Manitex International, Inc. (NASDAQ:MNTX) Q3 2019 Earnings Conference Call November 7, 2019 4:30 PM ET
Steve Filipov – Chief Executive Officer and Director
Laura Yu – Senior Vice President and Chief Financial Officer
Steve Kiefer – President and Chief Operating Officer
Conference Call Participants
Mike Shlisky – Dougherty & Company
Justin Clare – Roth Capital Partners
Good day, ladies and gentlemen, and welcome to the Manitex International, Inc. Third Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Steve Filipov, Chief Executive Officer. Please go ahead.
Thank you, Keith. Good afternoon, ladies and gentlemen, and thank you for your interest in Manitex International. On the call with me today is Steve Kiefer, our President and COO; as well as Laura Yu, our Senior VP and CFO. Please see our website or our press release for the replay instructions for this call, which will be available until November 14, 2019. And additionally, our slides that accompany our remarks will be available in the Investor Relations sections of our website, www.manitexinternational.com. If you have any trouble finding them, just send Peter an e-mail, and he'll send up the slides right over.
Now please refer to Slide 2 regarding our safe harbor statement. We ask that you review this statement and also refer to our SEC filings for further guidance on the many risk factors associated with our company. I will begin with a brief overview. Laura will present a financial summary, followed by an operating commentary from Steve, after which we will welcome questions.
Please now turn to Slide 3. I am pleased to be speaking to you today on my first conference call as CEO of Manitex International, and I'm excited to be part of Manitex's leadership team. As many of you know, I've been in the heavy equipment industry for many years, and I've had the opportunity to meet with many of you who are on the call today. I listed and described my experience with Terex as I think it is important you all get a sense that the person who Dave and the Board chose to bring in comes in with the exact resources and experience that will take to advance this company to becoming a global leader.
Given Terex's evolution since the early 1990s, I've been able to manage many different businesses, from forklifts to construction and mining equipment, to port equipment and overhead cranes and to almost every type of mobile crane that you can think of. I've enjoyed leading small and large divisions at Terex, both domestically and internationally, alongside some of the industry's best leaders.
So let me just say, before getting into the results, that I came into this with my eyes wide open. I'm ready to get to work. And yes, there's plenty that we need to get done.
Most importantly, I know our customers. At the end of the day, this is a relationship business, and customers need to have access to the top management of the company and trust you will do what you say. This is what I'm focused on accomplishing with our team. Simply said, we will be much more customer-focused in the coming years.
In the past 60 days, I've traveled to most of our locations and met many of our dedicated and passionate team members. We have a great team, and we will continue to build on the excellent work that they have done in the past years. I have attended several trade shows in the past few weeks, which is great opportunity to engage with our customers and dealers to understand where we are doing well and where we need to do better.
I recently participated at the JDL Trade Show in France. And with over 4,000 articulated cranes sold per year in this market, it presents a great opportunity for us to grow. I wanted to understand how we can increase our share in articulated cranes and truck-mounted aerials, and we have an excellent opportunity going forward. We have a well-capitalized dealer, great brand presence, and now we need to turn this into market share gains for us. It's all about focus. We produce cranes in Italy, and one of the biggest opportunities is right next door. We will do more in France in 2020.
I was also at the ICUEE Show in Louisville, Kentucky, which is a show dedicated to utility and rental industry. I was able to meet many of Manitex's dealers, many of whom I've known from my past, but also many new customers. We launched the new 60-ton stick boom and our new line of Manitex articulated cranes at the show, which we are now branding as MAC, M-A-C, in the U.S. We also held our first MAC dealer meeting, where I was able to speak about our new strategy and vision. North America presents another opportunity for us in 2020.
I have also held several town halls at our facilities, and I've been able to engage with our team to share our new vision and direction. We truly have a passionate team, and everyone has been very welcoming and helpful during the past several weeks. However, in locations like PM, we have lacked direction and focus. We have already made the necessary changes to our leadership structure in order to be focused on our customers and our end markets.
Please turn to Slide 4. We clearly have solid foundations and global brands that are positioned to drive better shareholder returns. We are going to improve our free cash flow conversion and have increased the focus with our team starting in Q4 of this year. We will continue to strengthen our balance sheet. Dave and the team have done an excellent job cleaning up any old issues, and we have more opportunity to improve this going forward. I will let Laura speak to some of the upcoming initiatives we are making to continue to reduce our debt.
