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Manitowoc Co. Inc. (NYSE:MTW)

Q4 FY07 Earnings Call

February 05, 2008, 10:00 AM ET

Executives

Steven C. Khail - Director, IR and Corporate Communications

Glen E. Tellock - President and CEO

Carl J. Laurino - Sr. VP and CFO

Eric Etchart - Sr. VP, President and General Manager, Crane Group

Michael J. Kachmer - Sr. VP, President and General Manager, Foodservice Group

Robert P. Herre - Sr. VP, President and General Manager, Marine Group

Analysts

Charles Brady - BMO Capital Markets

Seth Weber - Banc of America Securities

Jason Feldman - UBS Securities

Joel Tiss - Lehman Brothers

Unidentified Analyst - Robert W. Baird

Stephen Volkmann - JP Morgan

Kent Green - Boston American Asset Management

Operator

Please standby. We are about to begin. Good day, everyone and welcome to this Manitowoc Company Incorporated Fourth Quarter Conference Call. Today’s call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Khail. Please go ahead, sir.

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

[Technical Difficulty] call will be Glen Tellock, our President and Chief Executive Officer; and Carl Laurino, Senior Vice President and Chief Financial Officer. Joining Glen and Carl on today's call will be Eric Etchart, President of Manitowoc Crane Group; Mike Kachmer, President of Manitowoc Foodservice Group; and Bob Herre, President of Manitowoc Marine Group.

Glen will open with commentary on our markets, Carl will discuss the financial results for the quarter and the three segment Presidents will offer insights into their operations and outlook for 2008. We will then conclude with a question-and-answer session following our prepared remarks.

For any of you who are not able to stay on the line for today's entire call, you can hear a replay beginning at 1 PM Eastern Time today until 1 AM Eastern Time on February 12. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 9265214. You may also access an archived version of this call by visiting the Investor Relations section of our corporate website at www.manitowoc.com.

Before Glen begins his commentary, I would like to review our Safe Harbor statement. This call is taking place on February 5, 2008. During the course of today's call, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 may be made during each speaker's remarks and during our question-and-answer session. Such comments are based on the Company's current assessment of its markets and other factors that affect our business. Actual results could differ materially from any implied projections due to one or more of the factors explained in Manitowoc's filings with the Securities and Exchange Commission including, but not limited to the Company's annual report and Form 10-K for the year ended December 31, 2006.

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

Glen E. Tellock - President and Chief Executive Officer

Thanks, Steve. Good morning. Yesterday’s results were outstanding achievement for everyone at Manitowoc. Sales for the year topped $4 billion, EPS beat our own target, and our cash generation gives us plenty of flexibility for future growth. As great as 2007 was, we are even more excited about 2008. Our view of the near and intermediate term is every bit as strong as it was when we provided our initial 2008 guidance in December. Growth is our number one priority and we will meet our 2008 targets by taking advantage of organic growth opportunities in all three of our business segments. Later in the call, each of our segment Presidents will describe how he is managing his business for growth.

I would like to take some now to share the views on the state of the markets we serve and where we see growth opportunities. We started to build the global crane company in 2001 and 2002 by adding Potain and Grove to our legacy Manitowoc crane business. Our view is that by offering the broadest range in products on a global basis, we could maintain and add market share in a growing world economy. That strategy has been very successful. And we think that the current global construction cycle has many years of growth left. Despite impressive growth in North America and Western Europe, the world’s largest lifting markets, we are seeing even stronger growth in emerging markets, such as India, Eastern Europe, China, and the Middle East.

Regarding the traditional market, if North America, Western Europe, and Japan follow the historical 10-year building cycle, those markets should reach an inflection point of waning crane demand and approximately two to three years since crane sales typically peak later in the general construction cycle. The current U.S. housing market is getting most of the attention of construction industry observers and is basically masking the state of our end-markets, which remain solid. We like the U.S. markets that we serve.

Our view of international markets is even more favorable. Pick any of the key emerging markets and you will find a huge need for lifting equipment. Chinese growth is well documented and our plant there is operating ahead of expectations to serve the growing demand for tower crane and key crawler crane components. In India, our acquisition of that country's long time Potain dealer has placed us in a strong position in one of the world's fastest growing construction markets. Today, India is the world’s 12th largest consumer economy and Mackenzie forecast that its growing middle class will raise it to number five by the year 2025. That brings demand not just for traditional construction projects like, power plants and factories, but also bridges, water treatment plants, and other types of infrastructure projects that do not exist today.

Another key end-market for us is energy. The major oil companies and state owned agencies are installing production, refining, and petrochemical capacity around the world. Many of these projects are in areas where there is a small installed base of complex lifting equipment. Our global construction customers need new equipment for these projects and they also rely on our investment and after market support such as our new training care support center in Dubai.

