ago, we have repaid $770 million even debt. I am proud of the entire team, across the enterprise, for their efforts and support and especially for the excellent results that were achieved under very difficult circumstances.

Going forward, we will continue to strengthen in our two core business segments. We move in to 2010 with a highly skilled and talented team, complemented by formidable competitive positions in our industries. We will also continue to optimize our diverse global manufacturing base, and to invest in rapidly growing emerging markets. Our plans for 2010 include Nemours initiatives to further strengthen the business.

Other members of our management team on this call will address these plans in more detail, but it appears that our business has stabilized and we expect to see improving trends in the second half of 2010. Although the signs of improving global economy are bolstering our outlook, we are prepared to react to whatever the market might do.

We have demonstrated convincingly that we can quickly adapt to a changing economy. We have shown flexibility and creativity in solving problems and position our company for more promising growth opportunities.

So now, let me turn the call over to Carl to discuss our detailed financial results. Carl.

Carl Laurino

Thanks, Glen and good morning, everyone. Reported net sales for the fourth quarter of 2009 were $839 million, which is a decline of $377 million or 31% from the fourth quarter of 2008. On a sequential quarter basis, net sales declined $42 million or 5% due primarily to the normal seasonality of the Foodservice business.

The good news is that the revenue on the Crane segment stabilized with essentially no change in sales from the third quarter. Given the year-over-year sales decline in the fourth quarter, we also experienced a decline in operating margin in the fourth quarter from 8.6% to 6.1%. This was due to the dramatic decline in Crane margin that was only partially offset by the explosive increase in our Foodservice margin.

We were pleased with our decisive actions to reduce our costs by $240 million in 2009, but those actions were insufficient for us to preserve our margin performance in Cranes. We will derive additional benefits from our cost cutting actions in 2010 that will generate $125 million of additional cost reductions this year.

The GAAP net loss for the quarter was $23.5 million or $0.18 per share, versus a net loss of $200 million or $1.54 per share in the fourth quarter of 2008. This quarter’s loss included $0.11 per share related to special charges including debt extinguishment, loss on sale of product lines, and a loss from discontinued operations. Excluding these and other unusual items in both quarters, fourth quarter EPS was a loss of $0.07 per share this year, versus earnings of $0.46 in 2008.

Moving on to the balance one of our top priorities in 2009 was debt reduction. As Glen mentioned achievement of this objective was particularly noteworthy, considering the substantial market declines we experienced in both Cranes and to a lesser extent to Foodservice.

From a cash flow standpoint we finished the year very strongly with $160 million in cash flow from operations in the fourth quarter which is driven by significant reductions in networking capital and with over $900 million in combined receivables and inventories still remaining as of year end, we expected to continue to generate cash from working capital in 2010.

Moving on to our segment result, Foodservice sales in the fourth quarter totaled $358 million, up from $273 million in the fourth quarter of 2008. On a sequential quarter basis sales declined 11% due to typical seasonal patterns. Fourth quarter operating earnings in Foodservice were $42 million, versus $3 million in the fourth quarter of 2008, and $59 million in the third quarter of this year.

This resulted in a Foodservice segment operating margin of 11.6% in the quarter, which mirrored full year operating margins well in excess of our targeted double-digit margins in 2009. Full year sales pro forma for the Enodis acquisition declined 17%.

However, operating income rose nearly 3% representing a like-for-like increase in operating margins of 230 basis points, a significant contributor to these results was more than $35 million of integration synergies, which handily surpassed our original target of $24 million. Ultimately we expect to realize more than $70 million in synergies in 2010, and more than $80 million in savings and revenue synergies by 2011 as the benefits of our integration process continue to build.

Moving to the Crane segment, sales in the fourth quarter totaled $479 million, down 49% from $944 million in the fourth quarter of 2008, but equivalent to the segment revenues reported in the third quarter of 2009.

Crane operating earnings in the fourth quarter were $18 million, versus $115 million in 2008, and $21 million in the third quarter this year. This resulted in fourth quarter Crane segment operating margins of 3.8%, versus 12.2% last year, and 4.3% in the third quarter. The key driver to the sequential margin decline was due to lower factory absorption in the fourth quarter versus the third.

Crane backlog at the end of the fourth quarter was $573 million, down from $667 million at the end of the third quarter. The trend in new orders net of cancellation continues to show improvement since late last year, resulting in a current backlog that is declining at a much slower pace. Correspondingly our book-to-bill percentage as increased to about 78% in this quarter from about 50% in the third quarter and 25% in the second quarter.

