The Manitowoc Company, Inc. (MTW) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. We're here for our final session. I'm really excited to have with us Barry Pennypacker, President and CEO of Manitowoc. Barry, thank you very much for joining us.

No problem.

So Barry has a few minutes of prepared remarks, then we'll dive into Q&A. Barry, the floor is yours.

Thank you. Anybody want me to read that?

That's a no.

All right. So I think I recognize most of you here, just give you a little background about Manitowoc. We believe we are a global leader in lifting solutions. We've been a leader in innovation. We've introduced 60 new products to the industry in the last 4 years since I've been on board. We're global. About -- last year, about 60% of our revenue was U.S.-based, and the balance was outside of North America. Wide-ranging end markets anywhere from nonresidential construction, to residential construction, to the oil and gas industry, to just about any diverse manufacturing industry that you can think of, we're there with our cranes. We have a very stable customer base. They're very loyal. They've stuck with the company, even though we had our share of problems in the 2000 -- early 2000 time frame, particularly with not bringing innovative solutions to the market as well as significant quality problems. So we fixed that. We've got a -- we brought in a completely new management team within the last 4 years. And I think we're well on our way to continue to transform the company into a higher margin crane company that our customers would like to buy from. Leading brands in every category from all-terrain cranes to telescoping crawler cranes, and we are the #1 and #2 in each one of those markets globally, and we plan to continue that as we continue our strategy forward. We are focusing very strongly in the aftermarket. We have not really historically paid much attention to the aftermarket. But as you know, as a stand-alone crane company, the cyclicality is inherent and the way that we believe that we can handle some of these cyclical ups and downs, is to increase our aftermarket in our revenue and in aftermarket solutions and services. Global footprint, you can see the revenue in the Americas, U.S. and MEAP. I'll touch on some of those in a few minutes as to what the current situation is. The Manitowoc Way is our strategy. We focus really on 4 different items; margin expansion, growth, innovation and velocity. And that is our lean program that we've implemented and continue to implement over the last 4 years. Margin expansion. We want to optimize our capacity and our cost structure globally. We've done a lot of that over the last 3 years. We still have some more to do. And we'll be talking more about that as the time continues to pass us by in the next 24 to 36 months. We've proven our productivity through our lean program. We've used pricing. We've used it as a strategic tool in certain markets that we serve, and I'm fairly happy with we've been able to continue to use price as a weapon to offset any increases in cost that we may have. On the growth side, we want to increase our market share. We've lost a lot of share, it's not a secret, over the course of the last 10 years. And only in the recent, I'd say, 18 to 24 months, we've reversed that trend, and we're starting to gain share back in our key markets. So I'm very pleased by that. We are pursuing now acquisition opportunities for growth. We have been able to do that since we refinanced our debt at the beginning of the year. Last year, we've got some great flexibility now, which we weren't able to do in our prior agreement. Innovation. We -- if you go over to the show and you look at our booth compared to others, they may look the same. But when you get the customers in our booth, they're constantly talking about the new things that we're adding to our cranes in order to make them more productive and also being able to increase their return on invested capital. So today, the show is very, very packed. That's why I'm sweating because I've been very busy today. And I was very surprised. I thought it was going to be way down from an attendance standpoint, but today sure looks like everyone in the crane industry decided to come out. Velocity. We want to be an agile company. We want to use continuous improvement to -- in the back office as well as the shop floor in order to increase our overall transformation ability of the company. State of the business. We're managing through the cycle. We continue to look at ways to mitigate the cycle, but the crane business is a cycle, and we're continuously driving operational improvements in order to mitigate that. Quality and reliability. I mentioned that a little earlier. When I was here a 3 years ago, and one of the questions I think you were going to ask me is, what's the difference between this year and 3 years ago. This year, I've not heard one single customer come up to me and talk about quality or reliability. They talked to me about growth and the opportunities for them to purchase new products from us. 3 years ago, when I was here, it was 100% focused on quality and reliability. So I think we've really done a great job as a company to renew that focus and make sure that our customers are, in fact, saying the same thing. New products. We've introduced so many new cranes over the course of the last 3 years that our customers have now become accustomed to that. So if you go to the booth over there, you'll see 4 cranes on display that are brand new. You'll see 2 other cranes that we have, 1 in virtual reality to show because it's a huge crane, and it's in Germany. So we just use virtual reality to show people what it's about. And then we have a new emphasis that's getting a lot of attention over there, where we're bringing North -- European construction methods to the United States through our self-erecting cranes. And if I would say that -- if I looked at the entire show and I looked at where most of our activity has been, it's been in this self-erecting crane transformation that we're trying to do here in the U.S. So very pleased with the way the show is going. I'm not sure it's going to be an order-taking show. In fact, I'm sure it's not going to be an order-taking show with everything that's happening in the global economy. We don't have to -- not to talk about those. People are, in fact, pulling in their investments. But rest assured that the customers I've talked to, I just think that 2021 is going to be the year of really phenomenal growth for us. We focused on the balance sheet. Generated a lot of cash last year. We'll continue to generate a lot of cash this year. We'll -- with our revenue going to be down, we'll focus on working capital and inventory, in particular, in order to make sure that we exceed our cash flow expectations. EBITDA's 449% improvement, I mean what is that? I mean we've gone from 0% to 8.5% last year in 4 years, and I'm pretty pleased with that. Our performance, you can see from a financial standpoint. I mean there's not a single metric that I won't think has gone in the right direction. So I'm really pleased with our adjusted EBITDA. Our leverage ratio, you can see has come down dramatically, and our diluted earnings per share are positive every quarter. So I'm really pleased with the transformation that's happening and will continue to happen as we go forward in time. That's it.