Manitex has an excellent position in the stick boom market in North America, and we need to continue to drive innovation as an industry leader. We have some opportunity in other markets, and we'll start to look and see what we can do to diversify our business outside North America. As I will be spending a significant amount of my time with the PM team in Europe, I have asked Steve Kiefer to keep focused on our Manitex operations in the U.S., and you will hear from him later on in our prepared remarks.
We are all going to stay focused on the PM Group. This is our diamond in the rough. It has global reach and diversifies our revenues outside of North America and into more industrial markets. I'm very excited about our new branding approach to the PM business. We have launched a three-brand strategy, which will better position us for success. As I mentioned before, what better way to get market penetration than by using Manitex in North America, Tadano-PM in Asia and keeping PM where we already have a strong presence in places like Europe and Latin America. We also have a nice base to work off of in 2020 with a military contract, which we announced last month, and will provide our facility in Georgetown, Texas with additional assembly work in Q2 of next year.
Lastly, we need to grow our margins by more focus on our parts business and installed base. We have thousands of cranes in the field, which all represent a parts revenue opportunity for us. We also have an excellent potential in our truck-mounted aerials business and zero-emission Valla pick-and-carry cranes. These two product lines alone – with these two product lines alone, we have the potential to increase exponentially in a market like North America with special and tailored applications.
Please turn to Slide 5. One of the key successes of any turnaround is communication and keeping this communication simple especially in global organizations. PM is our growth engine, and we have already started to implement our priorities for the next few years, and our first step will be to refresh our core competencies. We are a global producer of lifting and aerial equipment, and everything starts with people. We need to make sure we have the right people in the right place at the right time, and the magic will happen. We have now aligned our team around dedicated business lines. We have flattened the structure and have put in place two business leaders at PM, one focused on cranes, the other on aerials, both reporting directly to me.
As you know, the channels to market are very different. One is a dealer model, and the other is a rental model. We need a passionate and dedicated team to be accountable and have a sense of urgency to problem-solving in each of these businesses.
Manufacturing excellence is all about process. We will start with simple things like 5S and making sure our facilities show how we build and assemble the highest-quality products. We have started to track on-time delivery, first-pass quality, and we have work to do, but this provides an opportunity for productivity and profitability improvement. Improving our parts execution is also about process but, more importantly, about uptime for our customers. We are now tracking our fill rates, distribution stocking plans and online parts ordering systems. By executing well on this, we have the opportunity to improve our customers' experience but also our profitability.
Once we have demonstrated we can do these things well and consistently, we will look at expanding and innovating. Many of the process initiatives we will put in place will help us improve our safety and quality, but this is also a major cultural change, which will take time. We have to manage our portfolio and fill gaps, simplify the portfolio by using tools like modular designs and also develop new products for new markets. I mentioned earlier about our new branding strategy for PM. This will help us get focused distribution and expand our network to new markets. Tadano is a good example of that, as is using the Manitex brand in North America.
We are a manufacturing company, and we buy 70% of what we build. Managing our supply chain is critical to our success in improving our margins. We have to make sure we get the best quality at the best price and just in time. We also need to review our core competence in our make-buy strategy. These are clearly processes – there are clearly processes we want to keep in-house but others we can outsource and keep our fixed costs down.
Lastly but most importantly is our parts and service offering. We will be looking at other areas to expand our offering in parts and refurbishment of equipment. We produce thousands of cranes a year, and getting more revenue from this installed base will drive better margins.
Clearly, anyone following our company's progress or any of the players in the industrial equipment space can see that we're operating in a challenging period right now. And our results were, number one, not where we expected to be; and number two, not indicative of where we set – where we are set to accomplish through the execution of our growth plans. Our vision at Manitex is clear, we will deliver improved returns to our shareholders over the coming months and years, and I remain very excited about our future. And even as we report a challenging Q3, we see Q4 looking better.
With those opening comments, I would like to turn it over to Laura and finish with Steve discussing operations. Laura?
Thanks, Steve. Good afternoon. Thank you for joining the call today. Let me direct your attention to Slide 6 and 7, Q3 financial update and operating results.
Our revenues for the quarter were $51.9 million, a decrease of 15% compared to the third quarter last year. This is primarily due to the market softness in the U.S. and Canada for the straight mast cranes and the regional weakness in the European market. Part of the revenue decline was also due to an unfavorable currency impact caused by a weaker euro, which declined 4% versus the U.S. dollar. This accounted for 2% of the 15% total revenue decrease. The negative revenue impact driven by the market softness for the straight mast industry was minimized by the growing articulating crane orders. Our book-to-bill ratio for the quarter was 1, an improvement from the 0.7 from second quarter this year. Backlog was at a healthy $63 million as of October 31, a 10% increase from the quarter end. The current backlog from the PM Group increased over $8 million or approximately 50% compared to the year-end. This increase was partially offset to the decline in straight mast crane orders in the U.S.