Finally, let me update you on our debt refinancing and related covenants. As mentioned in last month’s press release, we have taken this action to provide a better balance of secured and long term unsecured debt. With the proposed refinancing and pay down of secure debt from our operating cash flow, asset divestitures, and this note offering, it was also appropriate for us to obtain greater debt covenant flexibility.

As announced last week we obtained approval of the amendment which will become effective upon the issuances of at least $300 million and unsecured notes with use of the net proceeds to pay down our senior secured term debt. We expect to complete the note offering in the near term.

Before I conclude my remarks, let me share our 2010 guidance with you. For the full year we expect Foodservice revenues to improve modestly, and operating margins to continue their solid improvement. In Cranes we expect that the year-over-year percentage decline in revenues will be significant lower than the 41% decline in 2009. We also expect Crane revenues in the first half of 2010 will be significantly lower than those in the first half of 2009.

However, we expect Crane revenue grains in the second half of 2010, versus the second half of 2009. Additionally, we expect that operating margins in our Crane segment will track above the 3.5% trough margin that we experienced in 2003. Other 2010 financial examinations include capital expenditures of approximate $50 million, depreciation and amortization of approximately $145 million, and debt reduction of at least $200 million.

With that, I will turn the call over to our next speaker, Mike Kachmer, who will share his thoughts on the outlook for our Foodservice segment. Mike.

Mike Kachmer

Thank you, Carl. Our Foodservice segment entered the New Year in a very strong position. With the acquisition of Enodis we are clearly a leading player in the global Foodservice equipment industry. Our customers include many of the fastest growing and most innovative companies in the world. They come to us for innovations that allow them to improve their menus, enhance their operations, and reduce their cost. We serve customers in more than 100 countries, and we will continue to expand.

Our integrated manufacturing operations service sites, and sales offices, work together to assist customers worldwide whether these customers are local businesses or global companies. As you know, the integration of Enodis is well underway, yet we are continuing to identify and accelerate synergies both in terms of revenue opportunities, and expense savings.

Even now we are focused on maximizing these cost savings, we are also continuing to invest in people, products, and processes. A good example is the completion of an innovative and easy to operate smoothie machine from one of the world’s leading quick service restaurant chains. We will be delivering and installing thousands of these units throughout 2010.

Smoothies are expected to be an exciting new product line for our customer, and the marketing program is just getting underway. We have launched numerous energy savings, and sustainable initiatives in Foodservice to help our customers. Because we can help our customers operate more profitably, they are willing to invest in our products, even during recessionary markets.

We work with them at a senior level across the globe to meet their needs. The adjustments that we have made, and continue to make have allowed us to improve profitability and generate strong cash flow throughout there the recession. Equally important we are a major player in a very solid industry, driven by strong long term fundamentals.

According to the national restaurant association, it appear 2010 will be a year of transition and improvement, as U.S. restaurant industry sales are forecasted to advance 2.5% to $580 billion in 2010. Despite two consecutive years of unprecedented contraction, restaurant operators are increasing their investments in new menu items, new locations, remodeling programs, and sustainability initiatives. Such investments while still cautious create opportunities for additional and innovative kitchen equipment that enhance operator profitability.

The national restaurant association recently reported that 40% of all quick service operators find to make capital expenditures in the first half of 2010. A leading quick service chain recently announced plans to increase capital expenditures by 14% in 2010, building more than 1,000 new stores and remodeling approximately 2300 more. Planet retail, which tracks the global Foodservices in food retail industries, forecast continued global growth in facilities and sales in both industries for 2010 and beyond.

Our strong position in these categories gives us significant opportunities to grow along with our customers. Not only do we aim to be their supplier of choice, but also their innovator of choice. Our customers are constantly looking for ways to innovate their menus, and we are at the forefront of that innovation. As validation of those relationships, Trimester, Garland, and Lincoln, received kitchen innovation awards from the National Restaurant Association in 2009.

While Cleveland, Delfield, Frymaster, Lincoln and Manitowoc were recognized as best in class by Foodservice equipment and supplies magazine in no respective categories, as you can see, our branded are well positioned leaders that span virtually all major equipment categories. Our team is remarkably passionate about the combined businesses and the opportunities that align in front of us. Our priority is clear, to continue the work of integrating our Foodservice organization, and to build in industry leading business for the long term.

With that I’ll now hand off the call to Eric Etchart for his views and outlook on the Crane segment. Eric.

Eric Etchart

Thank you, Mike. As we all know the Crane segment is much more susceptible to business cycles, and the Foodservice side and this industry downturn as been one of the most abrupt that we have ever experienced. The good news is that we are seeing signs that we worst is over and suddenly in some parts of the world, most notably, China, India, Australia, North Africa, Brazil, and other portions of Latin America, growth has resumed and we have been expanding our product lines and facilities in these areas.