These are just a few examples of the demand for global infrastructure, that we believe support our 2008 growth targets and our optimism concerning the intermediate term. We are committing capital to ensure that we have the capacity and the technology to meet our customers’ needs and continue to create shareholder value.

Our Foodservice segment faces a different environment in 2008. This is a largely domestic business and our key customers are restaurants, convenience stores, and the lodging market. We are seeing several customers revise their capital spending plans in response to lower consumer spending on meals outside the home. Consumers are facing higher energy prices and an uncertain economic outlook, yet that is not a new situation. In the past 30 years, we have had runaway inflation, recessions, and oil embargoes, yet restaurant sales have failed to outpace inflation only three times. This is a stable industry, and we have a large base of installed equipment that puts in a strong position for replacement sales.

If 2008 were to be the fourth year of sub-power industry performance, we are still confident in our growth forecast. That’s because we are developing new products, we are serving new markets, and we are leveraging our relationships with national and global accounts.

In our Marine segment, our two facilities on the Great Lakes are now regarded as some of the best shipbuilders in the nation. This unit is the right size for our market and our goal is to build ships that match its capacity and skill levels. Our recent work with the Navy on the Littoral Combat Ship has proven that we can build very complex ships and the Navy has indicated that it wants 55 of the LCS. Feedback from the Navy on our work has been very favorable and participation in this program will use a significant portion of our capacity for several years. While the Navy selects a final design and construction program, we have a solid backlog of other government and commercial projects that goes well into 2010. An additional government program that will ramp up in 2008 is the responsible medium for the Coast Guard. This multiyear program is a good compliment to our current backlog of larger vessels as it is a complex both and allows manufacturing flexibility. We also expect to sign contracts for additional oceangoing tank barges, tugs, and other types of commercial vessels. With our team’s history of quality workmanship and on time delivery, we are on the bid list for nearly every project in the 200 to 500 foot range.

With our strong cash generation, we will also pursue acquisition opportunities in both the Cranes and Foodservice segments. We frequently evaluate targets that bring us new products, new end-markets, or new geographies. We have a clear desire to grow the Foodservice segment as we do with Cranes in the early part of the decade. Regardless of segments, we require that the acquisitions to be EPS accretive in two years and EVA positive in three years.

I wanted to share those reasons why we are excited about 2008. Then we can discuss any questions at the end of the call.

I will now ask Carl to take us through the financial results.

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

Thanks Glen and good morning everyone.

Yesterday, we reported fourth quarter 2007 net sales of $1.1 billion, a 44% increase over the fourth quarter of 2006. We also reported net earnings for the quarter of $99.2 million or $0.76 per diluted share compared with net earnings of $43.9 million or $0.35 per diluted share for the same period last year. All per share amount in our comments reflected the two for one stock split that became effective in mid September.

Earnings per share from continuing operations for the 2007 quarter totaled $0.74, an increase of nearly 111% from the prior year. Please refer to our press release for reconciliation between reported GAAP earnings and earnings from continuing operations before special items.

Turning to the segments. Crane segment sales for the quarter were $946 million, an increase of 56% from the fourth quarter of last year. Operating earnings were $141.7 million, up 83% resulting in an operating margin of 15% compared to 12.8% a year ago. Our operating margins increased from both the prior quarter and the 2006 quarter, primarily because of three factors. Streamlined work flow at our facilities as we are beginning to see the early benefits of some of our capital programs, good performance by our supply chain teams in keeping critical components on-hand, and improved labor efficiencies as new workers are rising up the learning curve.

For the year, operating margin rose from 12.6% to 14.5%, and we believe that we will see continued incremental margin improvements in the second half of 2008. Crane backlog at December 31, totaled $2.9 billion, up 88% from a year ago. Growth in backlog was strong across all of our geographic markets and in virtually all product categories. Last quarter, we saw backlog increase by 28% from the prior quarter compared to this quarter’s 8% sequential growth. In no way does this indicate that our business is slowing and Glen’s earlier comments show how solid our order pipeline is. As we have said for several quarters on these calls backlog is just one element of our performance.

Moving to Foodservice. Sales increased 7% to $100 million from $94 million in the 2006 quarter. Operating earnings rose 11%, and margin improved from 9.8% to 10.2%. This performance is especially impressive considering the tight capital spending environment in the U.S. restaurant industry. Restaurant remodeling and equipment refresh programs continue to be delayed, as consumer spending for meals outside the home has to compete with higher energy and housing costs. In this challenging macro environment, sales and margins for all three Foodservice product categories increased for both the quarter and the year because of increased operating leverage on higher sales. Our 2008 forecast for Foodservice is for mid single digit revenue growth, which is greater than the industry forecast, along with improving margins in the mid teens.

