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Manitowo (NYSE:MTW)

Q1 2010 Earnings Call

April 28, 2010 10:00 am ET

Executives

Glen Tellock - Chairman, Chief Executive Officer and President

Eric Etchart - Senior Vice President and President of Manitowoc Crane Group

Carl Laurino - Chief Financial Officer and Senior Vice President

Steven Khail - Director of Investor Relations & Corporate Communications

Mike Kachmer - Senior Vice President and President of Manitowoc Foodservice Group

Analysts

David Wells - Avondale Partners

Ann Duignan - JP Morgan Chase & Co

Henry Kirn - UBS Investment Bank

Nicole Deblase - Deutsche Bank

Charles Brady - BMO Capital Markets U.S.

Meredith Taylor - Barclays Capital

Robert McCarthy - Robert W. Baird & Co. Incorporated

Seth Weber - RBC Capital Markets Corporation

Joel Tiss - Lehman Brothers

Charles Rentschler - Morgan Joseph & Co., Inc.

Operator

Good day, everyone, and welcome to this Manitowoc Co. Inc. First Quarter Earnings Conference Call. 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 First Quarter Earnings Conference Call. Participating in today's call will be Glen Tellock, our Chairman and Chief Executive Officer; Carl Laurino, Senior Vice President and Chief Financial Officer; and Eric Etchart, President of Manitowoc Cranes. Glen will open today's call by providing an overview of our quarterly results and business outlook. Carl will then discuss our financial results for the first quarter in greater detail. He will be followed by Eric Etchart, who will offer insight into the market conditions for our Crane segment and to discuss the recent Bauma trade show in Munich. Following our prepared remarks, we will be joined by Mike Kachmer, President of Manitowoc Foodservice, who will also be available to participate in our question-and-answer session.

For anyone who is not able to listen to today's entire call, an archived version of this call will be available later this morning.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 April 28, 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 made 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 or more of the factors explained in Manitowoc's filings with the Securities and Exchange Commission, which are also available on our website. The company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or other circumstances.

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

Glen Tellock

Thanks, Steve, and good morning, everyone. Our first quarter results reflected the challenging market conditions in which we continue to operate. That said, our performance in both our Crane and Foodservice segments were in line with our expectations. While we are seeing continued signs of stabilization in the operating environment, 2010 is poised to remain challenging. Nonetheless, the entire Manitowoc team continues to execute on our objectives. Our ability to improve our business despite these headwinds is a testament to their hard work.

We remain committed to the three priorities I have outlined previously, which we believe will enable us to expand our leadership position in both Crane and Foodservice. First, we have continued to make significant progress against our goal of flawlessly executing the Foodservice integration. The addition of synergies achieved in the first quarter resulted in further operating margin expansion in this segment.

During the quarter, we continue to focus on all areas where we believe the greatest opportunities exist, which include organic growth, operational cost reductions and procurement savings. We leverage the combined knowledge and relationships of the legacy businesses to drive revenues and earnings from new product introductions. We have also realized cost benefits from facility consolidations implemented in 2009, which have already been completed or are in process.

In addition, our combined procurement organization is providing additional cost savings benefit by optimizing the cost structure of our large organization. The continued success in capturing synergies from the Foodservice integration gives us confidence that we should see full integration synergies in excess of $80 million by 2011.

In the Crane segment, we continue to position this business to drive performance as the market recovers. We have taken what was a very efficient and quality-focused infrastructure at the end of the fourth quarter, and have targeted additional areas, including operational efficiency, product innovation and our best-in-class customer service to drive optimum performance in this business.

And finally, we continue to remain focused on optimizing our cash generation to achieve both our near- and long-term debt reduction goals, while concurrently making ongoing investments in our business to drive future growth. We also made solid strides in managing our balance sheet during the quarter, as cash management and debt reduction continued to be a major focal point for our team despite the seasonal fluctuations in our working capital.

As we look at our segment performance for the first quarter, our Foodservice business continues to perform well and we are beginning to see meaningful benefits from the Enodis acquisition and the resulting integration efforts. We are pleased with our ability to boost operating margins as a result of the identification and realization of operating synergies with these two businesses. Furthermore, we continue to see significant potential for organic growth in both the hot and cold equipment categories through customer development initiatives like energy savings, speed of delivery, geographic expansion and menu changes.

We've also maintained our focus on innovation in converting projects in the pipeline. We expect to accomplish this through further integration of our businesses, while at the same time, enhancing our relationships with our customers and strengthening our brands. The assumptions we made prior to the acquisition of Enodis continue to hold true today, as our commitment to product development and technological breakthroughs should enable us to expand the leadership we have across our product line and drive future growth and margin expansion.

To that end, we expect to complete our U.S. rollout of the new smoothie machine and have received interest from customers internationally to test similar items. In addition, our approved low-oil-volume fryers and new holding products have been well received by customers. We also expect to announce several new products at the upcoming NRA Show in May, which we will discuss with you during our second quarter call.

Moving to our Crane segment, first quarter results were largely in-line with our forecast. As expected, the North American and Western European markets continue to be tough, but we are encouraged by further signs of strengthening demand in emerging markets. Additionally, energy- and infrastructure-related projects globally continue to drive modest improvements in the demand.