In China, we have recently started to produce crawler cranes, using many of the same proven strategies that have been key to success in the region. As a result, we are now producing three completely different product lines, crawlers, towers, and truck cranes in first class manufacturing facilities in Jiangsu, Zhejiang provinces.

In December, we also saw a pickup in some of our more mature markets, such as Germany and Australia, as a result for the first time, in more than a year; we had a month-to-month increase in our backlog. We have taken advantage of a recession to concentrate our efforts to lead innovation and to implement our innovations globally. This includes both product and manufacturing innovations.

We are expanding our Lean Six Sigma concepts in all manufacturing locations worldwide, and have implemented several initiatives to further expand our lead in product reliability and customer satisfaction. We have also initiated a worldwide supplier development program that will help reduce costs and improve quality. Our partnership efforts with a variety of suppliers to produce and operated of caps and boom channel fabrications are good example of this collaboration.

Looking ahead, we see opportunities driven by major global trends, such as the need for improving infrastructure and energy and power generation. This includes significant growth in wind energy projects in many parts of the world. We enjoy the strong position in these industries in both the mature and emerging markets.

We also continue to see demand for our market support services, our crane care business is not only a key differentiator for Manitowoc, but it is especially important to our customers during an economy downturn when there is an intensified focus on minimizing total cost of ownership.

Let me clarify that. While we still expect another revenue decline in 2010, it will be at a significant lower percentage to 2009, because we do not have a large backlog that we were working down during the first half of last year. If present trends continue, we do expect to see sequential quarterly growth as we proceed for the year.

In making this forecast, there are mixed views from nearly every trade association and industry economies that we follow. For example, AEM believes that the U.S. construction machinery business will increase 5% in 2010. Conversely the U.S. department of commerce is forecasting that construction put in place for 2010 will decline by 10%. From an international perspective global incite believes the world’s total construction will grow by less than 1.5% in 2010.

In light of this different forecast, we are maintaining as much operational flexibility as possible. This includes tight controls on inventory, SG&A and manufacturing cost, and a clear focus on the bottom line in cash. We believe that we will continue to generate positive cash flows from working capital in 2010. For 2010, our five top priorities are the following.

Continuing to build on our strong market share position in emerging markets across most product lines, developing our distribution network in India and in China, maintaining our global efforts on innovation and product development, maintaining a balance between lean inventory, and being able to respond to the short lead time expectations of our customers, and finally, leveraging our large install base to maximize after market revenue opportunities.

From a long-term perspective, we are among the world’s leading source of lifting solutions with a Masterbilt of nice brands and the broadest footprint in the industry. Globally, we expect to sustain demand for modern infrastructure and energy, and we are well positioned to support these end markets anywhere in the world.

We have a resilient business with loyal customers and large install base complemented by the best and the most experienced workforce in the industry. As a result, we will not only weather the current market, but simultaneously prepare for the next up cycle when growth returns to the world economies.

So, with that I’ll turn the call back to Glen for his closing comments.

Glen Tellock

Thanks, Eric. I think our two segment Presidents have given you good review of their businesses. It should be clear that we have dealt with the 2009 recession by taking responsive and decisive actions. In 2009, we focused on the integration of the notice in generating optimal cash flow to reduce debt. We will continue those actions in 2010 as well as ensuring that we are poised to emerge with greater strength when the markets recover.

With that we will now open the call for questions, Lena.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Charles Brady - BMO Capital Markets.

Charles Brady - BMO Capital Markets

I quoted on some clarification from Eric’s comments he seeing sequential increases in 2010. Just as on a quarter-by-quarter basis of Q1 sequentially up from Q4 am I hearing that correctly and then in a follow up to that, in terms of Crane margins, your commentary talks about being above that 3.5 run rate for the year, but I’m wondering particularly in the first half of the year when Crane revenues are still going to be down year-on-year, if there’s an expectation that margins would be below that 3.5 mark in the first half?

Carl Laurino

Charlie this is Carl. The message on the margins it’ that’s our expectation for the full year, that we will be in excess of that 3.5 margin. As you know our history is not to provide, quarterly financial guidance, and, that is the message that we’re seeking to convey is that, when you look at it from a full year standpoint, we will perform better than we did in the last trough of the cycle.

From a revenue stand point, I think the trend comment, and the expectation that we’ll have, quarter-on-quarter growth is really, driven towards, the comment is made as it relates to 2010. When you think about, what has been happening with the backlog and the fact that, the strength that we’ seeing is in energy and infrastructure applications, you don’t necessarily turn some of those demand levels, in short term basis and that therefore that’s we are talking about the ramping. This also a typical seasonal pattern where you would see softness in the first quarter and we wouldn’t expect 2010 to be a different from that perspective either.