Marine sales for the quarter were $72 million, down 6% from the 2006 quarter. Operating profit increased 68% to $5.7 million from $3.4 million in the fourth quarter last year. Profitability on both government and commercial projects remain solid at both of our Great Lake shipyards. For 2008, we expect Marine sales will be relatively flat from the $321 million in 2007. Operating margins will likely also remain in the range of the 8% we achieved in 2007.

One reason for our stable forecast is that 2007 had a very high level of repair and drydocking work due to the Coast Guard mandated schedules for Great Lakes shippers. Even though, fewer vessels are scheduled for required drydockings in 2008. We will replace that or close with a backlog of INLS and OPA-90 projects.

Improved operating performance in all of our segments obviously translated to the bottom line. Compared to the fourth quarter of 2006, net income from continuing operations in the fourth quarter of 2007 increased more than 119% and benefited not only from the strong operating performance described earlier, but reduced interest costs and a lower effective tax rate.

All of these factors also impacted our EVA performance which increased more than 77% from last year. We add forecast of 50% increase in EVA in 2007, and even with a much higher base, we believe we can meet our goal of another 50% increase in 2008.

One aspect of EVA is that it measures the effectiveness of capital expenditures. CapEx for fiscal 2007 totaled $120 million, which was above our previous guidance because several crane expansion projects are ahead of schedule. For 2008, we forecast CapEx of approximately $120 million, primarily for continued capacity expansion initiatives and an ongoing ERP deployment for the Crane segment. Eric will discuss the status of the expansion projects in his remarks.

I will conclude my comments by affirming our EPS guidance that we issued in December. Excluding any unusual items, we are targeting full year 2008 EPS in the range of $3.20 to $3.40 per share.

Our next speaker is Eric Etchart, who will describe our progress at Cranes. Eric?

Eric Etchart - Senior Vice President, President and General Manager, Crane Group

Thanks Carl. Good morning everyone. As Glen said earlier, this has been a successful year for the Crane segment. The indication of that 2008 will be even better, given the strength for our end-markets and the recognize value of Manitowoc products, our after markets services and not what I thought to energize our manufacturing capacity. Our customer focus and elaboration of our crane offerings have created a strong demand for all of our products in all of our markets. This is demonstrated by ourselves of $3.2 billion in 2007, an increase of $1 billion over 2006. Each region is growing at a high pace in both established and emerging markets.

If you look at Asia, we posted its six consecutive year of growth and an impressive 75% growth over 2006, this region accounts for just 12% of our global business. We expect that our Crane sales from emerging markets will total $1 billion in 2008, while demand will remain brick across our traditional markets. Even though, the market is growing very fast, we are growing even faster, thanks to the success of our new products innovation strategy coupled with a global penetration of Crane CARE. Our 2008 growth target of more than 20% will be achieved with a great team of employees, who are focused on executing on several studies. To meet our customers’ demands for Manitowoc's lifting products, we will boost our manufacturing capacities in 2008, that will substantially augment the levels that we achieved last year.

Our new plants in Slovakia and in India are already in production delivering high value products into new and emerging markets. We also added a plant in Portugal that will streamline the production of tower cranes at a nearby facility. We are using the same strategy here in the United States. In Manitowoc, we are having 50,000 square feet to the main plant. While optimizing and focusing such on having total cranes involvements in the nearby Port Washington facility. When finished in midyear, this facility enhancement will improve throughput and streamline our factory flow and efficiency. The same intensive focus is also occurring in Pennsylvania at our Shady Grove facility where we will integrate space and equipment to complement our crawler crane capacity. Similar improvements will also be made in Europe where we will ship some products made in Germany into our newly expanded Niella factory in Italy, a remake of our rough terrain product for instance strategy from Shady Grove to Niella some years back which has significantly boosted our market share for rough terrain cranes in Europe.

By having the global manufacturing network, we can produce cranes in the markets in which we have sold, ensuring we meet regional customer needs, reduce shipping costs, develop local suppliers, introduce natural currency hedges, and better support the customers that are loyal to our brains. For example, we have been producing tower cranes for export to India at our plant in China. With our recent acquisition in India, we now can serve the India market better with domestic supply, while relocating the China crane capacity to serve customers in other regions of the world. This clearly demonstrates Manitowoc's success in leveraging its people, products, and processes to capture optimum value in the lifting industry. But this doesn’t mean that we our content with our success. We are also installing Lean manufacturing in all our other plants to make the best use of our global network.

To capture more efficiencies, we are launching an ERP implementation this year. The state ERP deployment will take four years to complete, but will bring value to our stakeholders and allow us to become the truly integrated lifting company.

