The Manitowoc Company, Inc. (NYSE:MTW) Q1 2024 Earnings Call Transcript

The Manitowoc Company, Inc. (NYSE:MTW) Q1 2024 Earnings Call Transcript May 8, 2024

The Manitowoc Company, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. My name is Abby and I will be your conference operator today. At this time I would like to welcome everyone to the Manitowoc First Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Ion Warner, Senior Vice President of Marketing and Investor Relations. You may begin your conference.

Ion Warner : Good morning everyone and welcome to the Manitowoc conference call to review the company’s first quarter 2024 financial performance and business updates, as outlined in last evening’s press release. Participating on the call today are Aaron Ravenscroft, President and Chief Executive Officer; and Brian Regan, Executive Vice President and Chief Financial Officer. Today’s webcast includes a slide presentation, which can be found in the Investor Relations section of our website under Events & Presentations. We’ll reserve time for questions and answers after our prepared remarks. I’d like to request that you limit your questions to one and a follow-up and return to the queue to ensure everyone has an opportunity to ask their questions.

Please turn to Slide 2. Please note our Safe Harbor statement in the material provided for this call. During today’s call, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, are made based on the company’s current assessment of its markets and other factors that affect its business. However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company’s latest SEC filings. The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statement whether the result of new information, future events or other circumstances. And with that, I’ll now turn the call over to Aaron.

Aaron Ravenscroft : Thank you, Ion and good morning, everyone. Please turn to Slide 3. Today, I’d like to start with my update on market conditions. Our orders for the first quarter were up 6% year-over-year. Total backlog ended the period at a strong $971 million. In the US, crane activity around the country remains strong. Utilization and rental rates continue to hold up and although short-term is a bit mired by the election cycle, the overall outlook remains positive. With this in perspective, I recently spent a day with the owner of a large crane rental house who’s been in the business for more than 50 years, and he told me that he’s seeing more work coming than he’s ever seen. Of course, we all see the announcements around the semiconductor projects, but this fellow indicated that data-storage centers, rail and power generation were driving his regional market.

It will be interesting to see how this plays into decision-making over the next couple of quarters, but I view the medium and long-term outlook in the US favorably. Turning to Europe. The tower crane market remains very challenging. Our machine orders for tower crane decreased 34% during the first quarter of 2024. Our data suggests that the tower crane market is operating at 2009 levels. In spite of this difficult environment for machine orders, our aftermarket sales have held up relatively steady. The CECE or Committee for European Construction Equipment recently published their annual economic report. The report suggests that the overall European construction market will stabilize in 2024 and start to recover in 2025 driven by government investment in renewable energies and industrial infrastructure.

In addition, there’s a huge housing shortage and we have already seen some of the large crane rental houses start to sell off their older assets outside of the region. Finally, I would add that the comparables should start to get easier in the third quarter, which is normally the basis for a recovery. There’s no doubt that mortgage rates have been far more [inelastic] (ph) in Europe than they’ve been in the United States. The current mortgage rate in France is around 4%. I believe that even a modest reduction in these rates would provide some relief and evasive for recovery in the residential end-market. As it relates to mobile cranes, demand in Europe is stable. We have surely seen a wide variation of behaviors from customers across Europe, but on the whole activity is positive.

Italy and Poland have been particularly good for us, and we saw some green shoots in France during April. Utilization remains good at the crane rental houses and folks are actively managing their fleets. Heading into the next couple of quarters, we have a pretty strong order book, which is always a good sign. Moving to the Middle East. Our orders for the first quarter increased more than 10% year-over-year. Quoting activity remains at an all-time high, driven by investments in Saudi Vision 2030 and Qatar’s North field expansion project for natural gas. Although the timing of big orders isn’t always easy to forecast in this region, the strong demand is broad-based in nature, and we expect this to continue for the foreseeable future. Not surprisingly, however Chinese competition in the Middle East has started to heat up, and we’re starting to see pricing pressure.