Operator

Your next question comes from Henry Kirn - UBS.

Henry Kirn - UBS

Wondering if you could chat a little bit about the signs that give you visibility to a back half recovery Cranes is there increased chatter from customers? Is there something else you are seeing that gives you more visibility there today?

Eric Etchart

Henry, yes, we definitely see increase in demand, definitely in the emerging markets. There is also obviously some degrees of seasonality as well, after the Chinese New Year, we expect to see strong order entry in APAC that will definitely an impact on the second part of the year, because we have longer lean time on the large Cranes.

Also if you look at the burn rate of our U.S. distributors, it is anticipated to reach a level for our dealers to restart probably stocking as inventory within the channel will be too tight to serve our customer base. Who have expectation for immediate availability, so we track the burning rate of the inventory quite costly on a weekly basis and we believe that will also impact. So, overall we have also seen a lot of government business taking obviously time to materialize, but if you look at both standards on a global basis, there is obviously some activity.

Henry Kirn - UBS

Thanks and could you give a little color around the pricing versus cost delta that you are expecting based on your margin guidance?

Glen Tellock

This is Glen. When you look at obviously the input cost on the Crane side a little different than the Foodservice side, but on the Cranes, obviously with steel pricing, and some of the other components of that, still, relatively comparable to 2009.

Remember what the backlog looked like at the end of 2008. We are lot of pricing from the 2008 steel process that as it came down during the year, we couldn’t take advantage of most of those, so it did impact our margins, but then on the pricing side, on the end user pricing, it’s actually held pretty well.

I give the industry a little bit of credit in that respect I think everybody has got their favorite deals. They have got their favorite customers. They have got their favorite territories. So, if you do see something that looks a little off balance, I think it’s more the exception than it is the norm.

On the Foodservice side, I think where you have some commodity increases, mostly in the, it’s the steel pricing and could be the nickel, the aluminum, you just watch those commodity costs, and we do hedge those a bit, going forward, and there are markets that you can hedge against, whereas you know on the steel markets you don’t that.

Operator

Your next question comes from Nigel Coe - Deutsche Bank.

Nigel Coe - Deutsche Bank

I sort to speaking to the deal inventory; you said you track this, those levels quite closely. Can you throw out, a dollar number for the level of dealer entry burn during 2009 and can you be a bit more granular on when you expect those inventories to actually hit a floor?

Glen Tellock

Well, that’s a difficult one. We track there are some different components of their inventory, which could an RPO, which could be what they have, quote, they own rental fleets, versus what they have in new and what they keep in used. So it’s really not that dollar amount, that we’re looking at Nigel, it’s what is the utilization? What are the rates? What’s the trend?

I think that the key there is, what we watched all during the year is we watched the trends decline. These people were trying to manage their balance sheets, and they weren’t ordering, and they know that you’ve got to remember, some of these whether it’s a rental company or a dealer, the crane to them is like fund manager’s money. That’s what they used to make money.

Their key is utilization, and utilization rental rates for the most part, but I think the key takeaways there, it is declining, and we watched it by product line to find out where we can be of a best support to our dealer channel to say the whole channel is running out of this crane or this crane and will your customers have needs for that in the short term.

Nigel Coe - Deutsche Bank

Those metrics you tracking, utilization rates, rental rates have turned for your guys?

Glen Tellock

Have what?

Nigel Coe - Deutsche Bank

Have they turned? Have they hit the bottom?

Glen Tellock

You know, they’re tracking. I don’t think they’re tracking I would say on average is probably in the mid-to high 60s, but the difference there is, there’s a split between the high capacity cranes, which is better than that, and then you have the lower capacity cranes, which could be the small truck cranes, could be small RTs, could be boom trucks.

Those are going to give you a lower utilization, but I would say on average it’s about the mid-to high 60s, which is probably just a little bit better than what it was at the trough in 2002 and 2003.

Nigel Coe - Deutsche Bank

That brings onto next question on the backlog mix. You mentioned, Glen it’s obviously the high capacity cranes have high utilization. I’m assuming therefore, the orders you’re seeing skewed towards the high capacity which are tended to be better margin, so I’m wondering within your backlog is the crane margin improving? Just to dig into the point made the backlog build in 4Q, was that November/December, or was that earlier in the quarter?

Glen Tellock

I would it was the build of it back half of the quarter and I would say what the mix is in there? I think it’s a decent mix. I think it is skewed probably a little to the higher end cranes, but there’s also in some of the emerging markets. We have some dealers in the emerging markets, where we’re shipping RTs, trucks in China I mean it’s a decent mix, but I would say, yes, it’s probably skewed a little bit to the higher capacity.

