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

Good afternoon, everyone. I'm Jamie Cook. I'm the industrials analyst at Credit Suisse. And I'm very pleased to have with us Manitowoc. With us today, we have Aaron Ravenscroft, who's the President and Chief Executive Officer; as well as Dave Antoniuk, who's the Executive Vice President and Chief Financial Officer; and we have Ion Warner, who Head the Investor Relations effort. So we're very pleased to have Manitowoc here today. I've been covering the company, gosh, for 20-plus years. And I think the most exciting thing we see out of the company is, one, they've gone from sort of focusing on cost cutting to refocusing the company on growth. You've seen them expand through niche M&A in aftermarket, in distribution. They're building out their all-terrain line. They're diversifying in Europe and in China, so a lot of exciting things that are going on. So with that, I will -- all this is happening under Aaron. I will let him kick it off with a few prepared remarks and just tell you where the business is going, and then he will hope start the fireside chat. If anyone does have a question that they want me to ask please just e-mail me, and I will get the question asked for you. And with that, thank you very much, Aaron, Dave and Ion, and I will hand the mic over to you.

Thank you very much, Jamie. Just so for a quick background, I joined the company almost 6 years ago and roughly 18 months ago, I became the CEO. At the time of the transition, we really started to transition the business, I would say, not even over the last 5 years. But if you look at the business over the last 100 years, we've been really focused on products and product focus is the way we approach the business, the way we approach our customers. And in the last 18 months, we've unveiled 4 strategic initiatives. And the core and crux of those initiatives is really transitioning from being a product-focused to being customer-focused. So just to quickly go through the initiatives and make my point when you look at the first initiative we have, which is to build out our tower crane business in Asia-Pacific, I mean, historically, we ran that as really a factory out of China, shipping old legacy cranes that were developed in France to those folks in Belt and Road regions. In the last 18 months, we've built out an engineering team and really listened to our voice -- voice of the customer studies and build-out new cranes for those regions to meet their specifications. And that's not just driven by cost, but it is driven by actual specification for applications because a lot of those cranes go 200 and 300 meters high in the air and have special requirements. So we've launched 6 new cranes in the last 24 months, and that's been extremely successful for us. When I took over the tower crane business 4 years ago, I think we sold 6 cranes into China, and we should be on track to sell a couple of hundred this year. So we like singles and doubles. I think this is a great example of us trying to get closer to our customers, listening to customers and developing products that they want. The second initiative on the tower crane side is to build out the European rental fleet for tower cranes. And here is another great example where historically, we have large customers, large construction houses in Europe that would want to not only buy cranes from us, but they also want to do some rentals. And historically, we didn't do those rentals. So we've been building our own rental fleet in Germany, where we've had lower market share than we'd like. But by having those rental fleets that also allows us to better service those European construction companies that will go in -- there could be a French construction company that goes in the UK. But because we have our rental fleet in Germany, we're able to get more aggressive on those deals, where maybe we'll do a rental for 6 months and then the unit ends up coming back into our rental fleet in German. So it gives us a lot more flexibility, not just to grow our market share in the core business but also to better service those customers. Third initiative is to accelerate our product development on all terrains. Again, this is selling our product gaps that we've had. The business especially in Europe continues to be more taxi-oriented service work. So the crane operators are trying to do 2 and 3 jobs a day, but you've got to have the flexibility in terms of the rotability of those cranes. And I mean, historically, we've been in that space. It's just it continues to grow and there are some applications that we haven't covered. So we're looking forward to bauma and we'll unveil several new all-terrains at the show in October. And then the last initiative is to get closer to our customers in North America. Again, many of these are very focused on growing our aftermarket. In order to do that, we have acquired a couple of our dealers. So we announced the acquisition of H&E's Crane business as well as the Aspen Equipment. So those are the first steps for us. We're in the process right now of integrating those businesses, and we see not just opportunities with the acquisitions, but even synergies between the 2, and then there's some open territories we have and some different product offerings we've gathered, some service offerings between the 2 of them that should bode well for us in the broader market. So we have started to use our balance sheet to grow the business and accelerate our initiatives, and we're looking forward to the next couple of years. I think there's a lot of opportunity for us.

Okay, great. And so, I guess I'll kick it off. I want to talk about some of your strategic growth opportunities that you've laid out. But since we spoke last, we do have an infrastructure bill. So I'm just wondering, Aaron, I know you're always very balanced about sort of what you're seeing in the market. But how has that changed sort of customer conversations? How has that changed? And what do you think that means for it? Do we -- does this finally -- is this the catalyst to finally get a crane cycle recovery that we've been waiting for or?