As we look toward the remainder of the year, we continue to believe that our strong brands, history of innovation, technological improvements and solid aftermarket business will help to expand our leadership position as our end markets improve. Long term, we are encouraged about the growth opportunities for each of our businesses, and we are taking actions now to fully realize these opportunities. While challenging economic conditions will continue in the near term, we are tracking with our expectations. We believe we are doing the right thing to prepare for the recovery and position Manitowoc for long-term growth.

I will now turn the call over to Carl to discuss our detailed first quarter financial results. Carl?

Carl Laurino

Thanks, Glen, and good morning, everyone. The reported net sales for the first quarter were $722 million, which is a decline of $306 million or 30% from the first quarter of 2009. Net sales declined $117 million or 14% from the fourth quarter of 2009. The decrease in net sales during the first quarter was driven primarily by a 45% decline in the Crane segment, with flat revenues in the Foodservice segment. Lower revenues in the Crane segment during the quarter was due in part to the timing of deliveries, rather than a further degradation of demand. The stabilization of new orders can be seen by the first sequential increase in quarterly backlog for the segment in June 2008.

First quarter 2010 consolidated operating margins before amortization and one-time items were 5.9% versus 6.9% in the first quarter of 2009 and 6.1% in the fourth quarter of 2009. The year-over-year decline in volume and margins in Crane was partially offset by strong margins in Foodservice. We expect to see continued improvement in our consolidated margin profile over the long-term, as we continue to derive benefits from the cost-cutting actions implemented in 2009, plus $125 million of additional cost reduction benefits we expect to realize in 2010.

The GAAP net loss for the first quarter was $23 million or $0.18 per share versus a net loss of $656 million or $5.04 per share in the first quarter of 2009. The first quarter of 2010 loss included $0.10 per share related to special charges, including debt extinguishment and adjustments due to changes in U.S. legislation that impacted taxes. Excluding these and other unusual items in both quarters, first quarter 2010 EPS was a loss of $0.08 per share versus earnings of $0.18 for the first quarter in 2009.

Moving on to the balance sheet, as Glen noted, we remain committed to optimizing our cash flow in order to achieve our debt reduction goals, while continuing to invest in our business. During the quarter, we posted negative cash flow from operations of $70 million. This negative cash from operations was adversely impacted by the adoption of new accounting guidelines effective as of January 1, 2010, which requires on-balance sheet treatment of our securitization facility and treat the proceeds from the facility at cash flow from financing rather than from operating activities. However, this new accounting guidelines did not require us to restate prior year cash flow results. On a comparable basis, first quarter 2010 use of cash from operations would have been negative $7 million compared to negative $34 million for the same period last year.

Moving on to our segment results, Foodservice sales from the first quarter of 2010 totaled $355 million, which was flat versus the first quarter of 2009; and down slightly from $359 million in the fourth quarter, which is consistent with typical seasonality. Despite flat top line numbers, first quarter 2010 operating earnings in Foodservice were $48 million versus $28 million in the same quarter last year and $42 million in the fourth quarter of 2009. This improvement resulted in strong operating margins of 13.4% in the quarter, which increased over both first quarter 2009 margins of 7.8% and the fourth quarter 2009 margins of 11.6%. While we expect solid improvement in Foodservice operating margins for 2010, year-over-year margin improvement will be lower for the balance of the year due to tougher comparables.

Moving to the Crane segment. First quarter sales totaled $367 million, down 45% from $673 million in the first quarter of 2009, and 24% lower than the fourth quarter 2009 sales of $480 million. While we continue to see positive trends in emerging markets during the quarter, our results were impacted by the timing of deliveries given the production cycles for larger capacity equipment.

Crane segment operating earnings in the first quarter were $5 million versus $57 million in the same quarter last year, and $18 million (sic) [$13.8 million] in the fourth quarter of 2009. This resulted in first quarter Crane segment operating margins of 1.2% compared to 8.4% in the first quarter of 2009, and 3.8% in the fourth quarter last year.

Crane backlog at the end of the first quarter was $613 million, an increase of $40 million or 7% over $573 million at the end of December 2009. Net positive orders showed continued stabilization during the quarter, with net orders of $407 million, bringing the book to bill to 111%.

As noted in yesterday's press release, we are reaffirming our guidance for 2010. We expect Foodservice revenue to improve modestly and the year-over-year improvement in operating margins. For the Crane segment, we expect revenues to improve significantly for the balance of the year, while full year operating margins will exceed the 3.5% trough margins that we experienced in 2003. Other expectations for 2010 include capital expenditures of approximately $50 million, depreciation and amortization of roughly $145 million and debt reduction of at least $200 million.

Let me now turn the call over to Eric Etchart to discuss recent events in our Crane segment and to share some feedback on the 2010 Bauma trade show. Eric?

Eric Etchart

Thank you, Carl. During Glen's comments, the last 18 months have been the most difficult business environment for our industry history. We do believe the worst is behind us and we are seeing strengthening demand in China, India, Australia, North Africa and Brazil. We are also continuing to see reasonable demand coming from global energy and infrastructure projects, which include two nuclear power plants in Turkey that have entered the bidding process. Several infrastructure projects in Brazil stemming from its successful Olympic bid and additional mega infrastructure projects coming from Saudi Arabia.