Operator

Your next question comes from Meredith Taylor - Barclays Capital.

Meredith Taylor - Barclays Capital

You can step through the $125 million of additional cost reductions that you talked about for 2010, a little bit in greater detail. How much it is Foodservice? I would assume that the $80 million of additional cost savings associated with the Enodis acquisition is built in there, but maybe if you could step through that in a little more detail that would be helpful.

Glen Tellock

The bulk of the Foodservice savings are synergies. We signaled, expectation we’re get in excess of $70 million, from the run rate level, so that’s an increment of on the order of 35-plus in 2010 and obviously the balance of it is, getting the full year run rate from the identified actions that were taken out there 2009 as we continued to see where the markets were going and take those actions. Those are really the keys, there are obviously some incremental cost-saving activities in cranes, but the bulk of it really is just getting the full impact from the actions that were taken in 2009.

The other thing that’s in there Meredith is, when you talk about the $125 million, it’s purely cost takeouts, whereas in the synergies on the foodservice side. There are some revenue synergies, some growth, Cross-selling opportunities that’s in that $80 million, when Carl talks about the $125, is just cost.

Meredith Taylor - Barclays Capital

I’m hoping that you can talk a little bit about the $200-plus million of debt pay down, and specifically, how you expect working capital to trend over the course of 2010? I mean I know that Eric touched on, the need to maintain a balance between lean inventories and being able to efficiently meet customer demand. If you could talk a little bit more about the puts and takes with respect to the $200 million plus and dig a little deeper into working capital, that would be terrific.

Glen Tellock

I guess our history in trend, when we managed through cycle has been that we’ve been able on multiple years, post an inflexion point been able to bring out substantial amounts out of working capital.

Obviously, with the environment that we had in 2008, and how strong the markets were, almost that entire year for us, and the customer dynamics of trying to get their hands on lifting equipment as quickly as possible put us in a circumstance where from a conservative standpoint, from a meeting delivery schedule, really that provided us with some opportunities and benefits that you certainly saw in 2009.

We believe there’s a lot more of that in 2010, or continuing actions that are available to us in 2010. Given our overall guidance that we expect to yield year-over-year top line in cranes to be less, to Eric’s earlier comment about lean initiatives, operating efficiencies; those will play into that as well. You can probably gather from the overall guidance that we have provided that we would expect to get a little bit of additional cash from profitability as we get a little bit later in the year as well, when potentially maybe the pace of working capital opportunities might diminish.

Meredith Taylor - Barclays Capital2

I guess I’ll just close. I’m trying to get a little bit more color around the first half, sequential pick that you talked about. I mean, you’ve talked about on a year-over-year the decline, but can you talk about maybe first half of ‘10 versus second half of ‘09, and how we should think about how revenue trends might play out there on the crane side?

Glen Tellock

Again, I think the expectation, given the fact that we’re not carrying the same level of back log into 2010, that we did in 2009, that first half of the year, we’re going to see year-on-year erosion in the top line Cranes. When we get past the first half of the year, that there would be an expectation given what we’re seeing in the markets, where we stand from a backlog, and our outlook today, that we would show year-over-year growth, based upon 2010, against 2009.

When you look at the full year in total, that the contraction then that occurs, because of the erosion that I talked about earlier is going to be considerably less than the top line contraction that we saw this is in 2009 over last year.

Meredith Taylor - Barclays Capital2

I was actually wondering about the first half of ‘10 versus the second half of ‘09? So just thinking about order of magnitude, the sequential trends that you’re looking for there?

Glen Tellock

I think you get that seasonal effect and kind of hitting the low end early in the year, all coming at the same time, and then some of the opportunities that have enabled us to increase the order book that potential hit that second quarter. When you look at it from that perspective, I’m not sure that you would see a great deal of movement one way or the other.

Operator

Your next question comes from Ann Duignan - JP Morgan.

Ann Duignan - JP Morgan

Let me start with the balance sheet, and if we look at $200 million in debt reduction in 2010, it still leads total net debt to total capital at somewhere still above 70%. Can you talk about that and what your goal is there? What we might see as we go through 2010 incremental to just paying down debt?

Glen Tellock

Obviously, the $200 million is a targeted level that we would certainly expect to achieve again as we did achieve our debt reduction target last year. The longer term, expectations for the company that we would point to would be kind of a normalized level debt to capital of about 40%. As you look at it through the cycle, that’s the measure that we use for cost of capital calculation purposes and when we calculate our economic value-added and so that would be a longer term metric we could point to and provide.