Barry, can we talk about the cost improvement and margin improvement opportunities you have from here. At pretty low sales volumes, you nearly got to your 10% margin targets. So talk about is there an opportunity for that 10% to move higher in a higher-demand environment? And how should we think about your ability to get more juice out of the lender from here.

Well, I think as far as 10% is concerned and whether or not that's the peak, I don't believe that's the peak. We have to get there first and demonstrate that, which I think we get to the revenue expectations that I think we need in the $1.9 billion to $2 billion range. I think we'll exceed the 10% target. If you look back, and this is a statistic that I'd like to remind everyone of, since I've been here, the last 4 years, average revenue has been about $1.7 billion. In the 15 years prior to me coming to the company, the average revenue was $2.3 billion. If I had $2.3 billion in revenue, we won't be talking about 10%. We'd be talking about something very high, much higher. So we just need the revenue to come back. We need the market to come back. And when it does, we'll blow the 10% away.

And in terms of when you laid out your initial expectations for '20 from a margin standpoint, it felt like you gave yourself some room to execute considering how well you performed on the margin side. Can you just talk about if things go right, what sort of margin tailwind will we get from pricing, from further cost reductions, product quality improvements?

I think a substantial portion of our margin expansion from this point forward is going to be through the product itself. I think as we continue to innovate the industry and be able to give our customers cranes that are able to be more productive on the job site, we can charge more for that. So that's -- I think pricing is really something that we're focused on. This company never has been focused on pricing, but we are extremely focused on how we maintain price. At a minimum, we need price to offset cost increases. And that's what we're currently telling everyone what we're concentrating on. But as far as the rest of the margin expansion, it comes from the product, and it comes from productivity in our plants.

And in terms of your ability to absorb if demand is weaker, let's say, than the guided expectations, what kind of decremental margins are you thinking about for your organization?

25%, 25%.

Even though you've been able to do much better than that?

Yes.

And why 25%?

It's a round number.

But you're at about 15%. And in fact, your margins expanded in a pretty tough environment in '19.

Yes. I mean, we're going to continue to be focused. As you see, the #1 point of that strategy, the #1 point is margin expansion. So we are laser-focused on that. As far as the decrementals are concerned, I mean, we have -- we still -- when you look at our SG&A percentage, we're still in the 22% range with $250 million. We will have the opportunity at some point to leverage that. But until I feel comfortable that we've got the product line where it needs to be, we're going to continue to invest in SG&A and not really make that a top priority as far as margin expansion. That will become a reality in the next 2 to 3 years. But until that time comes, we're going to be laser-focused on our plants and our product development in order to take cost out.

Yes, David?

[indiscernible] included to lower your expectations or reality? And also within the product category -- is your product categories that the vertical itself goes to? Where do you seeing [indiscernible]

Well, when you look at our product line, one of our largest product lines that we produce in Germany are all-terrain cranes. The primary focus for all-terrain cranes is oil and gas. And with what's happened in the global markets over the course of the last week, oil and gas customers have really pulled in their opportunities to expand their fleets. We're just waiting to see. There's pent-up demand. They know especially on the downstream side of oil and gas, but there is a lot of products needed. And that will continue to evolve, regardless of what happens to oil price, I should say. But oil and gas, I would say, is an area where, coming into the show, we thought we would be taking orders. But it doesn't appear that, that will be the case. I would say that when you look at our global markets, our nonresi construction market in Europe, believe it or not, just continues to expand. We're very pleased with that. We thought, for sure, we'd have contraction this year, but it's been a pleasant surprise for us that nonresi construction in Europe has been very good for us. Given the update on China. China is not a big revenue producer for us, but it is a cost center for us, really. So although we have not had any supply chain interruptions because of those sourcing opportunities and the level of vertical integration we have, we have not interrupted our customer supply at all. But I will say that China has been a drain for us because of the cost differences between China and the rest of the world. The other issue that we're currently facing is we have a huge plant that produces self-erecting cranes in Italy. That supply chain has been interrupted here over the course of the last 48 hours. We're working very diligently to try and mitigate that. And we will mitigate it, but it will be at a higher cost. We'll have to produce the product in France as opposed to Northern Italy, but the virus thing is real. I mean look at this -- look at the show, we had 70% of our customers cancel on us. I had meetings with 12 analysts over the course of the last 4 days, every one of them was canceled. So I mean the coronavirus is real, and you see the papers the way I do. And we just continue to deal with it the best we can.