Finally, we will grow sales by introducing more new products that made lifting safer, quicker, and more profitable. An excellent example is the exciting GTK1100, a revolution nearing new crane concept, that is suited for heavy and high lifts in tight spaces. It requires only a fraction of the erection time that the traditional Crane does. This Crane was named the most innovative product at Bauma last year. Its features and benefits have been fully validated in the market, with outstanding performance, and recognition within the premium lifting industry. In success, is self evidence by the full order board and magnitude of lifting inquiries worldwide. And being on this success, we currently have over 30 new innovative products in our development pipeline that were specifically designed from the valued feedback of a customer and markets that we serve.

Our next big trade show is CONEXPO which we have held next month in Las Vegas. We will showcase 12 innovative Cranes that we are bringing to the market, as well as new developments in our Cranes CARE after market customer support system. Many of you on this call will be at the show, so please stop by our stand and a lot of professionals of the Manitowoc Company give you a personal tour of the world’s finest lifting solutions.

That concludes my remarks. I will now turn the call over to Mike Kachmer.

Michael J. Kachmer - Senior Vice President, President and General Manager, Foodservice Group

Thanks Eric. As Glen and Carl mentioned, the Foodservice Group showed improvements across the Board in 2007, despite difficult market conditions in some of our key segments. At Manitowoc Ice, our investments in energy saving technology are helping maintain our number one domestic market share position.

With energy costs rising as a percentage of our restaurants operating budget, owners welcome the chance to cut costs by switching to Manitowoc or upgrading their current equipment. The beverage divisions sales benefited from new products such as Flex-Tower and new marketing strategies focused on national accounts. At refrigeration, we continued to achieve significant improvement in our manufacturing process. This drives lower costs in higher customer satisfaction because our quality and on-time delivery metrics have also improved dramatically.

With our leading market shares and strong relationships with key customer, we are confident that we will continue to see progress in 2008 in spite of pressures from reduced consumer spending. We will do that through accelerated innovation, capturing economies and scale, manufacturing excellence, and rigorous cost controls.

According to the National Restaurant Association, the top two trends for consumers are going healthy and going green, and we're well positioned for both. We developed the Flex-Tower to meet the desire for healthier self-serve menu items. It gives customers 16 drink choices, not only the standard carbonated drinks, but also non-carbonated juices, teas, sports drinks, and spring water. It’s been a big hit in convenient stores and we're following it up with the FlavorPic. This new beverage unit has a proprietary nozzle that delivers the same carb in non-carb choices as Flex-Tower, but with the added benefit of either crushed or cubed ice. It’s the only unit of its type in the industry and consumers love it in field tests.

Foodservice operators have long recognized our commitment to having the most energy efficient products in the industry. We have built on the need for green technology by pioneering the use of insulation materials and manufacturing processes that minimum the use of volatile compounds and chemicals. It's a movement that’s not only good for the environment, it creates the healthier restaurant. Operators and customers are being more sensitive to the needs for products that match a commitment to conservation.

We're also managing our operations to achieve improved profitability. We've reorganized this segment to put all operations on a common set of control metrics and created an engineering group to insure that our current and future designs are the most efficient to build. We also attack costs by constantly reviewing the supply chain for savings opportunities and by using commodity hedges to stabilize pricing.

Finally, we’ll complete our ERP implementation later this year. The new system will help us manage production on a global scale and better service national and global accounts.

With that, I’ll turn the call over to Bob Herre.

Robert P. Herre - Senior Vice President, President and General Manager, Marine Group

Thanks Mike. Like Cranes and Foodservice, Marine also had a great year in 2007. Sales and profitability were up sharply as we completed several vessels either right on schedule or ahead of schedule. We also continue to approve our operational efficiency, and we accelerated training for skilled and craft positions. Both of these factors helped drive our 2007 results and will help us do more great work in 2008.

Nearly all of our peer shipyards are privately held. So, you may not appreciate what a rarity early deliveries are in this industry. It's one of the main reasons that the Manitowoc Marine Group is gaining in reputation as the go-through shipyard for complex midsized ships. Our strategic advantage is a stable workforce with an average of 15 years of experience that are enhanced by a wide array of modern production facilities.

The highlight of our work in 2007, span projects in both the commercial and government aspects of our business. Our commercial work focused on OPA-90 tank barge construction and many of the vessels we delivered were repeat projects using common designs. To date, we have delivered 16 double-hulled tank barges and our performance continues to improve. This quarter, we delivered a tank barge months ahead of schedule. As a result, we were able to schedule additional projects into our Sturgeon Bay shipyard. Our government work continues to be dominated by the LCS Freedom which is scheduled for delivery in the third quarter this year.

As the work load on Freedom winds down, they will be replaced by work on additional modules for the improved Navy Lighterage system. Because the INLS program is a continuing… continuation of an existing program, we’re well up the learning curve and should be able to achieve a target of profitability. As Glen said earlier, the navy hopes to build a fleet of 55 LCS vessels, and is very pleased with our work on Freedom. It is the first ship in a new class of vessels and we’ve set a navy record for the shortest time between contract award and ship launch. Current navy plans call for three additional LCS vessels to be awarded in 2008. If we are chosen to be on the final build team, it would represent an excellent long-term use of our facilities and a terrific return on the investment that we’ve made in this program.