Obviously, as we get to a point where we’ve hopefully continue to see stabilization in our markets, and potentially the working capital opportunities, wane in the businesses, that there is additional cash from profitability that will enable us to continue the debt pay down that’s, we’ve replicated on numerous occasion when we’ve taken on leverage.

Ann Duignan - JP Morgan

As you look at your model right now today, given what you’re looking at for 2010, when would you expect to achieve the 40%?

Glen Tellock

Our guidance of that 40% is not a 2010 guidance level that is a kind of a normalized leverage level as you would look at it, through the cycle, and based upon the normal types of active that we’ve taken on to fund our growth to the debt markets. That was a longer term metric.

Ann Duignan - JP Morgan

Switching to Foodservice, you know, one of the big differences between your business and ITW foodservice business, there are a couple of differences, but one of the key ones in my view is, that ITW breaks out after market separately and focuses on it. As a result, they’ve seen much less cyclicality. What are your terms in terms of focusing on the after market, and making this business less cyclical in the next cycle?

Glen Tellock

And you look at obviously Foodservice being a little different than cranes from an after market standpoint, and what’s used of it, but when you look at the Foodservice, I mean less than 5% of it’s going to come from the after market, but that’s what creates the opportunity.

The other thing is, you compare ITW versus Manitowoc, ITW their distribution channels are different and what matter to than what Manitowoc and many of ours are contract to service, whereas we bring a lot of the people in, whether it’s to the hot side or the cold side. We train them, and do a lot of the training side.

So we don’t get the service revenue, but accept certainly get the parts revenue, and that piece of the business, and when you look at the replacement side of our business being 50% to 60% of the business, that’s a critical piece for us to have those contracted service reps. Manitowoc, I would say engaged.

So yes, when you look at, you got the cyclicality, I think it’s just a simple market declines in the whole goods side of the business, yeah, we would be more susceptible to that, because we’re one of the piece of the business, but it’s also much greater piece of the business on the whole goods for us than some of the other competitors.

Ann Duignan - JP Morgan

So structurally, you think the businesses are so structurally different than you will going forward also likely be more cyclical, or more…?

Glen Tellock

No, certainly I think if you go back historically and look at the trends in either the hot or the cold side of the business I mean, go back to our cold side of the business for the last 13 years, the ups and downs were down 2%, 3%, and up 4%, 5%, and any of the big sites would have been acquisition-related type items.

I mean, we’ve said a couple of times that our market down of Foodservice at 20% that’s unprecedented, we haven’t seen that in 40 years. So I don’t use the word “Cyclical” when I think of the Foodservice side of the business whether it’s the hot or the cold, but I’m going to let Mike say something also on the Foods and Service.

Mike Kachmer

Yes, I think it’s also very important to know is that we’ve organized the business around three primary geographic call P&Ls, and through the integration process, we’ve established service leadership, as staff members within each of those three regions, and we will soon be establishing a global position for service that will integrate the regions, and development and implement new programs.

So we believe we’ve got a good strong core service component as Glen described earlier, but we also see upside as well, and we’re placing human resources around that opportunity.

Ann Duignan - JP Morgan

Good, actually that helped a lot. I appreciate that they update there. Just on the revenue synergies out of that business that you had set as a goal $80 million, I believe, did you see any revenue synergies in 2009 or, is it just all integration right now and we should start to see revenue synergies as we go forward?

Glen Tellock

No, we had revenue synergies in 2009, there were a couple of certain success stories we had, most notably the Smoothie project, and I think that a later rollout in 2009, so we’ll get the full year benefit in 2010. There are some other products that we’re coming out with on a combined basis this year, butut it certainly will be greater in 2010 than it was in 2009. That’s for sure.

Ann Duignan - JP Morgan

Can you quantify your expectations for 2010?

Glen Tellock

I think if you go back to what we said originally, and that’s about I would say we had two-thirds of it, better than two-thirds it’s going to come out of cost and about a third of that was going to come out of the revenue side.

Ann Duignan - JP Morgan

For 2010?

Glen Tellock

That was overall of the $80 million.

Ann Duignan - JP Morgan

So in 2010, can you help us understand what the revenue synergies might be on the Foodservices side?

Glen Tellock

A little higher than 13, on the revenue side, a little lower than 70 on the cost side.

Operator

Your next question comes from David Wells - Thompson Research Group.

David Wells - Thompson Research Group

First off, looking at the inventory on the balance sheet, can you give some color on what percentage of that are finished goods, kind of verse other portions of production? Really just trying to get a sense of, as production schedules get set going in to the first half of the year, how much will you have to sell out of inventory, and will that help some of the absorption issues that we saw in the fourth quarter on the crane side?

