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Manitowoc (NYSE:MTW)

Q2 2011 Earnings Call

July 27, 2011 10:00 am ET

Executives

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

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

Glen Tellock - Chairman, Chief Executive Officer and President

Analysts

Jerry Revich - Goldman Sachs Group Inc.

David Wells - Thompson Research Group, LLC.

Ann Duignan - JP Morgan Chase & Co

Seth Weber - RBC Capital Markets, LLC

Henry Kirn - UBS Investment Bank

Charles Brady - BMO Capital Markets U.S.

Ben Elias - Sterne Agee & Leach Inc.

Ted Grace - Susquehanna Financial Group, LLLP

Robert McCarthy - Robert W. Baird & Co. Incorporated

Joel Tiss - Buckingham Research Group, Inc.

Operator

Good day, everyone, and welcome to this Manitowoc Company, Inc. Q2 2011 Manitowoc 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 Second 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 Mike Kachmer, President of Manitowoc Foodservice.

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 second quarter in greater detail and will be followed by Mike Kachmer, who will offer insight into the market conditions and recent events in our Foodservice segment. Following our prepared remarks, we will be joined by Eric Etchart, President of Manitowoc Cranes for our question-and-answer session.

For anyone who's not able to stay online for today's entire call, an archived version of this call will be available later this morning.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 July 27, 2011. 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 effect 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 Manitowoc company does not undertake any obligation to publicly update or revise any forward-looking statement, 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, Steven. Good morning, everyone. The first half of 2011 has laid out largely as we had expected. Our second quarter results underscored the firming demand we are seeing for our products across multiple geographies. In Cranes and Foodservice, we are witnessing pockets of increased confidence across our customer base while some cautiousness remains. We're also pleased with the balanced sales performance across both segments. While we continue to expect growth through the remainder of 2011, the continuing uncertainty in the global economic picture is creating ongoing end market volatility.

Let's me start with a discussion on our segment performance. For the second quarter, Foodservice posted solid results that tracked above the overall industry growth rates. With improved operating efficiencies driving margin expansions, we continued to extend our global leadership position in this business. Specifically during the quarter, demand in North America and the emerging markets continued to increase while the marketplace in Europe showed signs of further stabilization. Our sustained focus on innovation and the breadth of product offering makes us a valued partner in our customers' long-term success.

During the quarter, we completed the successful launch of our Indigo ice machine platform, which received a Kitchen Innovation Award at the recent NRA tradeshow and a Dealer Design Award from the newest HVAC publication.

We also introduced a variety of technological enhancements for our Merrychef ovens and blended beverage product categories. The combination of our product offerings, existing relationships and global footprint has afforded us significant opportunities to drive continued growth as we move into the second half of 2011.

Moving to our Crane segment. Our second quarter results were solid as we experienced sustained order intake levels which drove year-over-year sales growth and another sequential increase in backlog. We are experiencing improved quoting activity across multiple geographies and product lines, with demand in North America picking up, particularly with large rough terrain cranes and blue trucks. We're also experiencing increased activity in Europe, notably in Germany, France and Switzerland, for our tower cranes and altering cranes. And in emerging markets, energy and infrastructure projects remain the key sales drivers.

Over the last several years, we have frequently discussed the 7 company-wide strategic imperatives that have played a vital role in strengthening Manitowoc's business segments and better position us for long term. Last quarter, we discussed our focus on innovation and aftermarket product support. Today, I would like to focus on our growth imperative and, in particular, our strategy of continued investments in emerging markets. We firmly believe the strategic initiative is a source of long-term expansion for our business.

During the quarter, Brazil performed exceptionally well and continues to have a favorable impact on our business. With leading positions in each of our product lines, Brazil is our #1 emerging market within the Crane segment. We continued to deliver strong results in this region as our market position and brand strength paid dividends. The explosive growth in Brazil has been primarily driven by energy and infrastructure projects, as well as various natural resource industries, which we expect to grow for the foreseeable future. To capitalize on the potential of Brazil, we're building a 270,000 square foot crane plant near Paso Fundo, which will initially build mobile telescopic cranes. The project remains on time and on budget for an expected completion in the first half of 2012.

Turning to India. There is significant ongoing development in this market and we are very well positioned to capture that growth in both in our Cranes and Foodservice businesses. Specifically, in the Crane segment, we are replicating the success we have seen in markets such as China with Potain tower crane as being the pioneer in establishing a leadership position. In addition, our manufacturing presence in this region is reaping benefits as we continue to further expand our market position.

We continued to see meaningful opportunities for growth through infrastructure projects in the greater Asia Pacific region, including Singapore, Indonesia, the Philippines and Australia.

In addition, growth in new restaurant construction by regional and global chains remained strong, which further positions us for continued success. Our global distributions focused on innovation and industry-leading aftermarket product support positions us extremely well, especially in an environment of increased competition.