Glen will now share some closing comments. Glen?

Glen E. Tellock - President and Chief Executive Officer

Thanks Eric, Mike, and Bob for those summaries. We have a strong management team in place from the segment leaders, and down through their organizations. We appreciate everyone’s efforts and look forward to more success in 2008. This concludes our prepared remarks, and we will now open the call to your questions. Sharliya?

Question and Answer

Operator

Thank you, sir. [Operator Instructions].

And we’ll take our first question from Charlie Brady.

Charles Brady - BMO Capital Markets

Hi. Thanks. Good morning guys. With respect to the Crane segment, can you just give us a little more color on… when you are looking our to ’08, with regard to the strength in some of the end markets, in specific more geographic areas. And how much of the strength is built into your forecast, where it’s really coming from?

Glen E. Tellock - President and Chief Executive Officer

Good morning Charlie. I think when you look at most of the end markets on the cranes, the biggest driver we have going today, is really the energy markets, if you look at petro chem… you look at power plants, if you look at utilities, you throw that all together and that typically gets upwards of 40% of our end market. So, that’s why we get excited about the long term whether it be North America, whether it be Europe, Middle East, Africa or whether it be Asia, the energy markets are driving a good portion… that’s a portion of this and we showed in several presentations better than 40% of it. It’s in all geographies and again it certainly masks again when we talked about the residential markets here in North America.

Charles Brady - BMO Capital Markets

Thanks.

Operator

And next we will hear from Seth Weber from Banc of America.

Seth Weber - Banc of America Securities

Thanks. Good morning everybody. Is it possible, Glen to I guess maybe to quantify how much some of this new capacity, whether it’s India or Slovakia, helped the fourth quarter revenue and margin during the quarter. And then as kind of a related question. If you were to take a step back and look at a time line. I mean could you Candid Cam for us, how far along do you think you are in this process of adding capacity. Are we third inning, fourth inning, fifth inning? Thank you.

Glen E. Tellock - President and Chief Executive Officer

Okay. Good morning Seth. Well, first of all on the first part of the question in the fourth quarter, there was minimal impact of any of the capacity additions that we had. It was a little bit from our acquisition in India in the fourth quarter. But as I would say from my old finance days, it’s fine enough not to move the needle. And then with respect to where we are at in the game on the capacity additions, it depends which region we are in. When you get to Slovakia and India, obviously, we are well into the game, and so you are going to see the ramp up very quickly in Slovakia where we are going I think full term at with respect to India. You are looking at the other expansions we talked about in North America, with Shady Grove and Manitowoc and Port Washington, we are probably in the third or fourth inning, and that will ramp up by midyear and then some of the things we are doing in EMEA. In Italy, we are very close to that being a full year benefit, probably at three quarters and then in Germany probably a half to three. Maybe that will come into mid year, mid to early fall. You can see by the end of this year and we watched very closely what our run rates will be by the end of the year. And the heading by the end of the year there is a good amount of capacity that we have on our run rate by the end of this year. But we do get the benefits as I just mentioned, and a lot of it this year.

Seth Weber - Banc of America Securities

Okay. And is this the incremental spend that you are now adding, from what you talked about I think, last quarter to this quarter. Is that a reflection of… I mean do you feel like… that you are losing business from competitors that have product available. I mean are your customers telling you that you need to add capacity to get to shorten lead times here, or is competition getting better or is it just that you are trying to be proactive and you see the cycle going longer?

Glen E. Tellock - President and Chief Executive Officer

I think, I think it is the strength of our outlook, obviously and that’s why we need… I think… again our strategy on many of the businesses whether it’s the food service or the cranes is to manufacture as close to the some of the end users as possible and this really gives an indication of the strength that we see in the markets going forward. The customers certainly want their cranes faster, I know we talk a lot about the backlog. I think the customer would rather have a smaller backlog and a faster delivery, but that’s the strength of the markets today and I think as we look out, it just shows how we feel these end markets are going to stay for a long time when we look in every region of the world.

Seth Weber - Banc of America Securities

Okay. So, no real change to the competitive landscape then?

Glen E. Tellock - President and Chief Executive Officer

No, I don’t think so, not significantly.

Seth Weber - Banc of America Securities

Okay. Thanks I will get back in the queue.

Operator

And next we will hear from Jason Feldman from UBS.

Jason Feldman - UBS Securities

Good morning. The first question is… I was wondering if you felt any impact from recently rising steel prices and also can you comment on how your backlog is priced. Whether you are protected essentially from rising commodity costs?