Lastly, Asia Pacific remains dominated by the storm clouds over China’s construction market. Although we’ve seen some bright spots in Hong Kong and Singapore. In South Korea, the tower crane market has slowed, but it is been offset by good demand in the mobile crane market, and lastly, Australia continues to chug along. Please move to Slide 4. just to briefly touch on the Manitowoc Way, I visited our French facilities a couple of weeks ago, and they’ve never looked better. In spite of the volume reductions, the team remains extremely motivated, and I’m very proud of how they continue to manage the things that they can control in a very difficult environment. On this slide, I’ve shown three great achievements at our Charlieu factory. At Manitowoc we always strive to eliminate forklifts on our plans to improve safety.

Given the size of our parts, there isn’t always a good alternative. As you can see in the picture on the left, however, the team is now using some very basic equipment to move large mass from the shop floor, which eliminates the hazards created by forklifts. The center picture shows a drum that the team developed in three months. This will be the heart and soul of the large 64-meter ton luffing crane that the team is developing to serve major Saudi projects and future European nuclear projects. And lastly, the picture on the right is a remanufactured mass for a large top-slewing crane. A key differentiating factor for Potain cranes is that we use a PIN system to erect and assemble masks, which is significantly faster than the typical bolt system that our competitors use.

These pinholes wear out over time. Since the team started on this initiative roughly 12 months ago, they’ve been able to reduce our costs for remanufactured math by 56%. This is quickly becoming a viable aftermarket product offering that we’ve dreamed about for more than 25 years. With that, I’ll pass it over to Brian for a financial update.

Brian Regan : Thanks, Aaron, and good morning, everyone. Please move to Slide 5. From an overall perspective, the first quarter results were in-line with our expectations. During the period, we had orders of $554 million, an increase of 6% from a year ago, bringing our March 31 backlog to $971 million. Higher order intake was primarily driven by the European mobile business. Net sales in the quarter were $495 million a decrease of 3% from a year ago. The year-over-year decrease was primarily driven by continued softness in our European tower crane business. This impact was partially offset by the Americas and the European mobile print business. Our non-new machine sales were $145 million, relatively flat year-over-year. MGX our in-house distribution business continues to grow its aftermarket.

However used sales in our traditional OE business were down modestly. SG&A expenses were $76 million or 15% as a percentage of sales and relatively flat year-over-year. Our adjusted EBITDA for the first quarter was $31 million, a decrease of 31% year-over-year. The adjusted EBITDA margin was 6.3%, a decrease of 260 basis points over the prior year due to unfavorable product mix. The European tower crane market continues to be a headwind with a year-over-year impact to adjusted EBITDA of approximately $20 million. This was partially offset by incremental shipments from the rest of the business. As we have stated in previous calls, power cranes sold into Europe represent our highest margin product. And unfortunately, our European factories also have the least flexible overhead structures, resulting in weak absorption of fixed costs as volumes decline.

Our GAAP diluted income per share in the quarter was $0.12. On an adjusted basis, diluted income per share was $0.14, a decrease of $0.32 from the prior year. Please turn to Slide 6. Net working capital ended the quarter at $509 million. Although our accounts receivable ended higher than we anticipated due to the timing of the Easter holiday, the main driver for our increase in working capital is inventory. While we have our normal seasonality with line starts relative to our build schedule, the single largest growth in inventory, whether it be year-over-year or versus year-end within our internal distribution channel. Our build schedule for these businesses was more heavily weighted in the first half, giving us more flexibility to ship products in the second half.

We expect to work our inventory down significantly by the end of the year. Moving to cash flows. We used $31 million of cash for operating activities during the quarter. Capital expenditures were $12 million, of which $6 million was for our rental fleet. We ended the quarter with a cash balance of $32 million. Total outstanding borrowings under the ABL increased $14 million during the quarter, leaving $74 million outstanding. Our net leverage ratio was 2.4 times, well under the targeted 3 times and total liquidity was $233 million. With that, I will now turn the call back to Aaron.

Aaron Ravenscroft: Thank you, Brian. Please move to Slide 7. Next week, Manitowoc is holding a crane days event at our Shady Grove factory where we expect to host more than 1,000 visitors. This is always a great opportunity to showcase our new technology, our latest aftermarket initiatives and of course, to new cranes. We’ll display 34 machines at the event of which five will be new unveiling. Over the last couple of quarters, we’ve been very focused on integrating our dealer acquisitions and growing our aftermarket. And I think, this is an appropriate time to remind everyone just how much we’ve done in terms of innovation without much fanfare. Since 2021, we’ve launched 29 new or refreshed crane models and here is a few highlights.