In addition, with continued higher crane utilization rates and some improvement in rental rates, coupled with early signs of dealer restocking, we believe the year is not only shaping up as we expected, but we believe these trends suggest stronger growth opportunities as we look into 2012. As I mentioned earlier, and with any transition year, our customer base across both segments remains cautious but increasingly more confident.

In addition to managing our business through uneven demand levels, we have taken proactive steps to counteract increasing commodity costs, evidenced by our recent price increases in the Crane segment and the third quarter price increase in Foodservice. Despite general market challenges, we are encouraged by end market demand as we maintain our first half growth trajectory for the remainder of 2011 and position our 2 world class businesses for accelerated growth in 2012.

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

Carl Laurino

Thanks, Glen, and good morning, everyone. We reported net sales for the second quarter of $950 million, which is an increase of $130 million or 16% from the second quarter of 2010. The year-over-year increase in net sales during the second quarter was driven primarily by a 23% increase in Crane segment sales, coupled with a 7% increase in Foodservice.

While revenue met our expectations during the quarter, we continue to experience broader base supply chain constraints in the Crane segment. Despite the solid progress we have made over the last several months, we are still experiencing some limitations with Tier IV engines that we discussed during last quarter's call, as well as select issues with supply chain deliveries.

Second quarter 2011 consolidated operating margin before amortization was 8.3% versus 10% in the second quarter of 2010. The year-over-year margin decline was primarily driven by general market pricing pressure, a shift in product mix and commodity cost increases. In addition, challenging comparables associated with the second quarter 2010 collection are fully reserved accounts receivables in the Crane segment, enhanced margins in this segment by over 100 basis points a year ago.

GAAP net income for the second quarter was $2.7 million or $0.02 per share versus net income of $14.1 million or $0.11 per share in the second quarter of 2010. Second quarter 2011 EPS, excluding special items, was $0.16 per share versus $0.11 for the prior-year quarter. The second quarter 2011 earnings included costs of $0.12 per share related to our senior credit facility debt refinancing and a $0.01 per share related to European restructuring charges.

Moving to the balance sheet. We continue to focus on working capital management to ensure we maintain an appropriate balance between our ability to meet growing customer demand and our debt reduction goal. While we continue to target $200 million in debt reduction for 2011, we will not compromise our ability to meet an anticipated increase in demand as we move into 2012.

During the second quarter, cash flow used for operations was $34 million. This was primarily driven by increased inventory for second half 2011 deliveries and accounts receivable levels from higher sequential quarterly sales volumes. Consistent with our seasonal pattern, year-to-date, cash usage was on track and we anticipate strong second half cash generation.

Moving on to our segment results. Foodservice sales in the second quarter of 2011 totaled $395 million, which increased 7% from a year ago. Second quarter 2011 operating earnings in Foodservice were up 13%, $62 million versus $55 million in the same quarter last year. Operating margin of 15.7% for the quarter rose 70 basis point from those in the second quarter of 2010. The year-over-year comparison was favorably impacted by new products, including the ongoing rollout of our Indigo ice machine series.

Moving to the Crane segment. Second quarter sales totaled $555 million, up 23% from $451 million in the second quarter of 2010. The quarter's results reflected continued growth in the Americas region, strong demand in the emerging markets, as well as a strengthening backlog. Crane segment operating earnings in the second quarter were $30 million versus $39 million in the same quarter last year. This resulted in second quarter Crane segment operating margins of 5.3% compared to 8.5% a year ago. The year-over-year comparison was negatively impacted by commodity cost increases and the previously mentioned bad debt recovery in the second quarter of 2010.

Crane backlog at quarter end was $840 million, an increase of $40 million or 5% from $800 million at March 31, 2011 and an impressive increase of $309 million or 58% from the prior-year period. The increase in backlog was primarily due to our third consecutive quarter of strong order intake. Based on the order levels we have seen during the second quarter and our end market opportunities, we have increased confidence about our ability to reach our goals of double-digit year-over-year percentage growth in Crane segment revenue. We also expect improved margins building off 2010 trough levels despite the difficult second quarter comparison and a challenging commodity price environment.

As noted in yesterday's press release, we are reaffirming our guidance for 2011.

Let me now turn the call over to Mike Kachmer to discuss market conditions and recent events in our Foodservice segment. Mike?

Mike Kachmer

Thank you, Carl. Our Foodservice segment continues to maintain a very strong position in the marketplace as a leading player in the global Foodservice equipment industry.

As Glen stated, we experienced increased demand in North America and the emerging markets during the quarter while we also made a positive strides in Europe as that market begins to stabilize. Our chain customers continued to drive the largest amount of growth in North America and various emerging markets.

During the quarter, we attended the National Restaurant Association Show in Chicago. Our conversations throughout the event with both new and existing customers confirmed the growing level of increased confidence in the industry, further validating our strong position in the Foodservice Equipment industry. According to a recent NRA survey, reported CapEx spending by restaurant operators during the second quarter and future CapEx plans for spending by the same group are now at their highest levels than any prior quarter in the past 2 years.