Adjusted gross margin was 17.2%, down 300 basis points compared to the same quarter last year. Lower adjusted gross margins were primarily a result of lower revenues but were also negatively impacted by the mix of sales, in which we sold fewer high-tonnage cranes compared to a year ago and recognized higher pass-through revenues on chassis and trucks with low margins compared to the same quarter last year. Adjusted value-add margin, which pulls out pass-through sales and nonrecurring charges, was almost 19%, slightly below the 20% range we were expecting. Looking at the production schedule for the fourth quarter, we expect adjusted value gross – adjusted value-add gross margin to trend 20%.
Our third quarter 2019 adjusted net loss was a slight loss of $30,000 or $0.00 loss per share. Adjusted EBITDA was $1.9 million, down $3.1 million compared to the third quarter last year primarily driven by the decreased gross margin. The third quarter 2019 results included $9.5 million onetime nonrecurring pretax adjustment, of which $8.1 million was a noncash charge related to the impairment of intangibles at the PM Group and Sabre. The company normally performs its annual impairment assessment in the fourth quarter using October 1 as its annual measurement date. Based on the current forecast, we do not expect triggering events to occur in the fourth quarter that would require us to perform another valuation.
SG&A expense, excluding nonrecurring charges for the quarter, decreased slightly year-over-year. This was achieved despite incurring incremental costs associated with expanding the sales team to help support the MAC and other new product lines. Our team has demonstrated an effective execution of managing our costs. As we have said, our target long-term SG&A as a percentage of sales is in the low teens. This will take some time, but we will continue to take the necessary steps. The company also booked a noncash tax expense of $2.2 million related to the deferred tax asset valuation allowance in the third quarter of 2019.
For the first nine months of 2019, cash used by operating activities increased by $4.1 million compared to the same period in the prior year. This is primarily driven by the decline in operating income in 2019 and a slightly increase in cash consumed for working capital year-over-year. Our statement of cash flows through nine months suggests an inordinary high usage of cash that we experienced in paying down the accounts payable balance caused by the higher inventory purchases from the first half of the year, which is a trend that is abating as we speak.
Our team continues to work together to decrease working capital by effectively managing inventory and accounts receivable to improve the company's cash conversion cycle. As a result, we have seen a reduction in our inventory by $3.6 million in the third quarter. As we are about halfway through the final quarter of the year, we are confident that we will see this trend of inventory reduction continuing for the rest of the year.
Let's move to Slide 8, net debt update Q3 2019. This slide provides a breakout of the net debt by quarter. Our goal is to improve the balance sheet with debt reduction. However, net debt increased in the third quarter compared to the prior quarter from this year primarily due to the cash consumed in the operating activities, as previously mentioned. We have paid down the gross debt by approximately $1 million in 2019. We will be reducing the debt further at year-end by making a $3 million principal payment on the Italian term debt. Management will continue to control costs and improve working capital performance to generate more cash, which will allow us to make further progress on debt reduction.
At the end of the third quarter, the company amended its revolving credit facility in the U.S. to increase the loan commitment to $30 million and extend the maturity date to July 20, 2023. With the $20.3 million cash we have on hand, the company has over $50 million in available liquidity. As I have mentioned previously, we believe we will expand on this strong liquidity position in the fourth quarter.
With that, I will now turn the call to Steve Kiefer.
Thank you, Laura, and thanks to everyone on the call for joining us today. Overall, our team spent the third quarter and are now moving through the fourth quarter focused on efficient production at our facilities, prudent working capital management and ongoing product and commercial development. Despite challenging and softening conditions in some of our end markets, we are pleased to see our knuckle boom crane products becoming an increasingly larger component of our backlog, while we maintain a leadership position with our North American straight mast crane products. While year-to-date industry orders for straight mast cranes are down over 30% versus 2018, our year-to-date results of the top line are down just 15%, thanks to the diversification in our portfolio, which, as I mentioned, is delivering a higher proportion of our total revenue from knuckle boom cranes and spares.
During the third quarter, our global sales teams performed well given the sluggishness in the market, and we ended the quarter with a book-to-bill ratio of 1, which was up positively from the second quarter book-to-bill ratio of 0.7. We entered the fourth quarter with most of our fourth quarter factory build slots filled and began booking some 2020 orders. As of October 31, our backlog was $63.1 million, which is up 10% since the end of the third quarter, and it is up 4.3% since the end of third quarter 2018.