However, while some bright spots have emerged, North America and Western Europe remained challenged as expected, coupled with an ongoing slowdown in commercial constructions. Despite these challenges, we remained focused on the areas that during the downturn, have helped us maintain our leadership position and will position us well as our markets recover. Our ongoing focus on innovation and technological improvement make our cranes more valuable to end users and widen the gap between our equipment and our competitors.

In line with our strategy to become a fully integrated company, we are also making progress on our initiative to establish industrial centers of excellence, which will act as central probation [ph] (30.49) plants creating additional operation efficiencies. Lean manufacturing is a major initiative for us as we constantly strive to further reduce waste, improve lead times and become a more efficient and profitable business. We continue to leverage our key emerging markets and are highly focused on capitalizing on the opportunities we have to grow further in these regions.

Before turning the call over to Glen for closing remarks, let me spend a few moments discussing the Bauma trade show, which I attended last week in Munich. Despite the travel disruptions that many encountered, I am pleased to report that we enjoyed significant activity. Overall, there was a sense of cautious optimism at the show, as my conversation with customers, distributors, competitors and others in the industry suggesting that the worst is over and the environment is starting to stabilize.

However, questions linger around the timing and the magnitude of the recovery. Generally speaking, our people agree that we should see an uptick in demand as we enter 2011. However, 2010 will continue to be challenging. Consistent with our core focus in maintaining our technology goal and innovative leadership within the industry, we announced several new products at Bauma last week.

Product enhancements include the new Potain Ultra View cab, which sets a new standard for operator comfort and productivity. We also premiered an innovative line of high-performance winches for our Potain tower cranes, which are designed for ultra high-speed lifting. These winches nearly double our hoisting speeds and offer our customers significant timing, cost advantages of a competitive equipment.

Among our new product introductions, we announced two six-axle all-terrain cranes, the Grove's GMK6400 and the Grove GMK6300L, both of which use technology that provide the strongest lift to enrich capabilities in the market today. Both of our new cranes were extremely well received at Bauma as the innovation and the technology of each cranes are clearly creating the new standard in the market.

We have a strong track records of successfully navigating through difficult time and operating environments. And while 2010 will remain challenged, we continue to be an industry-leader and we believe we have implemented the right initiatives limit from this downturn as stronger, more efficient company. With that, let me turn the call back over to Glen.

Glen Tellock

Thanks, Eric. As evidenced by our remarks, you can see that the operating environment for cranes continues to be challenging. However, we're encouraged by signs of improving demand in emerging markets and the reception of new product introductions. We remain focused on correctly positioning the business for future success.

As we work hard the remainder of 2010, we are focused on driving innovation throughout our business to extend our leadership position and believe that the initiatives we are pursuing in our business segments will spur both revenue and margin growth as markets recover.

We will now open the call for questions. Maury?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Meredith Taylor with Barclays Capital.

Meredith Taylor - Barclays Capital

I'm hoping you can expand a little bit on the comments you made around the timing of deliveries on the Crane side of the business. Specifically, I mean, can you quantify from a revenue standpoint or maybe from a unit standpoint, how much in the way deliveries were delayed? And were these deliveries that were supposed to be made that were delayed, or is this just an issue of the timing with the way that the order book is billed?

Carl Laurino

Meredith, this is Carl. I'd say the magnitude, I think, the kind of guidance that we gave in the last conference call really did it by semester. And we talked about the fact that given the size of the backlog as we ended 2008, some carryover that spilled into the first half of 2009, first half of '10 was going to be off from a revenue standpoint. Obviously, the biggest -- we didn't give any quarterly breakdown of that but the biggest element of it, particularly given where the demand was coming from, some of the larger lift capacity equipment that has the longer production lead time, I think, are the key reasons for the issue. There are always going to be some things, I think, particularly with some of the logistics of getting equipment delivered where the demand is coming from, and the emerging markets probably played a hand in how you would calendarize that semester. But I think the bigger issue was really just a matter of the higher lift capacity equipment representing more of the demand than in a typical discrete period.

Meredith Taylor - Barclays Capital

And then as I just think about what's been the traditional seasonality between the first and the second quarter, looks like Crane has typically been up 20%-ish sequentially. I mean, should I look for that seasonal pattern to hold, or are you looking for a potentially more pronounced first quarter to second quarter sequential revenue move?

Carl Laurino

I think it could be a little bit more than that just because of the issue I just talked about.

Meredith Taylor - Barclays Capital

In terms of the second half up year-over-year, you've obviously talked about some of the orders that you've seen, the deliveries pushed into the back half of the year. Could you calibrate a little more closely how you're talking about up year-over-year? I mean, is this up double digits? What kind of a sense do you have from the way that the order book is billed?

Carl Laurino

Well, I think, what I have to do is really point to some of the other things that we've said, which is that obviously, we expect the full year to be down a lot less than 2009 and obviously, we have not been on pace to improve upon the 2009 performance in the first half of the year. So we'll cut into some of that deficit from that guidance with the performance in the last three quarters of this year to satisfy that guidance level for the balance of this year.

Operator

We'll go next to Charlie Brady with BMO Capital Markets.

Charles Brady - BMO Capital Markets U.S.

Just kind of following up on Meredith's question in terms of going within the order rates, will you expect to continue to see sequential increases in orders as we roll through 2010? And dovetailing with that, would you anticipate the book to bill remaining above one through the remainder of the year?