For us, it's a long lead time. So it's not like the infrastructure build kicks in and all of a sudden the business just picks up overnight. It's going to take some time to build. But where we get really positive on this whole subject is the fact that it gives our customers certainty. And if you looked at the last couple of cycles we've had, they've been extremely short, and they never went nearly as high as they did in those 6 or 7 OE. People have been holding back. And if you think about the business since that period, I mean, there's been a lot of uncertainty and at every turn, everyone is looking for an excuse to pull back. Now that we have this infrastructure bill, I think that gives a lot more certainty to the industry and to the business that, hey, there's going to be work out there for 5 and 10 years and now is the time to renew your fleets. And I think that's the real point is if you look at many of the large crane operators in the United States and in Europe, their fleets have gotten pretty old over the last couple of years. So really over the last 10 years, they have been renewing their fleets like they did a decade ago. So we think this is the impetus. We're hopeful that this is the impetus to start a proper cycle. The last 2, we went up for a day and back down the next day.

And based on what the infrastructure bill, is it -- is there a certain type of crane that you think has more of an opportunity that we could use relative to a different type of what does that sort of imply for mix?

Yes. I mean to me, I've had a pretty balanced approach on that because, of course, any investment in the wind power is great for the crawler business and crawler cranes are expensive. I mean our largest most expensive crane is probably $8.5 million, $9 million. So you don't need to sell a whole lot of those to move the needle in terms of revenue. That being said, I actually think all the electrification work is going to be huge for the boom truck business. But of course, those aren't -- those don't come at $10 million of crack. I mean, they can get into the millions, but there are hundreds of thousands. But I do believe that, that's a really interesting opportunity for us. All of the utilities are investing in electrification. There's a lot of work that's done just not on the power lines, but all the entire backbone of the grid. So I mean anything you touch with infrastructure, they're always placing the cranes. It's just a question of how long those cranes are going to sit on the job. But when I look through all those initiatives, we love airports. There's a huge amount of opportunity in airports. If you look at even the build-out of the railroads. I mean, one of the things that's really driven our tower crane business over the last 5 years was the Grand Prix project around the Olympics. Basically, Paris has been building out their network of transit. And it's not unlike everybody -- everyone thinks it's laying rails, but it's building out the stations and all of those bode well for the crane business.

Okay. And then the -- sorry, the other thing that's, I guess, improved is commodity prices over time. Like you're seeing oil prices improve. Are you seeing any indications of customers letting CapEx spend on that front on the commodity side?

Yes. On the oil, everyone is still very reluctant to make purchases. I would say they're very conservative. We've seen some gains in the Middle East and then Saudi those than say, the United States. United States folks, there's a lot of capacity that was opened up whenever we had the last rundown. So still machines out there. So I think in a little less optimistic. Now the other big opportunity we have is on copper and other metals. So I mean copper has been well over $4 for almost 12 months now, I guess. So we're starting to see some life in places like Latin America that have been dead for the last decade. And again, here it's where we're conservative because we -- it's not that we're seeing expansion, but we're starting to see people invest again in the improvement of their existing mines, which is a good sign. So it will be CapEx but not CapEx, it's the big headlines where they're opening new mines, but there's definitely mines that have been underinvested over the last 10 years or at least 5 years because things like copper just even gold, I mean the prices of those commodities were -- made it tough for anyone to make investments beyond just basic maintenance.

Yes. And then can you just talk about given what you're seeing ahead in the infrastructure build, can you sort of talk about -- do you think the industry has enough capacity to sort of handle what's ahead? And are there any sort of incremental investments you're making ahead of the spend that could potentially come?

Yes. I mean not that -- I mean there's not been a huge amount of capacity removed. I mean there's been a few of us that removed a few factories, but we've also made some big investments in robotics. When I say that in the industry, I mean if you go to any fabrication shop, and it's not just in the cranes, but I'm sure it's any construction equipment company, there's a lot more use of robotics. And the biggest challenges we have are trying to find welders, quite frankly. And I'm not as concerned about footprint as I am about getting the right amount of labor. Yes.

Okay. And then I think on the last earnings call or actually probably the last 2 earnings calls, you sort of talked about price increases, right, and announce price increases and concerns that some of the order activity that having was potentially sort of a pre-buy. Any sort of update there? Do orders continue to be strong? I would think so with the infrastructure bill and some of the things that are happening. And then I guess -- I guess we'll start there.

