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

Good morning, and welcome to the Eighth Annual Crédit Suisse Industrials Conference. My name is Jamie Cook, and I am the machinery and engineering and construction analyst at Crédit Suisse. In terms of today's format, I will be moderating the question-and-answer period. However, if you do have a question, please feel free to e-mail me at [email protected], and I will make sure I get that question asked for you. Today, I'm very pleased to introduce Manitowoc, which is one of the global leading manufacturers of cranes with a growing focus on aftermarket. I'm very pleased to introduce the management team, including Aaron Ravenscroft, the President and Chief Executive Officer; David Antoniuk, Executive Vice President and Chief Financial Officer; as well as Ion Warner, Vice President of Marketing and Investor Relations. So welcome, Manitowoc. Thank you for being here. I wish we were in Florida, but we'll do with what we have.

But anyway, I guess, Aaron, maybe we'll kick it off with you and it's probably the best place to start. You've been with Manitowoc for quite some period of time, but you did take over the role as CEO in August. So congrats to you. But I guess after spending a number of years working with Barry Pennypacker, the CEO prior to you, maybe you could reflect back in time and give us a picture of the transformation of Manitowoc during that period. And maybe the role that you have played personally and sort of driving that change.

Yes, thank you very much. It's a pleasure to be here. Good to see you this morning, Jamie.

Good to see you.

So one of the things we always talk about is The Manitowoc Way and what that meant in terms of our implementation of lean over the last 5 years. But one of the things that we don't often talk about is how we really changed the organizational structure when we joined because that, frankly, had a lot to do with how we implemented The Manitowoc Way and got the results we did as fast as we did. When we joined the company 5 years ago, the company was run as a matrix. So the first initiative we have -- of course, there were a lot of changes at the corporate level because we had spun off the Foodservices business. There was some instant restructuring we had to do at the corporate level. However, we basically reorganized the entire business to really start to implement and drive The Manitowoc Way, which meant basically putting leaders in charge of specific businesses or business units or regions depending on what that looks like, depending on the business. So I think that had a huge effect on how we were able to have the gains that we had, as well as to how we got to where we are today with our current management team at the business level. So if I look at the organization, I would think we probably have maybe 25% of our current leaders were with Manitowoc when I joined the business, but they were in much lower levels in the position, and we were able to develop them over the last 5 years. And then there was a large portion of people that came from the outside, such as Dave.

Okay. And can you just talk about when you were looking to recruit externally, outside Manitowoc, the type of skill sets or type of companies that you are sort of benchmarking yourself to or the type of talent you were trying to complement the existing talent at Manitowoc?

So the history is that Barry and I had done this at Wabtec, I was much younger at the time, and then we did a Gartner number. So we had a good feel for what we're looking for. And when you looked at the old Manitowoc, we were much more sales oriented, I would say. If you looked across our organization, the leaders were more coming from sales and marketing than they were operationally. So when we went out to find the new leaders, we were looking for folks that were -- I hate to say more operational, but really more able to drive projects and initiatives rather than -- I'd hate to say chase the business, but there's a different mentality that goes with it and being much more process oriented. And so even when you look at our organization and the folks we developed, we ended up taking folks that weren't even recognized as leaders previously. Through our lens, we're looking for folks that are very process-oriented and love problem solving. And I call it one day at a time, days make weeks, weeks make months, months make quarters. That mentality is very different than what we had before. So when we sit down and have organizational discussions or business reviews today, there are no surprises. Everything that we're working on is a progress from, say, the last meeting or a month ago or a quarter ago. So I think that has had a huge effect on the entire organization. And that's really what's driven The Manitowoc Way, quite frankly, so fast.

Okay. And understanding you guys have been on a long journey and you're in a much better place today relative to where you were, Aaron, you're still the new CEO and every new CEO likes to put his stamp on the company. So not -- while we know you have a great appreciation for Barry and the prior management team and The Manitowoc Way and what's been implemented, we still want to know what that means. As we're sitting here and looking at your -- when you decide to retire to wherever they -- wherever that may be, how is that...

You sound like Dave now.

How are you going to change the world? So how are you going to change the crane company?