Glen Tellock

I think as you look at that, if you think of Eric's comments and some of the things we've talked about with 2010, late 2009, 2010 being the trough, I mean, you're going to naturally expect the order rates to improve as the year goes on. Now quarter-over-quarter sequentially, I think that's the question, but I think improvement is the key factor. But I would let Eric expand on that just a little bit.

Eric Etchart

We are expecting to continue to see some improvement as we move into the year. However, modest overall in 2010 based on what we can perceive in and the change of mood from the end users from what I could see at Bauma, uniformly pessimistic a year ago at the Intermat show in Paris to, let's say, cautiously optimistic. The situation, of course, may differ by product line. We have maybe improved tower cranes activity mitigated by softening of the all-terrain cranes on the book. But again, it's good to reiterate that we're facing a contrasting situation in the emerging markets versus the traditional markets. And that the cranes recovery also lags over the top of construction equipment by an average of 12 months. So there is no doubt that the crane demand has hit the bottom, but the crane utilization's going to rise and used cranes that has been extend in different countries remain as headwinds for a major shift in 2010. So it's too soon for fleet replenishment in North America and Europe and also looking at the excavation work is still too little. So there is a lot of confidence and visibility in North America and in Europe to expect an uptick of orders to significantly impact our backlog beyond orders, driven by firm contracts from construction company or some modest restructuring activity in North America from our distribution network.

Charles Brady - BMO Capital Markets U.S.

On that, can you speak to the installed base and the age of the installed base? And so when demand really does start coming back, particularly in the more developed markets parts of the world, kind of what that replenishment cycle might look like? I mean, there's certainly parts, Carl, you and I talked about this last week about with Germany and how the age of some of those cranes -- they're now 20 years old, there's an up cycle there. But I'm wondering if you can expand on that with other markets as well?

Glen Tellock

Well, Charlie, I think, again, it depends where you're at and it depends who you are. A lot of these, as we've said before, good portion of this go to crane rental companies. And what did people do during that period of time -- and let's say North America, and you mentioned Germany, so Carl talked about that before, but you look at North America, what's happened with some of the used equipment that's out there, what's the age of the different fleet? I think as you read other statistics of some of the crane rental companies, they have been improving the ages of their fleet by getting rid of some of the used equipment in other markets. So it's always hard to tell what the average age of the fleet is out across the world, but we look at it as the regions and by product line and again what's driving it, the infrastructure, the energy and it's not commercial construction and it's not the non-rent construction. So that's a different crane than what you've had in the past. And Eric, I don't know if you have anything to add to that.

Eric Etchart

With Germany, since you can leave the self-erecting cranes, you have a significant boom back 20 years ago with the Berlin Wall. In this, we can see some trends obviously with cranes along in the two freight now and being renewed. And that give us sort of a bit optimism that Germany should be a good market for us with overall, I can quote with your comments. Then in residential construction is pretty much standing and that's a major headwind for us.

Operator

We'll go to Henry Kirn with UBS.

Henry Kirn - UBS Investment Bank

Wondering if you could chat on the utilization of the crane fleet by type and geography as granular as you can get? And maybe with that dovetailing, what you're seeing out of Crane CARE sales at this point?

Glen Tellock

I'll give you as granular as we'll give. I would say North America, if you look at, it's going to be -- whether it's the mobile hydraulics, or the crawlers or on a higher-capacity cranes, that's where you're going to see the higher utilizations. And I would say, overall -- and maybe North America, I would say that utilization is around 60%, 65%. It's going to be a little higher on the high-capacity and obviously lower, so you get that average. If you go to Europe, it's probably not a little much different. I think the lower capacity ATs are starting to come off a bit but again, I think, it's the higher capacity ATs and a higher capacity crawlers. Towers are okay in Europe, not great, but in the North America, the towers are probably lowest utilization of any of the product lines. And then in Asia, it's kind of all over the board. So I think that's probably about the best that we would give on a generalized basis, Henry.

Carl Laurino

As far as Crane CARE Henry, the business is up year-over-year as you probably would expect, but not as much as the overall segment. So the contribution on the revenue side from Crane CARE is a little bit higher than the roughly mid-teen percentage that it was in 2009. In the quarter.

Henry Kirn - UBS Investment Bank

And on pricing, could you talk about how competitive pricing may have become? Has pricing decline sequentially, or has it flattened out from where it was a quarter or so ago?

Glen Tellock

I think it's remained relatively flat. We certainly can point to specific instances where people have done some unusual things, but I don't think it's any different than what it was in 2003 or 2004. Maybe the players that are doing that are a little different, but I don't think it's any different than we've seen in the past. It's relatively stable.

Operator

And will go next to Charlie Rentschler with Morgan Joseph.

Charles Rentschler - Morgan Joseph & Co., Inc.

My first question, how do you juggle the need to pay down debt, the ongoing need to pay down the debt and yet provide working capital as your sales hopefully trend up? Can you talk about that a little bit. You kind of have some leeway here in terms of debt payments, so you can service the working capital side?

Carl Laurino

Well, Charlie, in the management of the working capital, certainly, the priority and debt reduction is very high as you'd expect at the current level of level of leverage we have. I think with the actions that we've taken, both with the success in generating cash out of operations last year, some of the asset divestitures that we did, as well as the release that we've obtained against our covenants certainly put us in a comfortable position. But we're still focused on debt reduction as a priority.