Yes. I mean I think things have played out just as we expected. I mean, as we said on the earnings call, September and October were a little bit light, but nothing to concern us and we'll continue to track that as we go through the remainder of the year, the last 6 weeks. But I think it's played out just as we thought. There was some pre-buy, but there's also -- I mean, we said I think on the call that inventory levels at our dealers were in good shape and I mean I think it's what you would expect as folks start to see have more certainty and more confidence, there's definitely more business to be gotten out there. So I think we'll have the order rates that we had 6 months ago. 6 months ago, [ fleets ] aren’t strong.

You could have that in the second half of 2022. Like as you're thinking about, like, I know the short term -- I guess, as I think about your order trends, the way I'm sort of thinking about it is maybe this quarter and like next quarter, maybe we retract a little. But like as you're thinking about the infrastructure bill and people are concerned about the ability to get equipment, would you expect orders to then inflect positively in the back half of 2022?

That's a tough question. It's interesting because we've had a couple of meetings with a couple of different economists and some are saying, hey, which we believe interest rates need to go up with where inflation is, if that has -- if that happens, that will make it more complicated for people to buy expensive machines and then to finance them in the second half of next year. And the other side of that is then we start to see a balancing out of commodity prices. So I think we have a lot to see how it plays out over the next 6 months before we -- I mean, generally speaking, we feel very good. It's just we're in this environment where we're getting back to normal and it feels very bumpy. So I think more surprises. No one's really talking about interest rate increases. But personally, I think that they're inevitable whenever you look at the rates of inflation that we're seeing, whether it be in the United States or in Europe, I mean, electricity prices are doubling in Europe currently. So at some point, someone is going to have to take some actions.

Okay. And then can you -- and before I go to the strategic stuff, can you what you're seeing on the supply chain? Is there any signs of things starting to, I don't know, get less bad or improve?

Yes. So I mean I hate to just call it a joke, but it means because it's been so difficult, it's become a bit of a joke. It hasn't gotten any worse. I mean, currently it hasn't got worse. That doesn't mean it's gotten any easier either. It just means that by line items, it hasn't gotten worse. It's just different issues. And I don't foresee that changing in the next 3 months or 6 months probably.

Okay. And then the -- I think the acquisitions that you did in aftermarket, I guess, are interesting in terms of what that can mean for the company over time. So do you have like a longer-term goal in terms of what the aftermarket business to be sort of 3 to 5 years from now? Is it -- is the aftermarket, is it more of a -- we need to do M&A or is it -- there's opportunities organically that we're missing? And then, Dave, what does that mean for the margin profile of the business over the longer term.

So first, in terms of aftermarket, I think they go hand in hand. So as we do some of these deals, it's creating more opportunity that we see, and it's a matter of having the scale on the field service side of it. So that's sort of more North America. In Europe, I mean, now it's been organic base as we've gone after the rental fleets. Slowly but surely it started to grab our teams there. So I mean acquisitions will always give us a bigger punch than the organic gets always slower. But both of them, I think there's plenty of opportunity out there especially just our change in approach from where we've been historically. Those are things that we never ever considered for a century of our company. You want to talk about the margins?

Yes. So I think really, this is -- the 2 acquisitions are a platform for our growth. There's organic opportunities in territories that we were underserving, if you would. The companies that we acquired enjoy a margin profile that is better than our margin profile. So needless to say, it's going to be accretive to our EBITDA. And in most cases, it's mid- to high-teens in EBITDA percentage. So while we've not gone away from our goal of double-digit EBITDA margins, I think this is a catalyst to get there a little bit quicker or perhaps at a sales level that's not at the $2.5 billion or in that particular area. So I think that, generally speaking, we're not looking at it on a percentage of sales basis anymore. We're just looking at absolute dollars. So our goal is to grow the absolute dollar of our market business and services on a year-over-year basis and grow our, what I'll say, non-new machine sales as well. So that whole category of items, non-new machine sales encompasses services, encompasses parts. It also encompasses sales of used equipment as well that we've taken trade-ins where we weren't very active on that before. So all these items bode well for, what I'll say, generating a higher margin, and it's going to take time, as Aaron said, we're not looking at hitting home runs, so singles and doubles. But over time, as you continually do this, it's just going to be a benefit to the margins that we have right now.

Okay. And then, Aaron, I think last time we were on the road virtually. We were talking about acquisitions. You were talking about the acquisitions you just did, H&E and Aspen and you were talking about opportunities to increase your share with some of the larger strategic type customer. So can you talk about like what's progressed since then? How big of an opportunity is this and any singles and doubles base hits that you can talk about?