Yes. So the last 5 years, we've taken out over $100 million of cost, which has had a huge impact on why our results look the way they do today versus what they would have looked like in 2016 had we gone through COVID. That being said, however, if you look out into the future, I mean it's law of diminishing returns. We're taking out costs. The way we really drive the business is we've got to get our top line at a much higher level and we've got to focus on growing the business in areas where we have higher margins. So I really view me become the CEO as it transition from this cost phase to a growth phase. Our balance sheet is in a much better spot to not just do organic investments but as well as some acquisitions, and we're aggressively looking at all options in that space. And then with respect to any acquisition that we're interested in, we're interested in things that are higher margins, less cyclical and, frankly, just more attractive than the core business. Because today, like any cap goods business when you're just making machines and selling machines, it's very volatile.

Yes. And so maybe that dovetails nicely into sort of aftermarket and the aftermarket strategy, which I know has been important for Manitowoc. And I think you hear that more consistently across the industrial space, in particular as companies have technology to better help them understand, you know what I mean, what they're missing on the aftermarket side. So can you help us understand as we think about a crane, sort of the life cycle, how much is OE versus, you what I mean, like the aftermarket opportunity, maybe what Manitowoc's total aftermarket opportunity is? I'm just trying to understand what it can mean for the company and how much you can do organically versus what really needs to be done on the acquisition front?

Big question. So a couple of -- let me think about this in a couple of different ways. First of all, I'd say I look at it from an EBITDA perspective, not a revenue perspective.

Okay. That's great.

Secondly, I would say, when you think about our business -- because when we're selling lots of machines, the numbers get huge fast. So Dave and I don't talk with respect to as a percentage of new, I think that's totally misguiding. I mean the reality is what drives that number as fast is actually when we're selling fewer new machines, which is not the goal either. So we're very focused on, dollar for dollar, what we can generate in terms of non-new machine sales. This is something that we're looking to put in terms of our incentive plans, and we've been reviewing with the Board for the last couple of months. So that's really the target is how do we add more dollars that are higher margin, less cyclical, which is typically your aftermarket business. I wouldn't quantify how much I think is out there. I just think of when I look at our EBITDA and the opportunity to grow our EBITDA, it is a significant number. In terms of acquisition versus organic, the acquisition is much more attractive because it's faster. I mean that's always the case. It takes some time to build your way organically. And when I look out over the next 5 years, I think we -- where our balance sheet is now, we can do a lot more from an acquisition standpoint than we can organically in terms of affecting the numbers. That being said, I think it's singles coming from organic activities, where you're getting doubles and triples from the acquisitions.

Okay. And at this point when you're thinking about M&A, obviously, aftermarket is a part of that. Are there any other sort of adjacencies outside of the aftermarket side that Manitowoc is sort of focused on? And the question I always get from investors is sort of does it make sense for Manitowoc to be a stand-alone crane company? So how you think about things from that perspective?

Yes. So I mean there's other opportunities for us to acquire "crane businesses", but they would be more geographic oriented than it would be, say, technology. So I think we're very comfortable with the product line we have now. There just are a couple of opportunities out there. In terms of us being a stand-alone crane company, I think we've proven over the last 5 years that we can do that. So the next 5 years is how do we show how we grow the business as a stand-alone crane company, and there's plenty of opportunities out there.

Okay. And then during -- another sort of new sales initiative, which I guess is consistent with your focus a little more on growth under your tenure, is you talked about initiatives to grow I think in rental cranes in Germany. So can you just elaborate on that strategy? Why Germany first? How many other markets are out there potentially that Manitowoc is sort of testing? And I guess what are the risks investors should think about and opportunities with this new sales initiative?

So specifically with respect to Germany, we're talking about large top-slewing or what we call GME tower cranes. Today, we have a dealer network that's mostly focused on the small self-erecting cranes. And we've always seen Germany as a big opportunity to grow our market share for tower cranes. If you think about it, we're Potain, we're historically a French company. So our share is strong in France. And like any good -- any history that's out there, normally the French do great in France and not so well in Germany, the Germans are great in Germany but not so well in France. So we see this as an opportunity to gain market share without a whole lot of conflict. The returns for us are very attractive, as attractive. We look at it just like we would look at CapEx investing in the factory. Again, this just goes back to what our goal is to grow that business. It's less cyclical, higher margins, good returns and really in the core of our business. So with respect to outside of Germany, Germany is a big market. So I think there's plenty of opportunities there. But we do see other opportunities throughout Europe with respect to some of the large construction companies. So you'll have construction companies, say, in France, who are -- the work is outside of France and outside of Europe potentially, but they're always looking for different options. You get on a project. They may not have the complete portfolio of cranes that they need. So they may come and say, hey, I'd like to rent these 3 cranes for the 6 months on this project and buy the next 10. So it's always this game of bundling. We see some opportunities there. And then the one thing with the dealer networks globally, I would say, this is for every manufacturer in every space, that approach is -- it's gotten -- it's been going on for 30 or 40 years, and in some cases you don't have the best succession planning. And that's opportunities we say that, hey, if there's not the succession planning and they're interested in selling -- I mean, there's been a lot of private equity businesses out there buying distributors over the last 5 years and we see that as an interesting possibility, let's say.