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

Okay. Good morning, Jason. The impact of steel, I think if you look at the commodity pricing here early in the year, and we have watched the high tensile strength prices continue to rise all last year, and they are rising now maybe not the same rates that they were middle or last year. The regular steel is… I think is normal pricing, but when you look at the crane backlog, we went out and priced when we went into the 2008 and said… here’s our pricing, we went out. And pretty much projected where we thought those were going, and I think our assumptions and where our costs are going to be for the year are pretty solid, so the pricing in our backlog fits the delivery schedules for all of 2008.

Jason Feldman - UBS Securities

Okay. So you… based on how far in advance your purchase feeling, your view as to where it is going, you are fairly comfortable with the backlog prices the way it is in the current commodity environment?

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

That’s true.

Jason Feldman - UBS Securities

Okay. And then last question also on the backlog. You think you can just talk a little bit on how firm the backlog is. Under what circumstances are customers able to cancel orders if their needs or economic conditions change, in our deposits generally acquired? Is there ever an issue where you see some expected business not really materialize?

Glen E. Tellock - President and Chief Executive Officer

Again, Jason, when you look at the back log, it’s pretty firm. I mean, we haven’t… we’ve tracked a lot of things, we’ve spent a lot of time talking about this, and again, we’ve said it before, you can’t go back… I mean you can’t… you look at 1983, I think is the last time we’ve ever had a customer really cancel an order that wasn’t somehow taken at the time it was needed, so we feel very comfortable about it. In addition, we are… as you… and I think you are going to hear from competitors and what not as you start looking out into 2009. We are starting to expect down payments on some of the larger orders as people start talking about what they want to do in 2009

Jason Feldman - UBS Securities

Okay. Great. Thank you very much.

Operator

Next we’ll go to Joel Tiss with Lehman Brothers.

Joel Tiss - Lehman Brothers

Good morning. How’s it going?

Glen E. Tellock - President and Chief Executive Officer

Hey Joel.

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

Hey Joel.

Joel Tiss - Lehman Brothers

Just, two sort of quick ones for Carl, and then a bigger one. You know the free cash flow looked like it was… it got cut in half and also the receivables were up by almost 50%, over the course of 2007. Can you just give us a little bit of an idea, what’s going on behind the scenes?

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

Well, I think from a free cash flow stand point the biggest pinch for us Joel, has not been on the receivable side, it has been on the inventory side. And that’s a function of… there will be explosive growth that we’ve been able to achieve, obviously at the beginning of the year, we were guiding to a, kind of a 20% plus expectation on the revenue and Eric and his team was able to achieve significantly more than that, double plus those levels, and making sure that we had the inventory necessary in order to do that, created a lot of stress on the working capital, so that’s probably the key element to that one.

Joel Tiss - Lehman Brothers

Okay. And then maybe if you could help us to understand to… like in past cycles you guys have been doing this a lot longer than we have. In past cycles, what would be some of the early signs that you would see, that maybe the supply and the demand in the Crane industry is starting to come into balance? I know there’s many segments and all that but just sort of generalize it. Thank you.

Glen E. Tellock - President and Chief Executive Officer

Joel, one of the things that we watch… and I’ll make it specifically to North America, and it’s somewhat easier for us to watch because of our strength as a distribution that we have in North America as we watch the utilization rates and the dealer fleet levels. And we track that, and we’ve been tracking that for over 20 years and right now, the utilization of our dealer fleets is over 90% and I think there’s some reports out there that verify that and some other objective reports. At the same time, you look at their rental fleets and right now, as of the end of the third quarter which is the best data that I have, the rental fleet inventories of our dealers in North America are half of what they were at the troff in 2003. So, you can see that those are those two barometers that we watch. At the same time, you look outside of North America, you are going to watch the number of conversations that customers have of what new products are coming out. I think every year, at every trade show, we try to sit down with a lot of our customers, as we go through their dealer business plans. So, there’s a lot of different things worldwide that we go through, could be tenders in China. But I give you an example of North America because that’s obviously where you are sitting today. But there are other factors that are on a macroeconomic basis, but those just give you a good indication.

Joel Tiss - Lehman Brothers

Okay. Thank you very much.

Operator

And next we’ll hear from Matt McConnell [ph] from Robert W. Baird.

Unidentified Analyst - Robert W. Baird

Good morning. Could you give us the currency contribution to Crane segment revenue growth in the quarter and let us know what your 2008 outlook assumes for currency contribution?

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

We had about 16% of the over all growth was attributable to revenue…currency… excuse me. The outlook is… there really isn’t an appreciable expectation for continued contribution coming from currency as we’ve laid out the ’08 expectations right now.

Unidentified Analyst - Robert W. Baird

Okay. So, does that assume currency stays at the current rate--?

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

Currency neutral.

Unidentified Analyst - Robert W. Baird

Okay. And could you give us a sense of what percent of your Crane backlog is from international markets and how that compares to the current Crane segment revenue mix right now?