Yes. I mean any time you're talking about specific customers, it's not meaningful relative to the total scale. So it's about adding those up. But yes, we've had some nice wins. We had a nice win in Turkey recently on a project where we're running mass. We had a nice win in Germany recently, we just did an MDT-569 rental that we -- again, these are cranes that we were struggling to sell because they are large cranes in Europe, but now we're in place and getting used. So the wins are coming. There are some large key accounts that have expressed some really big interest in what we can do with them. And I'll be honest with you, when I sit down and look at our CapEx, I mean, that's the big question is, how do we want to go with our CapEx because we've had a lot of customers show up and say, hey, we would love to get on a rental program or we're going to do RPOs where we run them for 2 years and then buy them. And yes, I mean, it's cranes, so we've -- they're pretty expensive machines. If you want 20 machines that could be quick $10 million. So I think there it's going to be just managed by how comfortable we are to use our CapEx and our balance sheet to get into some of those deals. All of them are good. I mean, they're better than I would say our typical margin profile. It is just a question of cash, timing of cash.

Okay. And then shifting over to sort of China, I think you talked about you've invested in supply chain over there. I think you've invested more in engineering relative to history. And you sort of talked about I think you designed products for China, specifically whereas maybe before you did it. So I think you said to earlier, you saw a couple of hundred cranes this year, like what is that versus sort of the total addressable market? And to what -- how do you think about the profitability of these cranes in China because it's China relative to other regions?

Yes. I mean, the profitability is a little bit less than I would say our standard business, but it's not substantially less. It's a good business. It's also a matter of getting the right amount of volumes in the factory to make sure that we're productive and efficient. And it's a bit of gaming diversification. When you look at where our shipments come out of China, sometimes it's Korea, sometimes it's down in Australia, sometimes it's on the Middle East. I mean, all those businesses -- all those markets go up and down. So it's just bringing, I would say, more confidence to the factory that, hey, this year, we need to build 500 cranes or whatever the number of cranes is consistently. And it's definitely -- we talked about China, but the reality is it's also helped fuel the sales that we -- I mean we've set record sales for internal records in Russia in the last 2 years, I think, in a row. That was all driven by these new units that we engineered out of China.

Okay. And then the other debates are shifting back to sort of shorter term, but some of the questions that are coming in are -- everyone's gone after some pretty aggressive price increases, understanding there's a lag. But what -- to what degree of concern the price increases that you've implemented as we get to the back half of 2022 and potentially maybe they don't normalize, maybe they're just as bad, but if they do, that the pricing actions aren't sticky. And if they are sticky, Aaron, will -- you probably won't want to answer this or Dave, do we have the opportunity to set up for sort of above average incremental margins for that reason?

Yes. I'd say we're the leader on price increase without a doubt.

There are people following.

There are people starting to follow, but there's still long way to go. I mean one of the things that we worry about is the yen and the euro to the dollar has weakened. So I mean, as the dollar strengthens, it gives some offset to those folks not to do the price increases that they should feel. And you also have this issue of where folks are buying their steel from importing in the United States. I mean it's great that we have a steel tariff in the United States, but it doesn't do you any good. If you send a machine, that saw, I don't know 90% steel and it doesn't have a tariff, I mean it puts American manufacturers at a disadvantage, which you don't hear politicians talking about that often, but it affects the entire construction equipment industry. And we had dinner with someone who's not in the crane business last night, and that was a conversation we had sort of -- at some point, someone needs to address the steel tariffs because you're putting all the American manufacturers at a disadvantage at the moment because many of these folks that are importing against a stronger dollar have weaker steel prices. So that's my [indiscernible] over the stickiness of price increases. We've done it. The other side of it is in our business almost every deal is negotiated because it's such large dollar items.

Okay. And then -- I mean, you're going to have your Analyst Day in a couple of weeks. So I don't want to steal the thunder from that. But can you sort of preview the main things that -- the stuff that we're going to want to talk about or that the items that you'll be trying to express to investors, this is like your sales moment, Aaron, to get everyone back.