Okay. And then I guess the other thing that's changed in my 20 years covering the space, not to age myself, is just the players are the same but maybe they're in different hands, you know what I mean, in terms of some people remain committed to cranes, other people are smaller in cranes. Some people sold their businesses. How sort of -- and you're an expert in the space, how the competitive dynamics changed and how does that set up for this cycle? And do you see the players investing more in product innovation potentially relative to, some might would have argued, under previous leadership there was more of a starve. You know what I mean, like starve the innovation type mentality.

Yes, yes. So I divide the world in 2 spaces. I look at the, call it, western traditional world and then the Belt and Road markets. And in the Belt and Road markets, that's China plus all of their strategic partners that they made over the last 5 and 10 years. In that space, you're looking at competing with the Chinese players more and more than some places in the Middle East and Asia Pac. So I think that's one thing that's totally changed versus where we were 20 years ago, and we've got to face that head on and find ways to compete in those markets in a way that's different than we would have traditionally, which is why we've grown -- we converted our Chinese factory into a business where we've invested in our engineers. And we're developing products for those markets, specifically the Asia market, which is totally different than cranes that get used in, say, Europe or the United States. So I think that's one element of the game. With respect to the traditional markets, yes, there's the traditional players. We've had a recent consolidation with former Terex and Tadano, which I think we may -- I think if you ask anyone in the business, everyone would say that made a lot of sense. I'm sure that they'll be more focused on innovation. And Liebherr, of course. They're Liebherr and I don't think there's a whole lot of change with respect to their strategy. They've been executing the same strategy for the last 20 years. I'm sure in the next 20 years will continue to develop new products and be super competitive. So I think it helps, though, that we get a little more rational behavior in the industry with some fewer players. That's not just good for the manufacturers, I think it's better for the customers, too, because you start to get stretched super thin in terms of product support and innovations that are out there. So I feel pretty good with where things sit and where they've gone. Even though they haven't changed drastically, the small changes that have happened are meaningful.

And understanding how longer term when eventually we get this crane recovery -- which we'll get there, Aaron, we'll talk about that at some point, the probability of it being under your leadership is probably pretty high. But I guess before we go there, price cost, like assuming we're in lackluster environment in 2021. How do you guys sort of think about, you know what I mean, price cost and ability to get sort of priced in a ho-hum market even with some of the investments you guys have made?

Yes, I think price is going to be extremely tough to get in the current environment. I do view next year really as a transition year. If I look at cost versus price, there is inflation going on in the market. There's also the sort of what I call the COVID overhang or hangover effect where costs are going up. Of course, there were costs that we were able to restrict in the short term to manage through COVID that long term don't make a whole lot of sense. Eventually, we will start to travel again, maybe not at the same extent that we were, but those are sorts of costs that we skipped out on this year that we'll have to turn back on as we go. So there are some headwinds there. The other thing I would say that needs to be discussed is we've had a pretty big change in terms of currency in the last 6 months. That takes some time to really work through. I mean it's one thing if the euro goes up, but it's gone up so fast that how the market handles that is going to take more than 6 months to work out, and they probably won't work out completely until you start to see some more momentum in the marketplace.

Okay. And then I guess shifting -- well, actually, before I go to demand, just some of the conversations, maybe it's not as relevant to you, but from talking to companies over the past sort of 2 days in the second quarter, they were worried about sort of how quickly demand would fall to a falling knife. And as you sit here and you enter into 2021, maybe the outlook isn't rosy but it's clearly -- it's less bad than we thought. You have a vaccine. You know what I mean? Hopefully, next year this time we'll be in Florida. But my question is like what risks or inefficiencies do you see as we're looking at 2021 as it relates to COVID, like how worried about Europe or a potential supply chain disruption? Things of that nature that could create issues as we think about 2021.