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

It’s very… it’s just… virtually equivalent to what you see in the revenue breakdown which is about 60% international.

Unidentified Analyst - Robert W. Baird

Okay. Thanks very much.

Operator

Next we’ll go to Stephen Volkmann from JP Morgan.

Stephen Volkmann - JP Morgan

Hi, good morning.

Glen E. Tellock - President and Chief Executive Officer

Hi, Steve.

Stephen Volkmann - JP Morgan

I just wanted to maybe that just answered the question now, but the Crane sales up 55% or so is a lot better than what I expected. And I just wondered is there any thing, any timing stuff going on in the quarter or I guess it sort of felt to me like you didn’t even have the capacity to be that much. But is there anything in there that we should look at?

Glen E. Tellock - President and Chief Executive Officer

Steve, I think some of it is… the year-end and push to get some of the stuff out and if you look at what happened in the fourth quarter, you do have, in the third quarter the European holiday and I know that it gets all listening to that but you do have some of that that kind of, you try to plan around it but if things don’t happen in that third quarter period. Some of it comes in and it spills over into fourth quarter but again we've had many customers with things that we’re hoping to get everything in by the end of 2007 and so there you plan for that and then you just wonder how much you're going to get out of those last two weeks of the year before the holidays but I got to attribute a lot of it to the efficiencies of the factories that we have around the world on getting that our and getting the stuff to the customers. Now what I’m excited about is that trough put out some of it that we do see some of those efficiencies coming through the factories and we're expecting a lot of that to stay through and in the rest of 2008 and moving forward.

Stephen Volkmann - JP Morgan

Okay. Great and that was kind of my follow-up. Because I think, the things you listed or Carl listed in terms of the benefits of workflow and supply chain and labor and so forth. Seems like they ought to be sustainable and yet the forecast is obviously not changed for now and that seems like that doesn’t quite square to me. Do you have a comment on that?

Glen E. Tellock - President and Chief Executive Officer

Well I think the surprise for us is really what we are able to do in the fourth quarter, which was obviously extraordinary. We obviously, had an expectation over the longer term that we would be able to do that from just a December timeframe when we finalized our initial guidance and those expectations for the improvement in the longer time frame were already in place at that time frame.

Stephen Volkmann - JP Morgan

Okay. So, you just kind of got there a little faster I guess.

Glen E. Tellock - President and Chief Executive Officer

And you’ve mentioned on part of that, Steve, is like some of the supply chain. Lets take for instance you have a supplier of, for an example I use chassis. Still the bottleneck with your supplier and then all of a sudden you get all of that, you can see the strength of how fast we can put it truly. You try to plan for that, make it as efficient as possible but sometimes it doesn’t always work that way and so I think it’s a matter of getting everything in sync and that’s the ultimate goal to make sure there aren’t those hiccups in the supply chain. And I think we did have some of the benefits of all that through the fourth quarter.

Stephen Volkmann - JP Morgan

Okay. Great. And then just a quick follow-up Glen. It seemed like the language you are using regarding the potential for Foodservice acquisitions today was kind of the strongest I have heard. There is a sort of an up tick in activity there or anything we should read into that?

Glen E. Tellock - President and Chief Executive Officer

No, I don’t think so, I wasn’t trying to make any connotations by that I just think it’s… my only point is, I think and I've said it before is, you could look out five years and say look at the strength of what we have done on the Crane side internationally with distribution and manufacturing and if we can emulate some of those same things I think we have a nice package going forward. And that’s really the message that we want to send. But I think there is no difference in any activity now than before and I think it’s equally spread amongst the Crane and the Foodservice.

Stephen Volkmann - JP Morgan

Great. Thanks very much.

Operator

And next we will hear from Kent Green from Boston American Asset Management.

Kent Green - Boston American Asset Management

I have two quickies. Crane CARE, how much is that contributing now just direct profitability and then how much is it contributing to say, a solidified market share, do orders, just because you are offering that, and do you offer that on a full variety of cranes including competitors’ cranes

Glen-Unidentified Company Representative

With respect to the revenue, Savio [ph], we typically don’t give out the profit side of it, but on the revenue side, it’s anywhere from 14% to 15%, which… it’s masked a little bit, again by the strength of the whole goods market. But that’s a growing piece of our business on a regular basis, and over the past four, five years since we’ve really strengthened that strategy, but we have not gone into competitors’ type products right now. I think there’s a lot that we have to do on our own side. But, with respect to many of the strategies that we have in place, it’s become a very, very global business. We have all the call centers up and running now, and it is a key differentiator for us and it is a competitive advantage as we look at selling whole goods.

Kent Green - Boston American Asset Management

And then you mentioned energy. Is there any other broad based verticals or say markets that are grouped as markets like the BRIC… companies that you would like to disclose which you think is extra good for you… particularly cranes?