Our operating teams continue to effectively manage the various surcharge, supply chain capacity, freight costs and tariff issues that are well understood in our marketplace while our adjusted gross margin of 17.2% being impacted by a reduction in revenue, sales mix of lighter capacity tonnage cranes and higher sales of pass-through chassis at our Manitex straight mast crane business. Due to availability constraints of North American truck chassis that have been particularly prevalent the last 18 months, we have maintained a higher level of chassis in our inventory to ensure we can appropriately respond to market demand. With the commercial chassis market now becoming more balanced in terms of supply and demand, we are reducing our safety stock of commercial chassis and focused on free cash flow and net debt reduction as we move through the fourth quarter and enter 2020. Laura mentioned already how this will favorably play out into our balance sheet with working capital reductions expecting – expected in the coming periods.
Shifting to an update on market and commercial activity. Our internal channel checks, combined with data from outside sources, show overall stable rental fleet utilization for the various mobile cranes within our product offering. The end markets in which we participate that show continued strength are the construction, utility and government sectors, where we generate over 70% of worldwide revenues, with the energy sector, where we generate approximately 15% of our worldwide revenue, exhibiting softness in the quarter.
Other market and commercial activity of note is orders for our PM knuckle boom cranes showing increasing strength as we move through 2019. This is both in terms of going deeper into our core geographical markets, as Steve mentioned earlier, and expanding into adjacent market segments such as military. After being awarded a $1 million order from a military customer in Asia during the quarter, we were pleased to recently announce the award of a new contract valued at $4.5 million to supply articulating cranes to an international military organization. We will begin supplying cranes for this contract in early 2020 and complete shipments early in the third quarter. The contract also provides for an optional $4 million in deliveries, which could represent additional opportunity for the second half of 2020 and early 2021.
Our Valla mobile crane subsidiary in Europe was pleased to begin production and sales of the new V80R remote-control electric crane with a rated capacity of 8 metric tons. This niche product addresses a rental and ownership opportunity for industrial facilities and construction companies and represents one of several growth opportunities we are pursuing for our Valla subsidiary.
In addition to new products and new market segments, growing our global distribution network remains a critical part of our global growth plans, and we are pleased to have added five new dealers for our Manitex and PM lines during the quarter. This includes the dealer to distribute the MAC cranes in Canada and three former Terex straight mast crane dealers to represent our Manitex straight mast cranes.
Looking ahead to the rest of 2019 and early 2020, we will remain very focused on generating cash and further net debt reduction, operational excellence, new product development and the pursuit of global revenue expansion for our core brands. We're working hard to increase value for our customers, shareholders, employees and other stakeholders.
Thank you for your time today and your ongoing interest in Manitex International. And thank you to the entire Manitex team for solid gains, continued hard work, customer service, operational discipline and overall execution.
I will now turn the call back to Steve Filipov for closing comments and to take your questions.
Thank you, Steve. Please turn to Slide 10. In summary, I'm excited about the opportunity we have in front of us. We have a very solid foundation of Manitex. We have a great team, loyal customers, global brands and excellent products. Our Manitex business in North America is stable, and we are holding our ground in a challenging market.
Our PM business is our diamond in the rough and will be our growth engine. We will diversify our portfolio with PM into the industrial space and higher-margin business.
As in any company, we have the opportunity to reduce our costs in both SG&A and material costs. We will target our SG&A costs to be in the low teens and also focus on reducing our material costs by 2% to 3% over the next 24 months. We want to be a stable and solid business delivering over 10% EBITDA consistently over the next few years.
Now before I turn the call over to the operator for Q&A, I would like to thank the entire team here at Manitex and, in particular, Dave Langevin, who has been the CEO of Manitex since its IPO back in 2006. As most of you know, Dave has led the company through many up-and-down business cycles and has spearheaded the growth strategy since that time. With his team, he has built what we have here at Manitex today, a company with an exciting portfolio of niche, time-tested industrial cranes and lifting equipment.
I have known Dave for more than 25 years, dating back to our mutual time at Terex, and our paths have crossed numerous times since. I've known him to be a driven, straightforward and committed leader. As our Executive Chairman, he remains a key part of our team, and I appreciate his confidence and trust. I'm excited about the opportunity to lead the team on behalf of all of our stakeholders and partners and prove worthy of the trust he has placed in me to take this company to a new level of execution and growth. I am looking forward to meeting with our investors at upcoming conferences and showing you that there is plenty of value ahead of us to unlock in our shares for our shareholders.