Yes. So I actually view 2021 a lot like 2020, which maybe is really conservative. But there's a lot of headwinds going into the year. We're talking about supply chain, everyone has lots of suppliers in a place like Italy. Well, Italy was -- I mean that's what shut us down back in the second quarter. That -- and there's a domino effect. Maybe it's not -- there are specific suppliers could be a supplier of a supplier that shuts us down. So I think there's a lot of challenges specifically in Europe with respect to not just supply chain but also certainty. We've seen orders, I think, in the third and even in the fourth quarter that people aren't taking -- we're not getting orders for the future. We're getting orders for the today. So those are construction sites that were probably already financed, it's just they're getting started later than they normally would have and folks have been pushing that business in. So I don't think we've completely had a good view of what is 2021 going to look like. When I just look at our quotes on our orders, a lot of it is sitting sort of in today's world. The only place that I see decent visibility is around the wind market in the United States. That clearly has been more positive than what we've seen. But that's -- in terms of our order book and then I talk to our regions, China has been strong for all the same reasons that you hear every other CEO talk about. We've seen that. It's been good for us. But outside of that in wind, it's a lot of hit or miss more so than what we would normally see.

Okay. So I guess in that -- go ahead.

And I would add that even the sentiment has changed in the last 6 weeks, because the lockdowns have gone down in Europe and now the huge spike in the coronavirus cases in the United States is taking its mental toll. And I'm sure there's probably an election effect, too. But I would say that people seem more uncertain today than they did 6 weeks ago when I talk to people.

Okay. Okay. That's interesting. And so...

It changes fast. And that's what so hard is I wouldn't be surprised if we get -- well, I mean, maybe I'm hopeful, if we get into mid-January and the vaccine starts to go through and all of the sudden you start to see...

So, yes. That's what -- that was sort of my next question. I was sort of thinking, understanding you have the short-term negativity and impact as COVID is rising, but a lot of companies and a lot of, I think, investors, when you look at how the stocks have run for the group, were thinking, okay, like let's make it [ 3s ] next 6 months. We're playing for the second half of 2021, we're going to have -- we're all going to get our vaccines, you know what I mean. And so...

Yes. So we don't move as fast as the stock market.

No.

I mean that's the reality of it. So I think that it will be puts and takes. Of course, the vaccine, I believe, is going to work and it's going to take time. But I don't think it's going to -- I mean, until we get herd immunity, when is that? It takes at least a month between one shot to the second shot, so you know you've got a little time of a month there. So I'm already down. So I actually don't think that you see a real comeback and a lot of comfort -- people aren't going to pull down the -- remove the lockdowns until the data gets better and that we're a long time before the data gets better. So I actually think it's more second half. And then we get into this battle of how fast we can get the orders, the lead times on the products, the supply chain, and I think other challenges start to emerge. That's why I see next year is a real year of transition. Because we -- making cranes, there's a lot of hours to manufacture a crane and get our supply chain going again, that'll take some time.

Okay. And what are your customers -- in terms of understanding maybe the order trajectory, it sounds like the order trajectory in the fourth quarter don't get that excited about based on today of what you're hearing. But from what you're hearing from the customers, do you expect normal seasonality next year? Or is it more weighted to the back year? And then how are you -- what are you seeing or hearing from your customers just real time in terms of utilization rates on cranes, rental rates, that type of thing?

Yes. The big crane operators, I would say, in the United States and somewhat in Europe are saying, "Hey, we got all the cranes we need, they're being utilized. Our results are fine. There's no one worried about financial distress. Everyone's sort of just plugging along waiting for the final recovery from the COVID situation before they start to expand again or reinvest. That being said, when I look at -- and I would say it's not as much in our orders but in sentiment. Like for instance, in the tower crane business, typically, our winter campaign is extremely strong. So we have dealers placing orders in the fourth quarter that their goal is that they get it in March, April, May, June, and they'll send to their customers -- in fact, they never even go to the dealers, we ship directly to the construction sites. The problem that we see currently is we are not getting nearly as many of those orders as we'd normally get from some of our bigger dealers because they're just so uncertain. In fact, our team had a meeting yesterday with one of our larger dealers in Europe, and that was the feedback was, hey, you're not going to see the normal orders that you would see because we just don't know what's going to happen. Will those sites come online March, April, May? And then if you look at construction data in Europe, it's been trending down for some time. So think you have a convergence of 2 issues, which is making folks very nervous in Europe. But the standard business is fine. It's just this adding units and building your fleet, that's where the question comes in.

Okay. And then are you hearing anything new or any color just on the used crane market?

No. I mean it's the same old, same old. There's a lot of units out there. I think the biggest change is we see a lot more folks wanting to do trade-ins, and you just have to be more restrictive of how you play that game in this current environment to manage inventory. So I don't see much change in terms of used. And when I say that I'm really sort of talking between the U.S. and Europe. I know that there's a Ritchie Bros. auction coming up. I know there's a bunch of cranes and there are probably more than there normally would be, which means those prices probably won't be as good as they normally would be, but I don't see that as a surprise to anyone either.