Glen Tellock

Charlie, this is Glen. But I would say if you look at many of the things that happened during the last upturn, whether it was some of the investments in capital expenditures, some of the lean manufacturing initiatives that we've put in place, many of the improvements that we've made in our factories, the integrations that we're going through in Foodservice -- let's be honest, perhaps it was a little too high in 2007, 2008 and that's where we can get some benefit out of many of the things that we did knowing that we had to go through some of these, whether it's working with our entire supply chain. So we have a lot of opportunity there and our -- Mike and Eric are looking at it on a regular basis with their teams. So it really is a balance but they also know that managing the balance sheet, and I think when you look at what our incentives are based on, which is EVA, it's not only the bottom line, it's managing the balance sheet too and I think our people do a very, very good job at it.

Charles Rentschler - Morgan Joseph & Co., Inc.

My second question was to Mike Kachmer to give -- let him have a chance to speak. Mike, do you see anything on the horizon in the next few quarters that could keep you from generating operating income at least as good as the first quarter? Or is anything, any negatives, any icebergs out there you see sticking up that will be a problem or do you just keep trucking along like you have been? So beautifully, by the way.

Mike Kachmer

We feel very, very positive about the strategy that we've put in place that is very consistent with what we anticipated before the acquisition even took place. So the overall trends looking forward remain very positive. Carl has offered some thoughts relative to seasonality that's still part of our business. Some of it with the base business, others associated with the timing of different rollouts but overall, the positive trends will continue. We continue to invest in the business. The integration opportunities are not done. Many are still in front of us. So again, the overall trend will remain positive.

Charles Rentschler - Morgan Joseph & Co., Inc.

How's the smoothie machine rollout coming along?

Mike Kachmer

Very well. There's a couple of perspectives there. Number one, we will be completing the first major rollout that occurred in the U.S. with a large major customer. It started last year. It was very heavy in the first quarter and it will then slow down as the store rollouts get completed. The good news is that there are international opportunities that will exist with that same customer. And additionally, we will be offering different smoothie-related products over the course of, hopefully the latter part of this year, certainly into 2011, with other customers and other markets. So the category is going to be a mainstay for years to come.

Operator

We'll go next to Joel Tiss with Buckingham Research.

Joel Tiss - Lehman Brothers

Two things. One, you haven't talked really at all about the potential for raw material costs to be a headwind in the second half of the year? Is that true or am I just making it up?

Glen Tellock

No, I think -- well, we haven't talked about it a lot because I don't think from a materiality standpoint, I think when you look at where we're at and some of the things we already have in place with our contracts and with our forecasted usage of some of these, I think we feel okay about it. I think it's going to become a bigger issue as we start getting towards late in the year and then into 2011, depending on what happens in commodity prices at that point in time. So you recall, Joel, a lot of times in some of these commodities, more so on the Foodservice and the Crane side, we have a lot of these hedged. We have -- that takes some of the volatility out as we try to protect the balance sheet. You're probably talking mainly right now on the steel prices. We have some good contracts in place. But I think what we have to watch for is the same thing that happened in late 2007 and 2008, where all of a sudden the steel companies didn't exactly want to talk to you much about going out two, three months or longer in some of these contracts. But in today's environment, in the last six and nine months, it was a little easier conversation.

Joel Tiss - Lehman Brothers

And then I supposed as we get into 2011, the volumes will get a lot better and then it should be less of an issue. On Foodservice, can you just spend a little bit more time going through some of the different end markets and why you're seeing more of a flat result and if you can talk -- just breakout sort of casual, fast casual, quick serve, some of the different pieces and give us a sense what all those customers are saying?

Glen Tellock

Well, I'm going to let Mike speak specifically each one. But I think, Joel, if you just go back to some of our conversations whether it's last year, in February this year, we weren't expecting that the foodservice industry to have much of an uptick. First of all, just from the economy, consumer confidence and that type of thing. So I think it's playing out with just the way we saw, and I know there's -- with a lot of the things you read there, there's a lot of excitement surrounding certainly what could possibly happen in this environment. But I think people as -- even though Eric uses the word in Cranes as cautiously optimistic. I think some of that is still in the Foodservice side also. And Mike, if you want to talk about these specific end markets?

Mike Kachmer

Right, I would say that there's really three dimensions that we look at. First is the geographical slice then there is the customer segments/market segments slice, and then within each of those, there's the products/applications slice. The Americas remains trying as we've talked about in some of the earlier comments. But we're starting to see some hope for the latter part of the year as restaurants are experiencing better performance themselves. Ultimately, that will lead to more investment. But again, we've had success even in that market. Some of our major rollouts, such as the smoothie category that we referred to earlier, has been a very, very positive statement in an otherwise flat general market. Europe remains our most challenging environment where we've actually had contractions in certain countries and certain customer segments. And on the flip side, the Asia-Pacific market remains very upbeat, very optimistic and very energized. We see U.S.-based chains getting more aggressive with new store growth in the region coupled with Asia-based chains making similar strikes. So again, it's a different story with each of our three markets. Net-net, we're seeing some positive news on most fronts with the European sector probably the most cautious at this time.