Moving on, let me share with you how one of our recent product launches has been tracking in the market. The Indigo ice machine platform, recently launched at several events including NAFEM, NOA and several international shows, has been very well received in the marketplace. As a reminder, our Indigo ice machines offer industry-leading serviceability and food safety enhancements, all geared towards creating a more reliable and efficient ice maker.

We also continue to focus our efforts on accelerated cooking and blended beverages as growing disciplines and categories. We will continue to capitalize on growth opportunities within each of these areas. Our Merrychef ovens continue to evolve and we have recently integrated new technology enhancements into this product line that will be launched to several large chain customers.

In addition, our blended beverage line continues to gain positive traction. One of the world's leading quick-service restaurant chains continues to roll out our blended beverage products into additional markets. As a key partner in helping our customers achieve menu distinction, we are the only company that offers blend-in-cup and blend-in-pitcher products. We're continuing development of our full line of blended beverage equipment and demonstrating to a growing list of prospects the wide array of smoothie, blended ice and dessert-type beverages that can produced in this flexible product line. We continue to enjoy high interest in these products from large customers.

Our customers include many of the fastest-growing chains and most technologically advanced companies in the world, not only appreciate the flexibility of our equipment, but rely on us for innovations that allow them to enhance their menus, streamline their operations, expand their geographic footprint and reduce their overall costs. For example, our recent introduction of the oil conserving fire by FryMaster is enjoying strong interest from leading chains which realized substantial cost savings from reduced oil and energy use. And our expanded line of Merrychef's accelerated cooking ovens featuring our smart control system continues to gain more placements in sandwich, convenience store and supermarket chains.

As we look to the remainder of 2011 and beyond, the Foodservice segment is in a strong position to continue to drive growth by gaining additional market share, embracing growth areas as customers make new investments in their businesses and leveraging multiple global opportunities as the market expands.

In addition, we are diligently focused on increasing our own operating efficiencies throughout the business as we continue to grow on the top line. We are confident that we remain on track with our full year expectations and we continue to see meaningful opportunities for further improvements as we build an industry-leading business for the long-term.

With that, I'll return the call to Glen for his closing comments.

Glen Tellock

Thanks, Mike. As evidenced by Mike's comments, we continue to see significant opportunities for growth in our Foodservice segment through increasing global demand for our products, as well as opportunities for driving enhanced operational efficiencies.

To conclude, the performance results we have showed with you today in the Crane and Foodservice segments are indicative of the significant investments and strategic initiatives we have made, positioning us well for long-term success. In addition, we continue to invest in new product development and technologies to drive performance in the future. While we continue to believe 2011 is a transition year from a risk and opportunities perspective, we clearly have momentum and anticipate that we will continue to build on our strong foundation in 2012 and beyond, evidenced by the further stabilization across our geographies and increasing demand in emerging markets.

This concludes our prepared remarks. Danielle, we will now open -- now begin our question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Charlie Brady with BMO Capital Markets.

Charles Brady - BMO Capital Markets U.S.

With regard to commodity cost pressure,can you give us a sense of what kind of headwind that was on Crane and Foodservice in the quarter? And given that the price increases that you put through, are we going to be covering the raw material commodity cost increases in the back half of this year?

Carl Laurino

Well, the magnitude was certainly significant, Charlie, for us in the Crane segment in the quarter. It was over $12 million in total for the quarter. The full year expectation for us on that front is probably fully $30 million. So being the transition year, obviously, we will get some relief with the pricing increases that we have announced. And it's a greater or lesser degree depending on the product line and region, but it will certainly help in the back half of the year. And I think the wildcard, as always, will be the direction on the cost side. In Foodservice, the impact for us is probably about $5 million in the quarter, roughly. And I think it's probably a little bit easier for us in the last 6 months of the year in Foodservice.

Charles Brady - BMO Capital Markets U.S.

All right. Then still a follow-up on your Crane revenue guidance of low double-digit growth for the full year. The first half Crane revenue was up 16%, orders were up 56%. It would seem that to get into a low double-digit revenue rate for the year, back half would have to come in 9%, 10% or so. Is that -- is your guidance the concern of guidance? Or are you expecting a kind of a drop off in the second half?

Carl Laurino

Well, I think the guidance reflects a transition year. It's obviously -- we never had an expectation that this was going to be some reshape recovery. A lot of issues around the world as we all know and that creates overall caution on the side of the customer base and as we think about the outlook. But we still need to see some pretty good growth in order to achieve that guidance. And again, given the very strong quarter that we had, over 20% growth, that does provide us with increased confidence that we will definitely be able to achieve that guidance level, whereas earlier in the year, it's a little bit more of a wildcard.