Firstly, we developed Grove CONNECT & Potain CONNECT telematics solutions with a suite of remote diagnostics and troubleshooting capabilities. To-date, over 2,500 cranes have been equipped with this capability. Next, we launched two new truck-mounted cranes and a new boom truck that specifically serve the U.S. taxi market. Aligned with our breakthrough initiatives to drive new product development for all terrain cranes, we’ve launched nine new or refreshed models, and we continue to push forward to commercialize models with our hybrid technology. With respect to our breakthrough initiatives to grow sales in the Belt & Road region, our team in China has launched eight new tower crane models in record time. Most recently, we launched the MCR 325 and MCR 625, which are key luffing cranes to serve the Belt & Road region.

Lastly, for European tower cranes, we launched seven new models. Most notably, we started to incorporate CCS, our Crane Control System into our potain luffing cranes, which provides better load charts and simplified operations. In addition, we began to introduce our EV crane. This is our next generation of self-erecting cranes, which meet the new European safety standards and come with added features like Potain CONNECT providing extensive [key] (ph) management functionalities in remote or local troubleshooting capabilities with a smartphone. In closing, as we expected the slowdown in the European tower crane business is dampening our profitability in the short-term, and we will continue to battle the situation for the balance of the year. Fortunately, although it’s difficult to see in our results, the early gains from our Crane+50 initiatives to grow our aftermarket is helping us manage through the cycle.

On the one hand, our aftermarket business in the European tower crane market is proving to be far more resilient in spite of the depressed market for new machines. On the other hand, our dealer acquisitions from a few years ago continue to grow and exceed our expectations. We didn’t expect to break the impact of the crane cycle in three years where our Crane+50 strategy is bearing fruit. Overall, orders remain very strong, and we see good signs of pent-up demand around the globe. We’re already seeing projects move in Saudi Arabia, and we are slowly – [virtually] (ph) setting to see signs that the US infrastructure and semiconductor bills are moving. Concurrently, many of the large crane rental houses around the world have been very focused on reducing the age of their fleet for the first time in my 8-year tenure.

In the meantime, we remain focused on controlling the things that we can control, which include Number One, leaning into the Manitowoc way to reduce our inventory and generate cash; Number Two, executing our Crane+50 strategy to get closer to our customers and increased our aftermarket and Number Three, doing what we’ve always done: engineering, manufacturing and selling the best cranes in the industry, which will showcase at Crane Days next week. Before we hand it over to the operator, I would like to thank the Manitowoc team. Over the last couple of years, it seems like we’ve drifted from one crisis to the next, whether it be COVID, inflation and unexpected geopolitical calamity or a bridge accident that shuts down our main port of entry into the US, the team always steps up and tackles the problems head on.

I would just like to express my heartfelt gratitude to our employees for their endless commitment and dedication to the company. Thank you. With that, operator, please open the lines for questions.

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Q&A Session

Operator: And thank you. We will now start the Q&A session. [Operator Instructions] And your first question comes from Jerry Revich with Goldman Sachs. Your line is open.

Clay Nelson: Hi, this is Clay on for Jerry. Just quickly, with supply chain performance seems to be normalizing. Moving forward could decremental margins be relatively muted given as the improved productivity offsets the lower volumes in the cycle? Thanks.

Brian Regan: Yes, I think definitely seeing a tailwind related to supply chain. But the bigger impact, as we talked about in the prepared remarks is the tower crane business, and we will see that from a comp perspective in the second quarter as well, it starts to normalize in the second half. So I think that’s the bigger kind of issue that we are working through right now.

Clay Nelson: Thanks. And then as a follow-up, just can you update us on the strategic priorities over the next 12 months to 18 months, particularly just around capital deployment?

Brian Regan: Yes. I think, again, as we have talked about in the prepared remarks, inventory management over the next nine months is going to be really important. We did see the normal seasonality kind of spike in Q1. But trying to get through some of that inventory, particularly in the distribution business over the next nine months is really the priority.