Adam is coming to visit you tomorrow. So I'll just point that out.

What's that? We'll meet him tomorrow. That's right. I want, that's right.

A little bigger picture. Since the Terex assets changed hands, at least the large percent that did. Any impact at all how Tadano is coming to market with those products versus Terex or...?

No. No impact yet.

Barry, can you say more on that point? So the message from Tadano is that they're able to cross-sell between the different sales forces that there's only 25% sales force overlap, customer overlap. So they're anticipating share gains as a result. You're not seeing it?

Demag has been talking about share gains for the last 15 years. And all I look at is the products that we service against Demag. We continue to gain share. Look, if we were the old Manitowoc where we sat back and we didn't have innovation as a key part of our strategy and new products introduction is a key portion of our strategy and we thought that our brand name Grove and Manitowoc were going to carry the day. Yes, they did a lot, but that's not the Manitowoc of today. We do not accept the fact that Tadano and Demag together believe that they're going to take share from us because they can cross sell. We don't do too much of that.

And you mentioned you folks have regained a lot of share. Can you talk about which product lines and regions has been most pronounced?

America, in particular, the Americas, in particular, in rough-terrain cranes. It's funny because the people that you mentioned, so they're gaining share. But we see the share data. We know what the share data is and we're gaining share.

In order of magnitude, are we talking a few hundred basis points or...?

We're talking, in rough-terrain cranes, [ 1,000 bps ].

And Barry, can you talk about the new product vitality in terms of what we're seeing at the show, how meaningful are the products that you're profiling here compared to what the product rollouts have been over the past couple of years?

Well, when we came to the show 3 years ago, it was almost embarrassing to us because I think we had one new crane on the booth and it was the TMS9000. We filled the booth up with large crawler cranes because we didn't have anything else to put in the booth. If you look at our booth this year, we have no large crawler cranes on the booth. All of our competition have very large crawler cranes on their booth because they fill it up, and it makes it look like the business is really thriving. But when you look at our booth, all of the booth is taken up by products that our customers worked intimately with us in order to produce. And that's all I can ask for is that we gained share with the new product introduction. And I think what our customers will tell you is that the difference between 3 years ago and today, is that we listen, we act and we introduce products faster than we ever had before.

Barry, so you've been talking a lot about acquisitions over the last couple of quarters now, and it seems like aftermarket you hit on at least today during your comments. So can you give us a sense of what type of assets are out there in terms of like how meaningful could any sort of acquisition be to the overall Manitowoc umbrella?

Yes. I mean we will not entertain at this point anything that's not close to our core within the crane industry. So that's number one. That's the core to us. Number two, it has to have a very large percentage of its revenue serving the aftermarket. And there are multiple opportunities for us globally to do that. We're extremely -- we're extremely busy in trying to get these across the goal line. The issue is that a lot of these what we're working on are carve-outs and companies that have not carved out businesses before, particularly in this industry, it's quite a lot of work. And it's taken a lot longer than what we had hoped. But stay tuned, stay tuned.

And then you talked a lot about 2020. And I think you're level setting expectations at least based off of where the show is in oil and gas, et cetera. But you also made a comment about how you think 2021 is shaping up really nicely. So like what gives you that confidence that things are going to be inflecting as we get into next year based on having seen the short-term indicators?

I've been talking to customers for the last 2 days. And I see their numbers. I see what their opportunities are for '21. I see the fact that they have -- some of our larger customers are owned by private equity and private equity has pulled in their opportunities pretty close to the best over the course of the last 48 hours. So what would have typically maybe been a $50 million order this year, maybe $15 million, but that balance is $35 million, they still need, and they still need the $50 million next year. So that's why I think next year, barring some major global recession, there's a lot of pent-up demand. There's a lot of demand period that has to be filled. So I think with our product line, we're very well focused. We're talking to customers about '21 and '22 deliveries now for projects that are very, very large projects. I mean, I had a meeting this morning with one of our customers that needs upwards of 615 cranes over the course of the next 2 years in order to fill his overall needs. And some of those will come from rental. But a significant portion of them will come from new cranes. So we're -- with the investments we've made in the product lines, we're very well positioned to take growth. And I would say that a lot of people that we recognize from our competition have been crawling over our booth quite dramatically these last couple of days. So -- and Ion is usually my enforcer. So I go to him and say, "Ion, I see people out there crawling underneath the crane" and he goes out and he talks to them and nicely asks them to not take pictures and leave. So that's the biggest compliment I think we can say about our product line is that we've got competitors and they are trying to copy us. And that's the first time that's happened in a long time.