Glen Tellock

Charlie, I think to Carl's point, I think when you look at the first quarter, when you look at the second quarter, just those 2 alone were 2 different types of quarters from just a confidence standpoint in the end markets. And so changing the guidance given where we sit here today with North America being a big part of that so far right now, what's going to continue to happen in North America when you have all the political things going on, you have some of the things that are happening in Europe, so I think it's a matter of -- I think there's some cautiousness, as we've used that word in there. Is there an opportunity for some upside? Perhaps. But I think it's kind of silly for us to go and create a different expectation right now for the full year given where we sit and looking at where we're at now 6 months into the year and wondering what's going to happen in certain markets for the rest of the 6 months.

Operator

Next in queue, we have Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC

Is it possible to quantify what the price increase that you put through for both the Crane business and Foodservice recently?

Carl Laurino

Low single-digit percentage increase.

Seth Weber - RBC Capital Markets, LLC

For both categories?

Carl Laurino

Yes.

Seth Weber - RBC Capital Markets, LLC

Okay. And I guess can you help us understand what's in the Crane backlog at this point? How would you characterize the pricing of the orders that are in backlog? I mean are the orders that have been in there for a quarter or 2 relatively at lower price and then the orders you took this quarter have new pricing? Or how should we think about that?

Carl Laurino

Yes, Seth, as you know, we don't reprice backlog. We've not done that historically and we are not doing that in this instance. So there's -- part of the reason for my answer to Charlie's question was that there's a lingering impact from a margin standpoint that comes from that price commodity equation that will continue to affect us in the back half of the year. But the duration of the backlog in aggregate is probably 5 months or so at this stage of the game. So I don't have -- we'll get that burned off. And obviously, there's some activity that's ordering shift within the quarter and certainly within the 6 months that are left in the year.

Glen Tellock

Seth, the price increases were effective July 1 for Cranes and August 1 for Foodservice.

Seth Weber - RBC Capital Markets, LLC

Okay, that's helpful. And I know you don't reprice the backlog, but are there escalators with any of those contracts? Or are they basically just done at the time you signed the deal, it is where it is?

Carl Laurino

Generally, just at the time of the deal. There is very, very select type of orders where we would have an ability to revisit price if it goes beyond an index level. And then obviously, the customers can step away from the order as well. But by and large, that vast majority is a fixed price.

Operator

And our next question will come from Robert McCarthy with Robert W. Baird.

Robert McCarthy - Robert W. Baird & Co. Incorporated

I wonder if we could gain a little more visibility from you on the supply chain issues on the Crane business. You mentioned lingering issues with Tier IV engines. My memory was that or is that your issues have been really software associated with the engines and less availability. Are you talking about availability now? And how much did this constrained Crane revenue in the quarter?

Glen Tellock

All right. I'll speak towards the actual issues, Rob. And you're right, it is on some of the software. As you marry up the engine with the rest of the components that operate the cranes, so there's the complexity there. What I would give our team a lot of credit for is with some of the new reliability and quality initiatives that we've put in place. Typically, I would say in the past we have made the fix and we put the crane out in the field and we would have found a different problem. Now every time we make an engineering fixed, we put it through a number of different tests, including a number of hours that they have to spend in test. And so you can -- you're trying get all the bugs out within the factory as opposed to get them in the field. So some of it is our own internal processes to make that happen. And I wouldn't locate it to -- some of that with the Tier IV. It's not the engine itself. But there are some other constraints, whether you get in to Europe or you stay here in North America, when it comes to whether it's electrical components or certain motors or some chassis. It's getting to be just a few things, but it's kind of a nemesis in certain areas. So we're working through that. The impact is on the quarter. I'll let Carl mention -- speak to that.

Carl Laurino

Yes. As it relates to that issue, you recall, Rob, that we did talk about Tier IV as a constraint to the Q1 revenue and we framed that about the $50 million constraint in Q1. We saw that and we got those shipments out. And they did benefit Q2. So as we talk about other supply chain issues here now, it did now strip that $50 million calendarization benefit we had. So depending how you look at it, there really wasn't a benefit if you look at the supply chain overall in the second quarter by itself.

Robert McCarthy - Robert W. Baird & Co. Incorporated

You're saying that you basically offset any issues you have in the quarter by catching up on the first and it was net, sort of neutral, is that right?

Carl Laurino

Exactly.

Robert McCarthy - Robert W. Baird & Co. Incorporated

Okay. My other question had to do with the second half outlook in Foodservice, Mike. You have a price increase coming through. You have the Indigo launch complete. I would think that, that would involve a little bit of backlog that would have been built up that you're working off. You've invested to build your presence in Asia in the advance of some new business launching, I believe. And so I mean if I add all that up, in fact, during end market uncertainties, that kind of thing Glen is talking about, shouldn't we still be expecting to see stronger year-on-year growth comparisons from Foodservice in the second half of the year?

Mike Kachmer

Rob, the general momentum overall, including all those factors that you cited, remains positive. In some cases, all we're seeing is pausing, not stopping the new initiatives that we're rolling out. But the general momentum remains positive in all geographies and across most categories at this time.

Operator

And our next question comes from Ted Grace with Susquehanna.