Glen E. Tellock - President and Chief Executive Officer

Well I think the other market, end market that is good, obviously outside of the energy, is the utilities market, but I would say even outside of… well though I think it’s still good in North America, the non residential construction, its better outside of North America, so there are strengths in those markets. With respect to the amount of business doing in the BRIC countries, I mean Eric mentioned it. We have… when you look outside of some of our mature markets, I mean, we have over $1 billion, or going to be over $1 billion in the emerging markets for us, and that’s all new since… and for us since 1999 and 2000.

Kent Green - Boston American Asset Management

Thank you.

Operator

[Operator Instructions]. Next we’ll go to Seth Weber from Banc of America.

Seth Weber - Banc of America Securities

Hi. Thanks. Carl, so you are sitting on your net cash positive here following the fourth quarter. I think you have a callable bond that’s outstanding at some point in 2008. Could you just comment on your capital allocation plans here for this year?

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

Well, I think, Glen talked about the growth imperative of both Cranes and Foodservice and I think, priority one would be satisfying both the organic and the external growth aspirations that we have to grow out those businesses. We have had buy back programs in our history to the extent, so we're not philosophically opposed to utilizing that as a means to return cash to the shareholders, but it's in an environment when we think that other opportunities that we might be looking at warrant that you would use that mechanism. Obviously, we did do a modest increase in the cash dividend last year. The really small numbers makes it look impressive at 14% increase, but it is, I would feel modest element at this stage. So, those are a few of the things that we would be looking at.

Seth Weber - Banc of America Securities

Okay. Thank you.

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

Excuse me. You mentioned the bond as well. You’re right about that we do have the 2003 bonds that come through. They’re non-core period. In November of this year those carry a pretty attractive coupon, seven and three-eights.

Seth Weber - Banc of America Securities

Okay. Thanks Carl.

Operator

Next we go to Charles Brady from BMO Capital Markets.

Charles Brady - BMO Capital Markets

Thanks. Just with regard to China, in terms of what whether they’re seeing over there right now, I just want to say is that having any impact either in the fourth quarter, first quarter and on the plant over there and production, that might delay stuff coming out of China?

Glen E. Tellock - President and Chief Executive Officer

It had an impact on Eric and I last week. Because we didn’t, couldn’t get into there, but it did have an impact obviously because we had the factory closed for a couple of days. But that’s… whether it's a power outage in our factory in Shady Grove or Manitowoc or close factory there. We've contacted customers. We've told them of what the situation is, things will be back on line so I think it's a very, very short-term and our people will get that rectified and back on schedule very shortly. So, I think, it's a very short-term impact and not meaningful to anything that there you’ll see mid year.

Charles Brady - BMO Capital Markets

Okay. Thanks. And just with respect to the installed base of cranes out there. Can you give us a sense of what the age of some of the of various types of cranes… the fleet of crawlers out there, the fleet of all terrain cranes and how much business do you see coming out of just replacing and aging equipment base. Thanks.

Glen E. Tellock - President and Chief Executive Officer

Charles, I think, that’s and ongoing discussion for us and a review of the world markets. I mean, when you start looking at some of the emerging markets a lot of times you will find out people are going in with the used equipment first. So it’s sometimes difficult to get the number of cranes that are out there being utilized in places, whether it be Africa, whether it be parts of Russia or whether it be Latin America. But I would tell you in the mature markets the people are using that as a viable end market for them as they renew their fleets and you see a lot of the people saying, hey I have a viable alternative to sell things into, to… could be India, it’s not so much China, but it’s other parts of Asia. And what’s happening is cranes are going out and that’s how people are renewing their fleet, because in 2003 everybody was sitting with their fleets and they started to age. So, you are seeing that and that’s where the strength of this global economy comes. I would also say that 's the strength of our business as a global manufacturer. Many of our customers look towards us and ask us if I buy this with Manitowoc at the end of the life cycle I have for this product what do I do with it. That’s where Crane CARE comes in, that’s where our used equipment business comes in and I think, that's why you see some of the high resale values of the products that we have on the crane side.

Charles Brady - BMO Capital Markets

Thanks very much. That’s helpful.

Operator

That concludes the question-and-answer session today. At this time for closing remarks, I’ll turn it back over to Mr. Khail.

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

Before we conclude today's call, I’d like to remind everyone that a replay of our call will be available beginning at 1:00 PM Eastern Time today until 1:00 AM Eastern Time on February 12. The number to dial for the replay is area code 719-457-0820. Please use confirmation code 92-65-214. You may also access an archived version of today's call on our website at www.manitowoc.com

Thanks again for joining us. Have a good day.

Operator

That concludes today's conference. We appreciate your participation. You may now disconnect.

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Source: Manitowoc Co., Inc. Q4 2007 Earnings Call Transcript
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