And then maybe one last one from me. Just on inventories, where we said, coming into the end of this year and maybe not even specific to Manitowoc, but what you gather from talking with customers and what you're hearing about the industry in general, where does the industry sit today? And then based off of some of the demand trends that we now have coming at us for 2020, do you feel confident that as you enter into 2021, you're not going to be -- you're going to be at a place where you could produce some more inventory.

Yes. We're a different company than what we've been in the past. I match our demand -- I match our production to demand. We used to level load the factories when I came in. They would build 400 cranes in Wilhelmshaven, Germany irregardless if the market was 500 or the market was 200. We now -- if the market is 200, we produce 200 and if it's 500, we produce 500. So we've matched our overall productivity in our plants to what the market needs. So as far as Manitowoc's finished good inventory is concerned, if it's not retailing through the channel, we're not getting an order from our dealers. And if we're not getting an order from our dealers, it's not going through our plants. So I think we've done a fantastic job of being able to do that so that when the market does come back, and that inflection point happens, we'll be in really good shape in order to take advantage of it.

Barry, as we look back to the 2015, '16 oil and gas downturn, your sales bottomed at $1.6 billion?

Yes.

Is that the best analogy we should think about in terms of what the demand is going to be...?

I can't see a situation where it would be worse than $1.6 billion. I cannot. And $1.6 billion will be profitable where we weren't before.

And in terms of managing the production difficulties that you mentioned earlier, on the one hand, right, you got to deliver to your customers by producing in France, but on the other hand, probably have to think about lower production for at least some product lines over the next couple of quarters. Can you -- you spoke about the challenges of managing the organization and can you talk about if you had any increase in absences amongst the staff on your meetings?

Well, what we've had -- what we've seen an increase of -- in the course of the last, I'd say, 7 days is particularly in France, people want to telecommute as opposed to actually go to the office. In France, we have quite a large presence in France. And when you go to Paris and they shut down the Louvre, they shut down all the famous tourist sites, it kind of affects the mentality of the French people. And so the only thing that we've seen so far from France is that they want to work from home, and we encourage people to do that. In Italy, it's a little different. There are areas where the virus has affected people who work at our plant and live 45 miles away. So those people are quarantined. We have no control over that. The government is taking control of that. So when they get the opportunity to come back to work, they'll be in good shape to do so. I can tell you, though, I mean, I've seen a number of things happen here in the last 24 hours that's quite dramatic. I'm a big Penn State guy, as a lot of you know. And I got a text from Penn State saying that effective Monday when the session resumes, there will be no classes. Everything is online. So they're taking, and I think Ohio State, I heard today is doing the same thing. So they're taking...

Maryland.

And Maryland also? Yes, they're taking steps. So if they're doing all these dramatic steps, it's -- I feel like we got to respect them and it's going to be there. So I made the show. I banned international travel. I gave each and every one of our employees the opportunity to back out of the show. We had one person who didn't feel good. He decided that he didn't want to come to the show. But other than that, everyone has showed up. I mean I think -- I'm pretty pleased with how we're handling the situation globally. We have a very intense, I would say, effort in the company on health and safety, because let's face it, I mean we're making cranes that lift 650 tons. So you don't have to have a big mishap in order to hurt someone really bad. So this type of activity we've planned for. And I think we've handled it very well.

And lastly, on the M&A side, can you talk about the size parameters of the type of business that we're looking at, and how much leverage are we talking about?

We will not go above 3, we will not. I will -- and if I go to 3, I'm going to make sure that I see my way very quickly to 2.5. I don't mind leverage, but I have to have a very clear site to getting it back to that leverage. So we don't have a lot of capacity. I mean you see our ABL and things like that. I mean I think over the course of the next couple of years, I probably have the ability to do, I don't know, $500 million to $600 million of acquisitions. So that's pretty -- I think the acquisition targets that we're looking at are much more profitable than we are because they're very focused on the aftermarket. So I'm very, very anxious, if you will, to announce one of those and just stay tuned because we're working really hard to get that done.

So it sounds like it's a combination of smaller deals.

Yes, it's not going to be a $1 billion deal. We're not going to do that.

Good. Please join me in thanking Barry for his support in conference. Barry, thank you very much for joining.

You bet. I appreciate it.

Enough of that. It's the last day -- the last presentation of the day. It's the only thing that stands between us and a beer. So thanks a lot. I appreciate your paying attention.