Ted Grace - Susquehanna Financial Group, LLLP

I was hoping to come back to the Crane margin question. In Glen's kind of prepared remarks, it seemed like you said pricing isn't challenging, mix is an issue and then commodity. I didn't know if those were intended to be kind of forced ranked. Carl obviously led with commodity -- focused on commodity, talked about a $12 million hit. But if we back out the onetime item last year, operating profits down $1 million on $103 million of incremental sales, could you bridge the rest of it and help us understand kind of the dynamics, A, what happened to the pricing in the quarter and also mix? Because I guess we are under the impression that the strength in backlog over the last 2 or 3 quarters has been in RTs and boom trucks, which would be above average products, and some of the higher margin products like tower haven't really done much, so we would have anticipated better mix. But if you can help us kind of reconcile those issues, that would be great.

Glen Tellock

I would, Ted. I'll speak to the pricing side of it and then let Carl get into some of the other details. But on the pricing side, it is competitive. You have people still working off a lot of production, inventory and things as we come out of the what we believe 2010 being the trough. And so those there are deals. I mean you can look at other comparisons to competitors we have in this industry and I think you're hearing the same thing. And so I would say probably from a margin standpoint, it's probably 100 basis of pricing in the second quarter. And so there are certain things we'll do. There are certain things we won't do. But I would say that's the competitive pressures that everybody has as we're out of the downturn. That's why looking at what do we have from an aftermarket standpoint, what are the efficiencies in the lien and in the operations side we're trying to bring through, again, some of these things that we're doing are benefits that you will see just like we do in every other upturn. But sometimes, the cross, obviously, can get ahead of the initiatives that you have on the savings side. And with that, I'll let Carl bridge some of the others.

Carl Laurino

Yes, I guess the really only other key one that I would point out other than the pricing and commodity issue that we've already talked about and the receivable issue that we've already talked is engineering expenses, probably about 50 basis points for us, driven by some innovation initiatives that we have.

Ted Grace - Susquehanna Financial Group, LLLP

Okay. So just as we do think about mix, product mix, should we think about that being a neutral impact, modest tailwind, modest headwind?

Carl Laurino

In the year-over-year?

Ted Grace - Susquehanna Financial Group, LLLP

Yes.

Glen Tellock

Not a significant impact. Well, I want to add something, Ted. We've seen our order intake for altering cranes improving very significantly since Q4 last year. And that trends continue. We had a very strong order intake actually in Q2 for our altering cranes. So that is going skew a little bit in the extend well as we start shipping all those cranes.

Operator

And next in queue, we have Ann Duignan with JPMorgan.

Ann Duignan - JP Morgan Chase & Co

I just wanted to focus on the new orders for a second. While seasonally we would anticipate new orders being down Q2 to Q1, I'm just curious about your opening comments that you mentioned that there's a lot of volatility out there in your customer base and then we looked and then we've seen new orders done. Would you have expected new orders to have a been a bit stronger? Are customers quoting or asking for pricing but not committing? Is there any hesitancy like that going on in the marketplace, either in Cranes or Foodservice?

Glen Tellock

Ann, I think there's -- well, sort of the last comment in both Cranes and Foodservice, I think it's very robust. The quoting activity that we have worldwide is very good. But I think that uncertainty that we watch for is just a simple people don't know where the economy is going. Whether -- I know Mike and Eric, myself, talk to a lot of different customers. People have wants and they have needs. And they have the cash to buy some things, but they are sitting on their hands and they're watching whether it's in Foodservice or Cranes. But I would think -- I don't think it's so much that the businesses in there, I think people are just delaying some of their decisions. And so to be down seasonally the way it is, I don't think, is a real concern for us. But I think that's something we watch on a weekly basis. And I think we're comfortable by getting continuity with some of the guidance that we have for the year. I think it gives you the indication that we're okay with what we have. But I don't think it's so much that the work isn't out there. I think a lot of it just as people delaying their decisions, whether it's in Europe or whether it's in the United States. What we are seeing, though, in a lot of the new products, both on Foodservice and Cranes, those are creating a lot of interest. And that gets a little bit to the mix issue that we just talked about with Ted. You'll start to see some changes there because the new products are -- you see more on the Crane side, it's more capacity driven, it's the larger cranes, and so you have fewer of them. But typically, the margins are better. And then some of the new products in Foodservice, obviously, expanded margins there. So I don't think that we're all concerned about what happened in the second quarter, but we certainly want to watch with eyes wide open what's going to happen in the third and fourth quarter.

Ann Duignan - JP Morgan Chase & Co

Okay. That's good color. I appreciate that. Just one follow-up question. $12 million Q2 crane headwind from input costs, $30 million for the full year. What was it Q1, please? Or what will be in half 2? Is it the full $18 million in half 2? Or was there a headwind in Q1 also?

Carl Laurino

There were some headwinds in Q1 as well, but it was not as pronounced as it was in the second quarter.

Ann Duignan - JP Morgan Chase & Co

Can you quantify it? Or can you give us the back half headwind?