Keith, please open the floor to any questions.
Thank you. [Operator Instructions] We'll take our first question from Mike Shlisky with Dougherty & Company. Go ahead.
Good afternoon. Hi, guys good afternoon.
Steve, I appreciate all the commentary about PM that you've made. And you went to Italy. You made some assessment of what's going on there. I was just kind of hoping for just a bit more color as to what you've learned in the last two months, and I'm sure you've been there at least once or twice. Maybe just a bit more of detail about what do you think needs to be repaired or changed there as far as is there a cultural change that has to happen, are there enough people working there, is there a footprint issue. I just want to get just a bit more color as to what has to kind of change and how difficult might that be.
Sure. Sure, Mike. Thanks for the question. And I would say that I've probably been to PM every other week for the past couple of weeks as it's a big priority for us. As I stated in my prepared remarks, the first thing is – in my view, was to align the organization. We didn't have a lot of focus. We really have two different businesses, as I mentioned. And the crane business is a lot more different, a lot different than the aerial – truck-mounted aerial business. And if you're going to be successful in each of those, you kind of have to have separate teams focused on them. So I think that was the first step.
The other comment that I'll make on the product itself, which I took back to the team, I'll use this one to explain a little bit where we are on quality. But I spoke to a couple of customers, and the comments to me was where we have issues is quality that comes out the door, and there's a lot of small issues with the product. And then once you get two or three months down the road, you don't hear from the product again, and it works very well, which is good news because then that means we just need to control our quality really inside the factory and make sure that when we ship a product, that it's 100%. So what we've done is started to put in place, as I mentioned, quality throughout the production line so that when it gets to end test, we make sure that we test it in its completeness and make sure that it's 100% when it leaves the door. So the good news is customers like the product. We have quality issues like many others do, but I didn't see a lot of issues.
I think the other question you had, Mike, was around footprint, a little bit in maybe product. We don't have a product issue. I actually think we've got a great portfolio. We probably need to simplify a little bit when we're trying to deliver cranes to every market. And as I mentioned, I want us to kind of focus on the few that we can be successful in, which represents still a big opportunity for us. And on the footprint side, we have some – a couple of facilities that are very focused on our products. I don't see us needing a lot more people to increase our production. I don't see us needing to add more facilities. I think we've got enough brick-and-mortar, as we say, to continue the growth in PM. So right now, I don't see a lot of investment needed in the business.
Okay. I'm still trying to get a bridge from where it was a few quarters ago to where you want it to be. It sounds like, certainly, the quality out the door is obviously very, very important. Is that really it? Or is there sales that we'll have to change? Is there more partnership with Tadano that has to change? I just – I'm trying to get a sense for the scale of what you're trying to do here. Is it just small changes, or is it very, very large changes, in your opinion?
Yes. Well, thanks, Mike, and let me maybe take it a little deeper, right? And I think it comes back to the slide that I had about refreshing our core competence, right? And the first part of that, what I was explaining is a dedicated team. I think the other piece on quality is manufacturing excellence. And that's a process improvement that we need to do, and it doesn't take a lot of investment, it just takes time and effort to make sure that we're implementing the highest quality and process improvements. And then the parts piece is probably, I would say, the biggest dollar investment that we probably need to make, right? That means getting more parts on the shelf, that means more training for our dealers, and that's going to take a little bit of time.
So I think it's all of the above. And as in any capital goods business, none of this happens overnight. I mean it takes effort. It's going to take some time for us to get there. But in my first 60 days, I guess my big message to you is there aren't some big dark clouds above the PM business that I'm concerned about or that we can't fix. And I think that's something – a big message that I have for the investment community is it's a good business. We've got to focus on it. We've got room to improve it. And I think it's going to be a great business for us going forward.
Great. Great. That's good color. And then just kind of shifting to Tadano, can you update us as to – have you given more shipments to Asia of that – of European cranes? Have you accelerated any best cost sharing or supply sharing kind of with them? Or has that been kind of maybe put on hold while you try to get control of Manitex as it kind of stands today?
Yes. That's a good question, Mike. And obviously, I've spoken to a lot of investors about the Tadano relationship. I'll start with kind of the main message, right, which is Tadano has invested in us, and they've invested in us because they think that there is potential to sell our product in Asia. Unfortunately, Tadano also recently made a big acquisition. And obviously, it's a big one for them, and they need to be focused on that. So I think that we've been – or I would say they've been a little distracted. But at the same time, the – I would say the focus is still there. We've shipped two containers of products into Asia. We have badged those products PM-Tadano. They are now getting into, I'd say, the market, so into Indonesia, into Thailand and into Vietnam. So the good news is this product is starting to get out there. We also have a potential deal with a Tadano dealer in Saudi that is starting to kick off, and I'm pretty confident that we'll sign up that deal fairly quickly.