Glen Tellock

I think part of the success that we had in achieving the debt reduction target it was due to taking down some of the finished goods inventory that was part of what we dealt with when we had the abruptness of the downturn and a lot of the cancellation activity, which was also unprecedented for us. So as we look at it, relative to the inventory that you see on the balance sheet today, that we’re probably down to about 30%, roughly that would represent finished goods inventory.

David Wells - Thompson Research Group

Then, looking back at the Foodservice business, kind of comparing the third quarter to the fourth quarter, if you could step us through the cost structure of that business, and just trying to get a sense of, kind of a swing point in margins where the closer you get to say maybe $400 million in top line, and you see some nice incremental improvement in operating margin, and just trying to get a sense of, as you look at the top line grow in 2010, how much incremental margin comes down to the bottom line?

Carl Laurino

Well, I think the synergy guidance included in that is some opportunities to continue to take out some of the fixed costs. I would say overall today, we’re probably in the kind of two thirds variable to fixed, and we can potential push that a little bit as we would continue to institute some of the integration opportunities and from an incremental margin stand point, obviously that will have a positive effect getting probably well over 20% incremental margins.

David Wells - Thompson Research Group

Then lastly, just in relationship to the Chinese market, any update on seeing native Chinese competitors being more aggressive on the pricing front. I have seen some interesting commentary talking about fairly aggressive pushes in 2010, specifically in the crawler market and wondered how that affects that your expectations for that market as you go in to the New Year here.

Glen Tellock

Well, I think, the Chinese aren’t going to be any different than they were in 2008 when the market was good, but what you have seen out of the Chinese competition is a retrenchment to focus on the Chinese market, which is very good right now, but you specifically talk about the crawler crane market, so when you look at what the Chinese have with respect to crawlers, I would say what we see, if it’s going to be in the anything. If they are going to come with a 300 or any above 300 ton, it’s going to be 20% to 30% cost reductions.

Now what is that from I mean, there’s a lot of different things that they have, but it’s not the same steel, it’s not the same components. It’s not the same weight, and so the only benefit they have is on labor, because some of the same components when they are similar, we’re buying from the same suppliers. So as they come out, they improve their products, their cost structure goes up also.

So I would say on average when you look at where you are being beat, it’s a 20% cost difference, and then the question is, “How do you set against that with your customers? Do your customers have to look at what is the first of all quality is one, and then second is what is the after market support?”

That’s the big item right there is we can sell against that, so our distribution, our after market support, and then lastly, and what a lot of people have found out during this down period, if they did have some of the Chinese equipment in the run up, because they needed it for availability, and now they are trying to put it on the used market, there’s no global resell value for a Chinese crane right now, but if you take a Manitowoc or some of the other traditional competitors, it’s certainly available to those cranes and not to the Chinese.

So are they going to be a formidable competitor as time goes on? Absolutely, but let’s not forget that we have two large factories in China with respect to the crane side. We have several factories in Asia for our Foodservice side of the business, and at the end of the day, we’re still a net exporter to china, and you can qualify us as a Chinese manufacturer.

Operator

Your next question comes from Seth Weber - RBC Capital.

Seth Weber - RBC Capital

Couple of follow-up questions, just sticking on the emerging market theme, I mean are emerging markets for the crane business, should we think of that as structurally lower margin for you, relative to the U.S. market, or is it more just project, you know, bit by bit.

Carl Laurino

The margin characteristics for us are much more a function of the product mix than the geography. I think that you could say, whatever the logistic issues that may go with selling in to some of these places could give you an ability to make the global statement that maybe your margins are a little bit better in developed markets, but by and large, I would say it’s not a huge difference, and our margins are much more a function of the product.

Seth Weber - RBC Capital

Just sticking on the China theme, I know it’s early, but have you noticed any difference in activity there, given the recent rhetoric out of the government?

Carl Laurino

No, not necessarily, not at all. I think, when you look at what some of the rhetoric was, it wasn’t structured about the infrastructure and energy work, it was more commercial driven on some of those type projects and when you look at what our end markets are, a little political side comment here, despite what the WTO has said, there are still some significant duties on cranes that go in to China on some lower end capacities. So we are out of those markets just because of that duty. So the majority of our focus is in fact, if it’s not produced in China is on the infrastructure and energy markets.

Seth Weber - RBC Capital

I thought on a previous call we had talked about Foodservice margins in 2010 growing by about 200 to 250 basis points just from the actions that you guys have taken. Is that the right way to think about the slope into next year, into this year, I guess?