Carl Laurino

I don't have that in front of me, Ann, I'm sorry. But I will get back with you on that.

Operator

And next, we'll hear from Henry Kirn with UBS.

Henry Kirn - UBS Investment Bank

With all the concern about growth slowing in China, what can you tell us about what you saw there as you went through the second quarter? And maybe how did your Crane sales in emerging markets compared to last year overall?

Carl Laurino

Well, I'll speak to that market, Seth, and let Eric talk a little bit about that if he wants. But I think what you've seen is mostly in some of the line construction equipment for us. It's more of the truck cranes. The slowdown in China, a lot of it is directed towards the commercial and residential type of construction. The energy and infrastructure power is still very active. So what we did is we did see a slowdown in the truck crane, the joint venture we have, not pronounced but certainly slowing as opposed to growing what it did last year. But the comparisons year-over-year from a revenue standpoint, I think it's marginal from what we saw at the same time last year in the second quarter. Eric, do you have any comments on China's market?

Eric Etchart

No, that's the second -- or really the second in a row that we see that slowdown. I think every manufacturing construction equipment has seen the slowdown. It's probably healthy to see that kind of slowdown from what it is. I think some other emerging markets like Vietnam has taken the same type of measures to put inflation under control. I think that's also a healthy mix. But overall, the gain in the emerging markets outlook is still pretty good. And I think what we'll continue to overall foresee an increase in our sales in emerging markets versus last year.

Glen Tellock

I think I mentioned in my comments, if you look at the greater Asia Pacific, with Singapore and Australia and Indonesia, I mean that's had some significant growth year-over-year from last year.

Eric Etchart

Yes, with India continuing to grow for us, especially our towers, as Glen mentioned in his earlier comments, I mean we're already reaping the benefits of India. The first manufacturer is really producing towers in India and now extending distributions. Really, we see very good results. So we're pleased with that.

Henry Kirn - UBS Investment Bank

That's helpful. And on the Foodservice side, if the CapEx plans are improving, can you talk how much of that is new investment because of the customers having increased confidence and how much of that is the return of pushed-off replacement demand that was delayed during the downturn?

Glen Tellock

It's difficult to put a precise percentage on it because in some cases it's going through multiple layers of distribution. But I think it is a first split between the pent up demand that's resulting in replacement sales, coupled with very strong interest in new rollouts associated with either a new store or a new category. So very balanced. And I think fairly balanced across the geographies that we serve as well.

Glen Tellock

Yes, Henry, I think if you go back to what we have shown in many of our presentations, over 55%, 60% of the business in the Foodservice side is replacement business. And I think those trends continue to hold the water.

Operator

And our next version will come from David Wells with Thompson Research Group.

David Wells - Thompson Research Group, LLC.

I guess first off, just looking at the free cash flow generation year-to-date, use of cash of close to $200 million and given your debt reduction targets for the full year, I mean it applies some pretty hearty acceleration in free cash flow generation the second half of the year. Just looking at the balance sheet, can you walk us through some of the opportunities there, especially given your commentary about wanting to maintain the right amount of inventories to have in place for likely continued acceleration and revenue growth next year? I guess I'm not just not seeing a lot of leverage to pull, to generate that kind of cash flow.

Glen Tellock

Well, I think, David, if you're around last year the same time, it's the same thing. We had pretty aggressive growth last year and we said we're in the same position again today. But I'll let Carl give us the specifics. But the biggest one is just some of the timing that we had versus what we thought and mostly from an AR standpoint. When you look at the way we set our targets initially and you look at how some of the revenues were generated during the quarter, I think it's just a matter of the AR collections that that's an easy lever to pull and that's one that's just a normal activity. So I mean you can't see it by just looking at one piece of paper, but that's the simple one for us and there are big opportunities there. There aren't bad receivables. It's not bad. It's just that, that's what it is at the end of June. So Carl, I don't know if you have any different comments there.

Carl Laurino

No, I think that states it well. It does -- the firming of the business, the expectations for 2012 and the calendarization of all that certainly does put pressure on the target that we still have in front of us, the $200 million we recognize, but that is a lot of cash generation in order to get there. That's been our normal seasonal pattern for cash generation. It's to generate a lot in the second half of the year. We expect to be able to do that this year, but to some extent, it does -- to the extent that we might not be able to achieve that target, it will be for a good reason, that the business was actually stronger than we expect. The levers itself really are a function of what we can do from a churn perspective in both the AR and the inventory, working capital that we have. And we think that opportunity certainly does exist.

David Wells - Thompson Research Group, LLC.

That's helpful. And then if I look at consensus expectations for 2012, we're seeing implied incrementals in the 25% to 26% range, which would certainly be a pick-up from this year. I guess as you think about the business model, are we reaching an inflection point where we should see an acceleration in the incrementals? Or if we look -- if 2012 ends up being similar to 2011 where it's kind of a tepid growth environment here in the developed markets, certainly, maybe some upsides in the developing markets, I mean do the incrementals look more of the same? Or is that the right way to be thinking about the future of the business?