And then on the plan going forward, Mike, what I would say is I've got a meeting next month in Singapore with the Tadano team. And then actually, Dave and I are traveling to Japan in January to meet with the senior leadership at Tadano to really start to put some numbers to what does this really mean over the next couple of years. And that's – I'd say that's the piece that is lacking right now is what does it look like in the next 12 months, the next 24 months. So I'm working on that, and I'd say more to come in the next couple of months on that.
Okay. Maybe just talking more near term and close to home. I think you commented briefly that Q4 is looking better. Can you give us a little more detail about what you meant by that? Is it better from a sales or earnings or margin standpoint, et cetera?
Yes. Sure, Mike. So yes, Q4 is going to be a little bit better, I would say. We're halfway through the quarter. I think as we mentioned before, we've got a good backlog. I have been listening to a lot of other companies and competitors, and actually, I think that's a piece of very good news. We've got a growing backlog. As you know, in places like PM, as Laura mentioned, it's substantial, really, the growth that we've had in the backlog. So we're pretty much sold out for the fourth quarter, which gives us confidence that we're going to see a better quarter on the top line. And then I think from a profitability perspective, I think we'll be a bit better from a profitability perspective, but we still kind of have to go through the detail on the numbers and everything. But Q4 is going to be better than Q3 on the top line and the bottom line for sure for Manitex.
Okay. Great. And maybe I'll just squeeze in one more here, and I'll pass it along. But it looks like – and it's not a perfect math, but when you back out the book-to-bill and, well, the shift in the quarter in the backlog, it looks like for the first time in four quarters, you had an up-quarter for earnings over the prior – for orders over the prior year. I guess first of all, is that true and based upon just trying to back out the backlog and the shipments?
And then secondly, I mean do you think we actually could be at an inflection point in your backlog here? Could it actually be up modestly, just shifting, just keep on going as they are into the first part of 2020?
So I just want to be clear, Mike, on your question. It's related just to the backlog trend. Is that your main question there?
Well, I want to confirm that, in fact, the orders were up year-over-year in the quarter. And then on the backlog side, certainly, it has inflected quarter-over-quarter. Is there a chance for there to be some additional upsides from here? Kind of have we seen the worst of it on the backlog, do you think?
Yes. I think I would say – and maybe Steve can give some color on this, but as we mentioned in the prepared remarks, Manitex's backlog is down a bit, right? The big growth in the backlog has been in PM cranes. And the articulated crane business and aerial business is – truck-mounted aerial business is still growing. So I think we feel confident that, that trend is going to continue. And we're going to push for more orders in Q4 so that we can fill up Q1. On the Manitex side, as we mentioned, right now, it's a stable market, but it's off significantly versus prior year. But Steve, do you want to add some color maybe on that?
Sure. I mean the external conditions are challenging and somewhat softening as a theme you've heard from others, Mike. But that said, the things within our control as far as developing and introducing new products, we're doing effectively. As far as winning new dealers to grow share for our MAC and PM and Tadano-PM brands as well as our Manitex brand is continuing to strengthen. And third, we're maintaining very strong market share for our straight mast Manitex cranes.
So whether we're truly at an inflection point and if this is going to continue, we know the direction is up for us over the next several years. We just don't know if it's a straight line or up and down a bit. And some of that, Mike, is related to just are we – is the business cycle going to extend and continue or are we going to take a site dip next year in the U.S. economy. But those issues aside, the things we're doing of continuing to strengthen our dealer network, capitalizing on the significantly huge share gain opportunity we have for PM and continuing to maintain our Manitex straight mast crane business is – are the right things that we need to be doing for the longer term.
Okay, great. Thanks, I will get back in queue.
Thank you, Mike.
We'll take our next question from Justin Clare with Roth Capital Partners. Please go ahead.
Hi, every one thanks for taking my questions.
I guess, first off, I was wondering if you could just speak a bit more about where you're seeing weakness, like the specific end marks – in end markets where you're seeing weakness. And then are there other areas where you're seeing strength? And then how do you see the end markets changing as you move into Q4 and Q1?