Glen Tellock

Well, I think our message is just significant improvement. We’re not being that granular with it. Obviously, you can see the discrete message relative to synergies by themselves. Expect that increment to be on the order of $35 million plus in 2010 versus what we achieved in 2009. I’ll kind of leave you with those numbers.

Seth Weber - RBC Capital

Then just sorry, if I missed this, but did you give an organic Foodservice revenue number for the quarter?

Mike Kachmer

Modest increase.

Operator

Your final question comes from Ben Elias - Sterne Agee.

Ben Elias - Sterne Agee

I was wondering if you could comment on the short cycle business in the crane side, now that we look at order trends go from 170 to 250, to I guess, 385 this fourth quarter, and you are saying that orders will increase sequentially, you also said on the third quarter conference call that the short cycle business has picked up, and therefore, the backlog burn is not going to be as quick.

I think you also mentioned in the fourth quarter that backlog actually increased sequentially in December. So just trying to get an idea, once sequential increase in orders we get a pretty good idea for that build in the crane revenue, and I’m just trying to figure out the short cycle business, and how that is looking?

Glen Tellock

I think, Ben, when you talk about the short cycle business, I think you are talking about the lower capacity cranes…?

Ben Elias - Sterne Agee

No, the stuff ordered, built, and shipped within quarter…?

Glen Tellock

Yes, book-to-bill, okay. I think the comment there’s we’ve seen it stabilize. I mean, I think that’s the best world that we can come up with, I don’t want to say it’s a trough because I don’t know that there’s a bottom, but I think stabilize meaning it can go up a little bit, go down a little bit, I think it bumps along.

I think, what we did talk about is in the fourth quarter we saw 80%, book-to-bill and that’s different than the third quarter, which was 50%, but when you combine the orders with that book-to-bill, that’s where you get the stabilization as we see it, and in our conversations, and we watch this, as I said in the press release the metrics and the trends, we’re encouraged by some of that. So I think the best world we can use there is stabilized.

Ben Elias - Sterne Agee

I think in previous conversations or conference calls, you did talk about the replacement cycle on the Foodservice business and how it has been a little slower, and traditionally it has been a pretty flat business, but this time around the up tick might be a bit sharper. When do you see that, is that consistent with comments Mike made about U.S. restaurants committing a lot of CapEx in the first half of the year?

Glen Tellock

Yes, I think so. I think when you look at some of the market statistics that Mike gave, but if you just go back to the end of 2008, and in 2009 the best example I can give you, when you look at the replacement side is sometimes people made the decision, it’s better to replace, but when you are in the midst of what is happening in 2009, it’s a no different than what we did in our manufacturing businesses or anything else.

The phrase that we’ve used internally as for example, if your roof leaks you buy a bucket, and if it leaks a lot, you buy a bigger bucket and on the replacement side of Foodservice, people were trying to do what they could to limp along before they replaced. So at some point in time, yes, the typical trends are 50% to 60% of that business is replacement, but in an economic environment like we had last year, of course that’s going to happen.

I don’t know if Mike has anything to add to that, but …?

Mike Kachmer

Just a couple of comments, I think we along with most people that forecast the industry see an up tick occurring in 2010. We think some of the general market forces will be more towards the latter part of the year versus the front part of the year, but as Glen noted, there’s pent up demand across many of the categories that is a result of people really just guarding every dollar they can around replacement dynamics, so we’re ready.

Ben Elias - Sterne Agee

A final question this is around the tax rate. How do we look at the tax rate going forward in 2010? Is there any way to sort of bracket this?

Carl Laurino

Well, it’s obviously going to depend on, where we are from, how the earnings play out. Obviously, we derived, benefit out of our cash tax position in 2009. We would expect to replicate that in 2010, given some of the carry forward characteristics, but certainly at lower levels than we had in 2009.

Ben Elias - Sterne Agee

So 10% to 15% would be fair or…?

Carl Laurino

That’s fair from an ETR standing point.

Operator

That concludes our question-and-answer session. At this time, I would like to turn it back over to Mr. Glen Tellock for any additional or closing remarks.

Glen Tellock

Thank you, Lena. I wanted to thank everyone for joining us today and for your continued interest in Manitowoc. 2009 was obviously a difficult year, and while we anticipate a gradual improvement in the global economy, 2010 will continue to be challenging. At Manitowoc we will not ease up. We will continue search for ways to drive cost out of the business, while improving our products and customer service.

We have a solid team. A team that has been tested and proven itself to be up to the severe challenging of the past year, and of course we have market leading positions in both of our business segments. So I feel that we are very well prepared to generate strong returns for our shareholders in the years ahead. This concludes today’s call. Have a great week, everyone.

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Source: The Manitowoc Company Inc. Q4 2009 Earnings Call Transcript
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