Aaron Ravenscroft: And our CapEx remains $60 million.

Brian Regan: Yes.

Clay Nelson: Thanks, I will pass it on.

Brian Regan: Thanks Clay.

Operator: And your next question comes from the line of Mig Dobre with Baird. Your line is open.

Brian Regan: Good morning Mig.

Mircea Dobre: Good morning. Can you maybe recalibrate our expectations relative to your prior guidance? And maybe help us as to how we need to think about Q2 relative to Q1 as well. Thank you.

Brian Regan: Yes. As we said, Q1 was in-line with expectations. We didn’t update our guidance intentionally because we think our guidance is still the right range at this point in time. The sensitivity around the tower crane as we don’t have much of a backlog, and we’re really living hand to mouth right now makes that wide range still appropriate.

Mircea Dobre: Okay. So you are reiterating guidance, but — it sounds like the tower crane headwind is still there. So as we are thinking about Q2 specifically, I mean, normally, we have a seasonal ramp in revenue margins also a little bit better. Is that still to be expected? Or is this more of a back half story at this point?

Brian Regan: Yes. I think the Q2 impact related to towers is going to be — from a comp standpoint is going to be similar to maybe a little bit less, but it will be similar to what we saw in Q1 and then the second half normalizes.

Mircea Dobre: Great. Then my follow-up on this tower crane discussion, and I recognize that the industry-wide data here can be a little fuzzy. But one of your Japanese competitors put out some data in this regard. And what they are pointing out is that the tower crane market has actually been really, really robust in 2023 probably some of the best demand we have seen since 2008. I’m kind of curious your perspective here. Have we sort of seen a such an investment cycle in tower cranes to where maybe this downdraft is more than just a year, it could be multiple years in nature? Or is this — where are you, frankly, seeing something completely different for your business? Thank you.

Aaron Ravenscroft: I don’t know of any Japanese tower crane companies. So I’m not sure who you are referring to. With respect to the European market, it’s broad-based, everyone we speak to is seeing the same thing. If you dig into that CECE report, there is some more data in terms of the downturn last year. Given that we’re at [’09] (ph) levels, we’d like to believe we’re at the bottom and feel that we’re at the bottom. But there is a bit of normal seasonality the tower crane business, too. I mean, folks like to take their cranes in the beginning of the first quarter to really sell them or rent them sort of March and April. So we are already sort of through that cycle. And of course, everything is slow in the third quarter in Europe. So I think from a seasonality standpoint, we are really looking to the fourth quarter before we get a good view. And that’s normally when we have our winter campaign and we start to see orders for folks for the next fall.

Mircea Dobre : Thanks for the color.

Aaron Ravenscroft : Thanks Mig.

Operator: And your next question comes from the line of Stephen Volkmann with Jefferies. Your line is open.

Aaron Ravenscroft : Hi, Stephen.

Stephen Volkmann: Good morning guys. Thanks for taking the question. I’m going to stay on tower cranes, if it’s okay. It sounds like, I think you’ve said a couple of times that the comps sort of get easier in the second half. Could towers be flat in the second half? Is that the right way to think about it? Or we just don’t know.

Aaron Ravenscroft: Well, we are sort of hand to mouth since we don’t have much backlog, but that’s generally sort of how we view the second half of year. But that’s why the broader range is because if you get a big order, it could change it or — so that’s we are hopeful, but — that’s what we’re saying.

Stephen Volkmann: And as towers are flat, maybe my words not yours, but that should sort of reduce a bunch of kind of year-over-year margin headwind because of the margin mix issue.

Aaron Ravenscroft: That’s correct.

Stephen Volkmann: Okay. Great. And then Crane Days, Aaron is that like a catalyst for orders do you think? Or is this just sort of getting the word out?

Aaron Ravenscroft: Yes. I mean, anytime we have that many customers, we are hopeful to get some orders. As you can see, we’ve got plenty of inventory. So we are eager to start pushing machines next week. Normally, there is always some things that have been in the works and folks bring those orders to the event that the real intent is to just get out and be [indiscernible] with our customers.