Yes. No, thanks for the question, Justin. I'll start, and I'll pass it to Steve maybe on Manitex. And since I've been spending quite a bit of time on PM, I'll talk a bit about where the – kind of the pluses and minuses are.
As I mentioned in my opening comments, France is a big potential for us, and we have a very small share, and I think that's a big opportunity for us. I think the U.K. is another big opportunity. Brexit has now been pushed out a little bit more, so I think the uncertainty there is still there, but people are still confident that there is still things to be built in the U.K. So that's a positive sign. The Latin America has also been very strong for the PM products in Chile and Argentina and a couple other markets. And then as we talked about earlier in Asia with the Tadano branding, I think over time, that will help us. I mean every crane we sell through the Tadano distribution in Asia is a lot better than we had in the past, so it's all upside, in my view.
And then maybe I'll turn it over to Steve on the stick boom, talk about kind of the end markets there and kind of our strategy.
Sure. Many of the straight mast cranes and MAC knuckle boom cranes that are distributed throughout the Americas and North America in particular go into the rental market. And as you've probably heard from some of the larger rental companies that market is still healthy and performing well with good utilization, and that applies also to mobile cranes from what we see in our channel checks and conversations with our various customers.
Getting into some of the particular end markets that are particularly strong, utility and electrical utility in particular continues to be very active; governments of various types, federal, state and local, continued to have many projects in process and are launching projects that have been accretive to the rental companies that we sell to; and construction still continues to be strong with an ongoing backlog of projects in process. I would say the biggest part of our business, of our distribution where we see weakness is in the energy sector, and that's about 15% of our overall revenue, down much more – or much dramatically from several years ago.
And there's some detail in our investor deck on that, Justin, where our revenues are generated by market segments. So fortunately, the segments that are performing well, like construction, utility and government, is about 70% of our global revenue, and energy is about 15% of our global revenue, where we see some weakness.
Okay. Great. If we could then just shift to margins, so in Q3, you indicated there was some unfavorable mix that contributed to the decline in margins sequentially. I was wondering if you could just talk about how you see the mix trending in Q4 based on the orders that you've booked in your backlog.
Sure, Justin. I'll start, and Steve will take that one. But yes, I mean, clearly, we've talked about the mix, right? So we sold more smaller stick boom products and larger stick boom products, so that obviously has a margin effect. There's also the shutdowns in Europe during the quarter that affect producing more products from PM, which actually has a higher margin in articulated cranes and our aerials business. So I think that, that trend going forward is going to be a little bit better. We obviously have the holidays and shutdowns going on in the fourth quarter that we need to deal with. But I think, as I said before, it'll a little bit better as we get through the fourth quarter. But Steve...
Sure. Yes. No, that covers it very well, Steve. I think the only other thing I'll add to the discussion is commercial chassis for the – for in particular the Manitex straight mast cranes. And as I mentioned in some of my remarks, we did order a significant amount of commercial truck chassis late in 2018 and into 2019. We thought it was and is proven to be a prudent thing as we move through the year because many of you are aware of the significant tightness that has occurred in supply of commercial chassis, and we wanted to protect our customers and our dealers to make sure we could respond appropriately to market demand.
Now as we've entered and moved through the third quarter, we have seen the supply and demand of commercial chassis start to come more into balance and the supply constraints for chassis abate. So we're working down and have in the third quarter already worked down the amount of commercial chassis that we had. And going forward, we'll be relying much more on our dealers to the extent that they desire to make sure that they're securing chassis for their crane deliveries.
And Laura, do you want to add something?
Yes. Looking at the Q4 forecast is that chassis sales is significantly down compared to the second quarter, which will improve our gross margins.
So if commercial chassis remain very well in balance, we're, going forward, going to get back to a very normal ratio, lower ratio of chassis that we keep on hand.
Okay. Great. Maybe just one more from me. You mentioned that you plan to continue to reduce the level of debt on the balance sheet. I was wondering if you could give – be a bit more specific as to what level of debt you eventually want to reach, what you're comfortable with.
Okay. Thanks, Justin. Yes, I'll take that, then maybe Laura can add some color. But I think we said in our remarks, right, the next big debt payment we have is in Italy. We're going to pay about $3 million in the fourth quarter. So I think that's a positive sign. We're also looking at seeing what else we can with the debt in Europe, and that's another opportunity for us to reduce some debt there. And I think going forward, our leverage in the capital goods business, I think, should be somewhere in the 2 times to 2.5 times range. And I think Manitex has kind of been, obviously, long, long time ago, not in a very good place. But I think we've kind of trended in the 2.5 times, somewhere in that range.