Operator

We'll go next to Ann Duignan with JPMorgan.

Ann Duignan - JP Morgan Chase & Co

Can we just take a step back, I just wanted to clarify couple of things that you've said. I think you noticed that -- do you expect Cranes sequentially to be up more than normal, which should be more than 20% sequentially. And orders that you said or you think there's going to be some modest improvement. Wouldn't that by nature imply that book-to-bill is going to decline, going forward?

Carl Laurino

I think what we're trying to say about 2010 is that it's -- we view it as still a difficult environment. And obviously, we've got some challenges in the developed markets, specifically. And that can create some vagaries as far as what the pacing of the order flow might be. So it's really difficult to predict and what I think based on everything that we've said, people would certainly view 2010 as the trough year. It's not atypical.

Ann Duignan - JP Morgan Chase & Co

But book-to-bill should decline sequentially, before picking up?

Carl Laurino

We're not making a forecast there, but certainly not inconceivable, obviously. It's part of the ability to get to over a factor of one in the first quarter. The revenue was down quite a bit.

Ann Duignan - JP Morgan Chase & Co

Yes, exactly. That's my whole point. That people tend to focus on book-to-bill and sometimes it's because the bill is going zero. And that wouldn't surprise us to see book-to-bill decline before it starts to increase. I just wanted to clarify that because I think people obsess over it a little bit. On the Foodservice side, I'm just curious, could you tell us a little bit more about the synergies in the first quarter? It is best that you can quantify them because I know it's hard to actually pull out what were synergies or integration synergies. Can you talk a little bit about how much synergies you did see from organic growth? How much you did see from cost benefits? And how much you did see from procurement?

Carl Laurino

I think the bulk of the margin expansion that we saw in Foodservice was a function of the synergies. I think the -- we probably -- when you look at the guidance that we've given for incremental synergies this year, we certainly took a pretty significant step in that direction just in the first quarter. I would say probably $35 million-plus in incremental synergies in '10 over '09. And so that certainly was a pretty big factor. Some of those would be on the procurement side and we would identify procurement -- probably [ph] (57:39) a lot would fall in there. But I think Mike is prepared to give a little bit more color on what the actions have been.

Mike Kachmer

Yes, I think our estimates through the course of 2009 as we look forward to synergy opportunities is holding true. We're still roughly seeing about 70% of synergies occurring on the cost side of the equation, with 30% associated with revenue opportunities based on cross-selling, pre-existing customers, developing new products based on the knowledge that existed in the two separate companies. So that's what is roughly holding true.

Ann Duignan - JP Morgan Chase & Co

But can you breakout the cost benefit versus the procurement? I'm just trying to get a sense of...

Glen Tellock

It's about on the 70%. It's half and half.

Ann Duignan - JP Morgan Chase & Co

And that's actual in Q1, not your goal?

Mike Kachmer

Correct.

Operator

We'll go next to Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets Corporation

I guess just also another clarification, I think, Glen, when you're talking about the competitive environment, you mentioned that the players are different this time versus last. I mean is that a -- are you trying to make a comment or the Chinese becoming more aggressive? Can you just expand on that a little bit? Is that what you're alluding to?

Glen Tellock

Well, I don't know that's necessarily all the Chinese. I just think there's more players than some of the different large end capacities that were not around in 2002, 2003 and I certainly not want to go again and say anything bad about the competition or anything. But I think there's more players in it, so you watch what some of the other players are doing and they haven't been in this situation before. So I think it does get a little bit different. But it's mostly -- it's not in your traditional market that you're seeing and it's mostly in the emerging markets where some of these deals are taking place.

Seth Weber - RBC Capital Markets Corporation

My question is really -- I'm just trying to drill down on this, the Crane margin being above the 3½% trough from last cycle. I mean how much of that is dependent on volume recovery and how much is, if it's possible just to talk about, how much is dependent on volume versus how much is -- you have these contracts on hand already so you kind of know what your profits are going to be on the cranes that you're building through the end of the year?

Glen Tellock

Well, a lot of it obviously, Seth, is going to be driven on volume because a big part of that I think what you saw in the last run-up, you get the benefit of absorption in the factories. But I think the other thing is that people tend to forget about it, many of the changes that we made in the crane infrastructure during 2005, 2006, 2007, 2008. We left trough at 3½%. We have much more of an emerging market presence now. We consolidated many of the operations into other operations. 2003 was -- right after the consolidation of Grove and Potain in Manitowoc, primarily the traditional markets, a lot of different factories, the improvements we've made, because I think that all boiled into that projection as to how that can happen. And I think that these new products is a difference of more of the infrastructure energy and in end markets than what we've seen in the past. So I think it's all a combination of those that give us a lot of confidence that it can be where it is. Now at the flip side, you can go back to what commodity costs were in 2003 and they're heck a lot different now stores your pricing versus back then. It's all those things taken in combination that give us that confidence. It's not necessarily just what we have in our order book right now.

Seth Weber - RBC Capital Markets Corporation

But if you were to go back, I don't have the quarterly numbers in front of me but during the quarters for 2003, did the margin get down to the 1% that we saw this quarter?