Glen Tellock

Well, it's a good question. I certainly haven't provided any 2012 guidance at this point in time. But as we looked at 2011, I think it is pointing out as we expected it to given the condition of macroeconomies that we're dealing with and the late cycle nature of our Crane business, almost exactly as we expected, pretty significant pressure on margins in Cranes, in 2011 in particular. And there's some pretty good performance on the Foodservice side given that 2010 was already a growth year for us in Foodservice. It's playing out in exactly that manner. The commodity cost pressures can be a double-edged sword for us because when we've got a lot of cost pressure on us on the commodity side, it probably bodes well for the opportunities for us on the Crane side, and that hopefully will play out to your point. We'll have a return to normalcy from an incremental margin standpoint in 2012, but a lot of it will depend upon the shape and the firming of the demand levels in order to be able to perform at the historic incrementals that we've been able to achieve.

Operator

And the next question will come from Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc.

Mike, can you talk about the margin structure of the Indigo product line relative to the prior ice machine products that you're replacing particularly once when you're at a full production rate there?

Mike Kachmer

No, Jerry, we don't provide specific product line financial information. But I think if you look at the track record of Manitowoc over a period of time, given our engineering initiatives and the innovation that we put into the product, we tend to do pretty well from a margin perspective on any new product that we introduce.

Jerry Revich - Goldman Sachs Group Inc.

Okay. And Carl, on the Crane side, in the prepared remarks, you highlighted strong orders across the Crane markets. I'm wondering if can rank orders for us, which regions saw the strongest year-over-year order improvement, and also touch on whether you expect the same regions to drive growth in bookings in the back half of the year based on inquiries that you're seeing?

Carl Laurino

Well, we'll let -- I mean again, to your point, we are seeing strength. And there are many areas that we've talked about, the emerging markets, and then Eric just talked mentioned that. But I'll let him talk about specifically with the orders and what his feel is for where they're coming in the back half.

Mike Kachmer

Right. We expect definitely continued strength in North America. And we've seen a lot of strength in rough terrain cranes. You had that before. Boom trucks is also a product line that we see significant strength. It's not coming from housing, obviously, because housing is still in a dozing mode. But we've seen a lot coming from the oil and gas, explorations, utility and maintenance, railroads and then also large rental houses obviously renewing and repeating because there are too many. So North America and Canada seems to be good. We have to watch, obviously, this inventory. But the retailing activity from what we've seen has been fairly good until now. So North America and Canada is kind of a wild card because if you look at what's happening in the market, the E&C backlog is very strong and you need to be strong on one hand. you also have the unemployment. Obviously, the construction is declining, which is kind of a good sign. On the other hand, you have somewhat in the repeating index, which is down, so it's a mix picture. But overall, we think that we should continue to track well in North America. Emerging market should continue to be a good story, and we see Europe -- again, in the commentary, we say that Germany, France and Switzerland are doing great. And we've seen some kind of recovery in the tower cranes, albeit from a very low level. So...

Jerry Revich - Goldman Sachs Group Inc.

Okay. I appreciate the color. And I'm wondering if you can talk about how the order shape out over the course of the quarter. And in response to the prior question, you mentioned there's some anxiety around sovereign credit risk. I'm wondering if you could just help us understand the way that shaped up in terms of booking levels in the past couple of months.

Carl Laurino

I mean you see what the order rates are that we disclosed. But I would say, with respect to the sovereign credit risk, I mean Spain, Italy, they've been down and they're still down. So there's not a lot of risk to what we've seen. Really, as Eric just mentioned, whether it's tower cranes or ATs or RTs in those areas, it's coming from such a low level that it's more upside than anything. So there's really -- I mean that risk is based in everything that we've already talked about.

Operator

And next, we'll hear from Joel Tiss with Buckingham Research Group.

Joel Tiss - Buckingham Research Group, Inc.

I just wanted to go a little further on that. Can you just sort of -- instead of talking about which end markets are good, can you give us a little sense of under the covers there? Is the equipment wearing out? Or did the fleets cut their cranes too far? Or are we seeing capacity expansion? Can you just sort of give us a sense of what's driving it? What's driving crane demand?

Glen Tellock

Again, we've talked about the transition to some of the larger-type capacities. And that's what's driving some of this and its new products. I mean if you look at the AT, on AT side, the 6300, you look at some of the towers that we've introduced. I think you have a lot of that. And at the same time, there were a lot of fleets that were -- the aging of it, a lot of the crane rental fleets in North America, they sold off during the downturn. And so you see a little bit of replenishing there with the results we've talked about the destocking. So I think it's a broad spectrum of where this is coming from. But an example would be -- another example I will give, as Eric mentioned on the boom trucks, 50-ton boom truck. That wasn't around 2 years ago. There weren't 50-ton boom trucks. And those are going in the mining or the oil and gas and that kind of thing. Eric, I don't know if you have any other further detail on that or comments.