So I think if we could stay around there, it would be good for us. And I think, as Laura mentioned, I mean we're in a pretty good place. I mean we've got $20 million cash. We've got $30 million on our revolver and we haven't used. So we got $50 million of liquidity. So I think that gives us a lot of flexibility to do things. And like I said, the first one is we want to reduce the debt. The first step is Italy. But Laura, do you want to add to that?
Yes. So we also have the convertible notes that's due the end of next year. $7.5 million is due December 2020, and another $15 million is due in January 2021. We're well positioned to pay down the debt. As Steve mentioned, we have $50 million liquidity right now.
Okay, thanks very much. I will pass it on.
Thank you, Justin.
We'll take our next question from Mike Shlisky with Dougherty & Company.
Hey guys, thanks taking up, few questions here. Just following up on that last question, if you're fully booked in the fourth quarter and you're selling off some chassis that's probably in your inventory, and those are pretty expensive trucks, do you see an opportunity for a really strong fourth quarter free cash flow as well?
Yes. We're – I think as I mentioned, Mike, we've got the team focused on cash for Q4. So I think we've got a – we're going to get ourselves in a good position in Q4. We've got – if you look at our inventory year-over-year, we've increased our inventory by $10 million, right? So that's an investment in cash. But the good news is much of that is in finished goods, so we're going to pull it through the production line. So yes, I mean I think for sure we're going to focus on generating more free cash flow in the fourth quarter.
Great. And Steve, so prior to your arrival, the company put out some multiyear targets. I want to get a feel for how you feel about those targets today. You had mentioned in your remarks on the current slide today that you want a 10% EBITDA margin or higher. The outlook we had before was within two or three years to be at $300 million or up to $350 million of top line with 10%-plus margins.
Anything as to whether that's still something we can kind of rely on or kind of think about it as a broad target?
I think, Mike, I'm still aligned with Dave on those targets. I think that we've got the portfolio today, I think, to get us probably somewhere in the $300 million range now. Some of the – a big part of that growth is going to come from PM, but clearly, we need Manitex stick boom business to kind of come back a bit, right? We're off a little base. We feel that, that's kind of the lowest base of the business. So hopefully, that starts to at least pick up a bit. But clearly, we need to be in that $300 million, $350 million revenue range and somewhere in the range of 10% EBITDA. I still see those as valid. And as I've said, leverage kind of somewhere between 2x, 2.5x, I think that's a safe place to be for our business.
And from a time frame perspective, this was earlier this year, so they were saying two to three years from then. So first quarter, let's say, 2022 or so, 2023, is that still a good time to think about this thing to be reached?
I think so, Mike. Somewhere in 2022, right, I mean there is some fundamental – as we were talking about earlier on that slide, the fundamental things that we need to fix in the business are going to take close to 24 months for sure. Now we're going to get the low-hanging fruit when it comes to revenues, when it comes to costs, but we're talking about a big change in the business. But I feel confident in the next couple of years we could still hit those numbers.
Great. And I also want to get a little more clarity on the path ahead for PM. When the company arrived in the portfolio, it was $100 million top line, and I think it was 9% EBITDA margins or $9 million. Presuming that's been eroded quite a bit, I would guess the top line, by one-fourth; and EBITDA line, by half. I can just make an estimate there. Do you think it's a big stretch to get back to that $100 million, $9 million EBITDA margin again within a couple of years? Or is there a whole new set of targets you've got now for the team?
Yes. I mean you've done your math, Mike, so I think you're not too far off of where the business is today, right? It's in that EUR 80 million range. And like you said, it's probably about half of what it used to be from an EBITDA perspective. I think we can get to the $100 million range. And we talked about next year, we have some nice orders in place for that business to continue to grow. We talked about Tadano. We talked about the two military orders. Those are for 2020.
I think the Manitex team in North America under the MAC brand, they've got a plan to definitely do a lot more, 30% to 40% more than they did this year. And as I said, Latin America continues to perform well. So are we going to get there next year? Probably not. But I think the year after, we can definitely get in that range.
Excellent, thanks very much. I appreciate it.
At this time, this will conclude today's question-and-answer session. I would like to turn the conference back to Steve Filipov for any additional or closing remarks.
Thank you, Keith, and thank you, everyone, for your time today. We look forward to giving you more positive news over the next couple of quarters. And again, if you need anything, please reach out to myself or to Peter if you need more information. And again, thank you for your time. Appreciate it.
Ladies and gentlemen, this concludes today's discussion. We appreciate your participation.