Carl Laurino

I think so, yes. Again, I'm not looking at it visually but my recollection is that the seasonally soft first quarter we were lower than certainly we were -- and recovered to get to the point of 3½%. And our message in this instance based upon a lot of the things that Glen mentioned is that despite a little over 1% in the first quarter, we'll still get over that 3½% margin.

Glen Tellock

Seth, I would go one step further, with definitely a different mix in 2003 than what it is right now.

Seth Weber - RBC Capital Markets Corporation

A question for Eric, just on the last call you had mentioned I think a pickup in Germany in December. And it sounds like that's kind of gone away. Is there some sort of any color around that? It sounds like -- I mean do you think that maybe orders just got -- people were just holding off on orders around the Bauma show? Or is there something that changed in Germany over the last quarter?

Eric Etchart

No, there is no change. If you look at Western Europe right now, I mean Southern Europe is completely dead and there are really free markets which show more resiliency and obviously, Germany is one of them. France just an extend [ph] (01:03:26) and Switzerland. So these other markets showing resilience in Western Europe. So no, I don't think my comment would be different here. And Bauma, I mean just to confirm again the orders and take that we had on during the show. Some of those orders were coming from those specific countries that I just mentioned.

Operator

And Robert McCarthy with Robert W. Baird.

Robert McCarthy - Robert W. Baird & Co. Incorporated

I'm still a little confused about, well more than a little I guess, confused about what happened in Crane in the first quarter. I thought I understood that you had some shipments delayed from the first quarter to the second. But it sounds more like order intake was a different mix than you expected. It was incrementally weaker on more quick turning Crane business and it was stronger for larger? Is that -- did I get that right?

Carl Laurino

Yes, I think so, Rob. I think the comment about the order flows being modest was really juxtaposed against the backlog that we took into the beginning of 2009, not necessarily anything sequentially. And then as far as the revenues being modest, I think in response to Meredith's question, it did indicate that given the fact that as we have been saying, as demand has been more resilient on the heavy lift side, things are going into energy and infrastructure projects. The production throughput is a little bit longer and there's things that we have had in hand as an order that was just not in -- in a level of completion to get out of the first quarter. Does that make sense?

Robert McCarthy - Robert W. Baird & Co. Incorporated

And in terms of your outlook for crane order activity going forward, we have a couple of quarters now of around $400 million additions to backlog. You've got backlog of about $600 million. But it seems to me that generating $500 million a quarter in revenue in the back end of the year or at least on average, which is your forecast were up, comparison in the second half, will require orders to strengthen from here, I think. So can you help me understand, one, whether you can meet those objectives if orders stay at the level they're at today? And then, if we're going to see acceleration going forward, is any of that -- I mean I heard maybe some inventory replenishment at Grove, in other words, you'd be able to lift production schedules closer to retail there, maybe there are some that going on at tower. Anyway, can you -- do you understand my struggle? Your ordering take seems to -- it looks it needs to go up and I'm not clear where that incremental strength will come from?

Glen Tellock

Well, there's no doubt. I mean if you just look at where it is if you run up the backlog, you're exactly right. Your intake has to go up. And that's a matter of like we had several years ago, it's how much do you get out within the quarter that doesn't go on the backlog. You've to start playing that again. But I think when you look at it and you look at the projects, you have the conversations with the customers and you look at the fact that you don't have a backlog that goes out very far. You see more of this. This is what I need and this is when I need it. And that period of time, Rob, becomes a much shorter piece of the pie than it has in the past. We're seeing much more of that. Now people are saying, "Hey, if you can get it to me by now, by whatever date, that's you're going to get the order." And then that's how it plays out. But I think when you look at the new product introductions we have when they rollout and you look at some of the other areas of the world that we see our production schedules, yes, I mean it obviously means that orders would be perceived to be higher in the back part of the year.

Operator

And we'll go next to David Wells with Thompson Research Group.

David Wells - Avondale Partners

First off, with regards to the emerging markets and the relative strength that you're seeing there, what type of work is it that's coming through the pipeline there? And I guess I'm trying to get a sense of how much of that is tied to stimulus that was passed in 2009? So what is that -- what did the underlying demand look like in those markets as that stimulus benefits starts to roll off here as we come into the end of the year?

Glen Tellock

Well, David, in the emerging markets about the only place that had a stimulus that was any meaningful stimulus would have been China. And then there is different things surrounding that. But your other part of the question is where you're seeing the demand and it's in mining, it's in infrastructure, Eric mentioned in his comments, the nuclear plants in Turkey. You're seeing infrastructure in Brazil. You go to Australia, a lot of it is in mining and again infrastructure. The Middle East, as Eric mentioned, that's infrastructure work when it comes to hospitals and universities and research centers. And then it's just an entire banking financial community. I mean it's all for that. And again, I don't think it has anything to do with the stimulus. It just has to do with where people need the infrastructure, energy and petrochem. Eric, I don't know if you have anything to add to that.

Eric Etchart

No, I mean, basically, you reason very well. I mean you look at Brazil, basically, they have a quarter of a century in four years, based on what's going to happen in Brazil and the spending, so it would be huge. I mean regardless of the Lula administrations and the change in the October elections, I mean Brazil has two levels [ph] (01:10:23) of infrastructures for the year, two big events that are planned, the Olympics and the World Soccer Cup. If you look at other things, Chile, for example, will be at work. They have now a previous plan with, I think $9 billion of infrastructure to be rebuilt and this is going to start at probably at the back end of 2010. You look at Saudi Arabia, I mean there are huge infrastructure projects will likely to -- hospitals and financial center and another big Olympic city at Jeddah. All those projects are of various finance and that's where the demand would be coming from. In China, we expect that they will continue all those stimulus and we anticipate [ph] (01:11:12) to see the Chinese market is certainly going to continue on 2011 and 2012 for sure.