Okay. That's helpful. And then maybe a question -- I mean, it sounds like volumes in 2021 could be flat, maybe off modestly. I don't know that we can fall much, much further. But the puts and takes, I mean, you laid out a lot of negative puts as I think about 2021. I don't know what the positives are. At the same time, you guys tend to be conservative and do better. So I'm just wondering the puts and takes investors should think about outside of volume, we can put our own big -- our own assumption on that.

Yes. I mean when we go through our budgeting process, there's plenty -- we try to focus on the issues we've got to go tackle and work through. I mean one thing we didn't talk about is mix, mix will be a challenge for us. So again, I see next year as a year of transition. You know how fast orders can come back. And that's what's going to drive the business, quite frankly, and that probably will happen in the second half. I mean -- but until you start to see a big increase, like you normally do in the crane business, and not telling any secrets here, we literally will turn on overnight. And one morning, I'm going to wake up and our order -- and the orders we got the day before are going to be fantastic and we're going to start to get excited. It's just how long it takes us to start converting that into sort of what our quarterly run rate is from revenue can take some time, as what you saw in 2017. So that's why I say that next year will be a year of transition. And then there's plenty of challenges out there. There's just so much uncertainty, I think, is the issue.

Okay. So then let's think longer-term because 2021 is going to be a challenge next year.

Yes, I mean...

I guess as you think about the changes that you guys have made on the cost side, like product innovation, are you rethinking, in particular you coming in as new CEO, understanding your Manitowoc better, and are you rethinking? Or at some point, will you come back to the Street and talk to sort of, I guess, any change in views on sort of long-term financial targets for Manitowoc?

Yes. I mean we're -- I would say that, long term, we believe that the business will get up above the $2 billion market and above that number, then we're looking at double-digit margins. So long term, I'm very positive. I mean you and I have discussed this before when -- back when I was a stock analyst 20 years ago. We went through the same thing in 2002, I think it was, where there were not a whole lot of orders out there and everyone was negative. But you saw what happened in 2007. No, I don't think we'd get back to those marks, but we're a cyclical business. We got to manage to the downturn and be prepared to take advantage of the upturn. And I think that's what we're doing.

Okay. And then I guess just last question. We get a lot of questions on will the cranes cycle ever recover? No one can answer that. But as you think about some of -- do you think there's any sort of structural changes in the market that are different for the cranes cycle? A lot of people talk about energy, you know what I mean, like that business is in decline, in particular as we shift to a greener world. I mean, I guess some greener wind is good for you. But I'm just -- yes.

We go through this -- we see this even with the crane market. And we went through this -- no one really talked about it 5 years ago or maybe it was more like 3 or 4 years ago. I mean there was a ton of construction in the United States, that was these 4 story buildings, which is great for self-erecting cranes, although U.S. doesn't really use self-erecting cranes. So that was a -- when you looked at nonresidential construction 3 or 4 years ago, the numbers were going up. We didn't see that benefit because folks were building 3 or 4. That being said, tomorrow you build one bridge and you got 50 cranes on that bridge. So this is something, I think, that the crane business has been through for the last 50 years or 100 years. Even in -- I look in China, they're modifying how they do construction. They're moving to much more precast, which means they need bigger tower cranes, which that favors us. So I think it's -- life is always evolving and, look, you're always going to need a crane to lift something, whatever it may be, whatever you're building, whether it be a battery, factory or mine or -- and we play globally, so we see all those spaces. So I -- like you said, does it go from oil and gas to wind? You still need to build a wind tower and you need a crane to do that. So -- again, I go back to what we used to talk about in 2002 and we had the exact same conversations, and then all of a sudden things took off. And when you look at the infrastructure in the United States, how long can we continue with crumbling roads and crumbling bridges and airports the way that they look. I can go to India and be in an airport better than any airport in the United States. That's the reality of the situation.

So basically, the more things change, the more they stay the same. That's why we're cyclical. Well, that's [ what people want ], a cyclical analyst. You got an upgrade from where I am today. But anyway, I appreciate your time, the entire management team of Manitowoc. I hope you all have a very happy, healthy holiday. Thank you for your participation, and we'll talk soon.

Thanks Jamie.

Hopefully next year we're in Florida. Take care, guys. Thank you.

Sounds good. Take care. Bye-bye.

Bye.