Eric Etchart

No. I would say one logic has been down in the U.S. over the last 2 years was wind and natural factors. The first quarter, you've seen more than 1,000 megawatts of wind power spread across 12 states. And that's an end market that right now, as an OEM, we do not benefit right now in terms of the issue itself because you have a lot of machines, being either of the 16,000, which was really what that type of markets now has improved. We see really a positive trends in the wind, and the focus will be 6,000 to 7,000 megawatts and it's going to be the same in 2012. So that part of the market should obviously see some demands definitely from the rental houses first. But later, we should benefit from that.

Jerry Revich - Goldman Sachs Group Inc.

Okay. Yes, I'm just trying to get a sense of how the demand flows even if we stay in this kind of slow grinding recovery. And then can you just talk a little bit more about the pricing that's been put in place? And is that the way things looked today? Is that enough to offset a potential negative price cost in 2012 in the Crane business also?

Glen Tellock

If you look at where we're at today and you go out in the next 6 months and you take the first 6 months, if you go out 12 months, yes, we feel that's adequate. But I think it's, again, some of the things -- if you go back to prior recoveries, the cost side typically gets ahead of this. And I think with the increase that gets out of the revenue side and where you try to get ahead of it and there was some opportunity in prior upturns, you have some different competition now that is keeping things a little -- I think the pricing a little less advantageous. And so that's why we come out with a new products. And I think when you look at whether it's Foodservice or Cranes, as Carl mentioned, we're coming out with new products, you do cannibalize a little bit of what the former product was. But once you get through that inventory you get with the new product, obviously, we're bringing out things with higher margins than what we've had in the past. Whether it's a simpler machine or whether it's more efficient, easier to produce, I mean it goes from the whole supply chain through the end markets. So I think the pricing we have is adequate. And again, just like we said before, we're not the cheapest and we will be -- we will try to be leaders in this area. So what competitors do is their own decision, but I think we've made some pretty good decisions. We look at the markets. Again one thing I would like to say about Foodservice, it wasn't an across the board in average. Mike and his team has done a really good job to stay in some place where that might be a 2% or nothing but in other places there might be 7% or 8%. So we gave you what the average number is, but they really took a hard look at some areas that we had opportunities.

Operator

And we next have a question from Ben Alias with Sterne Agee.

Ben Elias - Sterne Agee & Leach Inc.

A couple of questions, couple of months ago you mentioned that even with a higher run rate on the Crane side, your margins will be a little lower because of the investments that you're undertaking. Could you just quantify the dollar amount of the investment and what the margin impact is? And when that rolls off, would we see margin benefit in 2012 and on?

Glen Tellock

I think unless there's other investments that maybe Carl talked about, investments we're talking about are in the emerging markets. It's Brazil, it's India, the things we've done in China, Slovakia, Italy. I mean those things don't roll off. Some of those are permanent investments. If you look at the innovation, it's bringing some of the people back. It's some of the austerity measures that we bought back in. I mean they don't roll off then. They will stay there. So it's our -- it's up to us to, one, whether it's pricing or taking cost out in other areas, but those certainly are not going to roll off and so it's a matter of volumes and taking cost out and bringing new products to market. So that's the same things you've seen forever.

Ben Elias - Sterne Agee & Leach Inc.

On the Foodservice side, I guess the smoothie machine exclusivity deal with McDonald's have ended. And I think they're looking to rollout the concept outside the U.S. by the fourth quarter. I think you are in talks with a lot of the other quick-serving casual dining competitors. Could you just elaborate. Wendy's rollouts and the size of the market? What can we expect in the latter half of the year next year with this one particular product that you have?

Mike Kachmer

Well, first of all, we're not quantifying the forward opportunity. We're talking about it in a qualitative sense and it's a very positive situation. And we are having multiple conversations with large chain customers around the world. And really, about those machines, we're the only supplier of this type of product category with 2 variations. We have the blend-in-pitcher concept, which was rolled out in North America. We also have the blend-in-cup version that's really getting a lot of interest from all customers, including the one that rolled out the blend-in-pitcher machine last year. So we think the market potential is very large. It's still gaining momentum. We think it has multiple years of duration and we're capitalizing on that momentum.

Glen Tellock

The other thing to remember about rollout, Ben, is that you're always going to have varying degrees that occurred in any given quarter that creates a noise from a year-over-year comparison standpoint. And it's really difficult for us to just draw out a number there about an opportunity because you have to remember that there might have been things that occurred historically that were driven by a single product rollout that creates a lot of unit volume in a short period of time.

Operator

And ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back to Mr. Steve Khail for any additional or closing remarks.

Steven Khail

Thank you, Danielle. Before we conclude today's call, I'd like to remind everyone that a replay of our second 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. We look forward to speaking with you again during our third quarter conference call in October. Have a good day.

Operator

And again, ladies and gentlemen, that is the end of today's teleconference. Thank you for participation. You may now disconnect.

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