David Wells - Avondale Partners

And as a follow up, I continue to hear some chatter out in the market about prices for used equipment started to soften somewhat. And given the pressure that we're seeing in the North American and European markets at the rental level, how much of a concern is it -- at your perspective that you could potentially see used equipment come to market that would cannibalize new sales here toward some of those emerging-market projects that you referenced?

Glen Tellock

Well, David, there is always that chance. I mean it's been there ever since we build the equipment. So the used market is always a channel and we use that channel also. We take trade-ins or anything else. It's all part of the sales process. But well at cannibalizing things, all it does but I don't think it's to a great extent where it depends what the age is, it depends what it's going to do. You have newer technologies and some things. You look at if it's going to be in our team, how old is the RT, we have some new products coming out when it comes to weight, when it comes to length and lift capacities. It's in what type of project. I mean it used to be, David, that all the used equipment went into these emerging markets as a dumping ground. Well, as they get very good at taking international engineering and construction firms go throughout the world, they have safety requirements also that it doesn't necessarily -- they don't want any quote equipment that used to go to some of these places. So I think you always see the used prices fluctuate. And I think, yes, they're softening but they're certainly not out of the normal what we've seen in prior periods. Eric?

Eric Etchart

Yes, David, I mean if you look at Spain, from -- obviously, all the market is down big time on towers and you have a lot of towers idle. And the initial report that both towers were landing in Latin America just because it's traditional fallback market for the Spanish manufacturers. This does not happen. All the cranes stayed in Spain. And the reason is the specs are different. They use remote controls in Spain. If it has to go through Latin America, you need a cap, so you need to add up some kind of money and all these other things. And at the end of the day, you have not seen the huge traffic of these used cranes that you have brought in jeopardizing our new Crane sales in Latin America.

Operator

And we'll go next Nigel Coe with Deutsche Bank.

Nicole Deblase - Deutsche Bank

This is actually Nicole, asking questions on Nigel's behalf. I wanted to talk a little bit about working capital. It was kind of surprising given the volume declines that working capital actually built during the first quarter. And it looks like it would've been accounts receivable. So if you could talk about the reason behind that. And then also the mix of inventory between work in process, raws, et cetera?

Carl Laurino

Sure, Nicole. I think the issue with accounts receivable, I think that probably the biggest piece of it would be depending on if you're looking at it from the end of the year. Last year or the first quarter last year's $63 million just from the accounting impact of the securitization going back on to the balance sheet. That was $63 million versus the end of the year and it was nearly $100 million impact as you look at it year-over-year. So that's probably the biggest part of it. The other part of -- the fact that we're building working capital is really coming from the expectation that we're going to need to satisfy some of the increase in orders that we've been seeing. And its larger equipment that's got the longer production lead time that doesn't flow through the income statement until the equipment's delivered. And those are the two big issues.

Nicole Deblase - Deutsche Bank

And mix of inventory?

Carl Laurino

Well, it's probably a little bit more on the work-in-process side that really drive that latter issue.

Nicole Deblase - Deutsche Bank

And I mean, how do you guys feel about the rest of the year with working capital? Are we going to need to see working capital continue to increase? Or can you reduce that as the year progresses?

Carl Laurino

Well, I think we're committed to the $200 million in debt production, the target level that we've put out there to the extent that we have. The curse, if you will, from a working capital standpoint of higher demand, obviously, we would hope to be able to generate more out of our profitability in order to satisfy that objective.

Nicole Deblase - Deutsche Bank

And then looking at your competitor, Terex, orders there were down significantly quarter-on-quarter, and you guys obviously had a much better performance. Is that mostly product mix, do you believe? Or is there something else going on there?

Glen Tellock

We don't know. I mean, I certainly -- we don't know exactly where the orders are coming from or what they're looking at or what their comparison was the last year or what it was from the fourth quarter side. And we just -- I mean, we don't know. I mean, I don't think we're prepared to comment on something like that.

Nicole Deblase - Deutsche Bank

Lastly, looking at the backlog, can you give the impact that FX had?

Carl Laurino

Pretty minor.

Eric Etchart

Yes, pretty minor because you have to take into account for the first quarter that activity is very slow and from January and February because of this Chinese new year. So really, it started March, and I think we should expect Q2 obviously to see an uptick in orders in APAC because the economies are good there.

Operator

That does conclude our question-and-answer session. Mr. Khail, I'll turn it back over to you for any closing remarks you might have.

Steven Khail

Thank you. Before we conclude today's call, I would like to remind everyone that a replay of our first quarter conference call will be available later this morning. You can access the replay by visiting the Investor Relations section of our corporate website at www.manitowoc.com. Thank you everyone for joining us today and for your continuing interest in the Manitowoc Company. Have a good day.

Operator

Again, that does conclude today's conference call. Thank you for your participation.

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Source: Manitowo Q1 2010 Earnings Call Transcript
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