So first of all, I'm excited to introduce the team. Some of the investors have met Les Middleton, who's been with us for 6 years. Christophe Simoncelli, who runs the tower crane business out of France; he'll be joining us. Unfortunately, Brian Wang who runs China can't join us but Christophe can easily fill in for him. So you'll get their perspective. We'll have some more insights on all the initiatives, some of the wins that you talked about, even how we think about some of the mix of the acquisitions. The other thing that we'll have James Cook join us. James runs Manitowoc EHS, Safety as all of our ESG initiatives. So we'll be presenting some of the initiatives we have there. Of course, we always have some nice videos relative to the changes in our factory that we look forward to sharing with everyone. So I think it's going to be a good insight as to really how much the company is changing its mentality and approach because literally for over a century, we've been entirely focused on making products, selling to dealers and the dealers sell it. But the world is changing. And when you start to look at how we're doing business these days through the acquisitions and some of this rental fleet development we've had, I mean, we really changed the way we approach the market. And I think that's critical for how we grow the business, not just grow but grow profitably for the next 20 years.

And then do you think there's anything big on the technology side in terms of that you're differentiated on cranes with some of your product development like relative to what you're seeing from your peers, do you think your peers are sort of at the same pace as you guys?

Yes, I think we're -- I mean it's -- you're trying to defy the laws of physics. So how much different each of us are. I mean, I think that there is definitely a differentiation in the way we use electronics and software and those sorts of things, but we're still lifting, right? So it just comes down to what the -- really that's listening to the voice of the customer and what they want. In most instances, they want a simpler crane or an easier crane to use or a crane that is easier to train unskilled labor on and so they can get up get them on a machine and get them going sooner. So that's again I think there's as much around how we're engaging folks, whether it be field service or training or operator development that has as much effect as it does the actual crane itself.

Okay. And then, I guess, Dave, with some of these strategic acquisitions that you've done and the focus on aftermarket, et cetera, is there any opportunities, I guess, on free cash flow conversion, I mean relative to how we think about things differently?

Right. Yes. No, it's a great question. Obviously, one of our things to grow the -- grow through M&A, right? That's one of our 4 strategic priorities. The one item I will say, Jamie, back in 2019, if you recall, we recapitalized our balance sheet with new debt, and that had a 3-year note fall. So in essence, right now, we're looking at the opportunity to do the same thing again in the early part of 2022 and no close away and we can then put a tender in for everything on April 1. And when I look at the interest rates currently in the market are extremely favorable to us right now relative to where our current debt coupon rate is. So we're looking at the opportunity to perhaps with the right acquisitions, look at getting a benefit from redoing our notes, if you would, number one. And then in 2019, we took advantage of the lower interest rate to then go out and increase or upsize the notes offering. And that's surely going to be on the table this year, which will then put a little bit more gun powder on the balance sheet to allow us to go out and look at acquisitions without having covenant restrictions. So and then moving on to operational side, I think this year, we're going to be -- our free cash flow will be positive. We'll have good free cash flow. We're looking to maximize or look at a beneficial free cash flow next year. We're still putting the final touch on where we're going to be. And so I'd say stay tuned for that. But obviously, our conversion rate, we want to see a conversion rate of at least one going through there. I think our working capital is going to be in a good position entering into what I say, a higher demand environment because we've experienced this higher demand environment. So I think between good working capital management, the opportunities to increase our notes bodes well for putting a little bit more cash in our balance sheet to allow us to grow organically.

Okay. And then I think we have time for one more question. Let me just make sure no one's asking me before I have all the questions like usual. Okay. So I guess just my last -- and maybe you'll give us new ones in December, which would be exciting. But the $2.5 billion in revenues, the 10% plus EBITDA margins, is there room for change here or upside or perhaps just a different path to get there or less relied on a crane cycle recovery.

Yes. I mean I think if you look at the acquisitions and we paid 6x for $30 million in EBITDA. I mean, to me, that's what's going to drive us there. What's going to happen in the market is going to happen in the market, I mean, volatile for 100 years. So we wake up in the morning and say, our goal is to make sure that when we go to the next downturn, our EBITDA is significantly higher than it was in the last downturn. And I think if there was any silver lining in the whole COVID nightmare for us, it's really been, look, we proved that we can generate some decent EBITDA in a very, very low volume period. We continue to push on that. But as it goes on the upside, -- The upside is the pain. We have no real control over where our market goes and if there is a run on a bag scenario, which is completely plausible, whenever you look at just the supply chain issues and then on the back of the infrastructure projects. But to predict that as Dave's predicted it twice and he was wrong. So I'm afraid to predict it.

Okay. Well, with that, I think we're out of time. So as usual, Aaron, Dave, I appreciate your support. I'm glad you're in Southern Florida enjoying the weather. I hope to join there next year. But thank you, again, for your support, and have a great holiday. So thank you so much.

Thank you very much, Jamie. Thank you.

Bye-bye.

Bye-bye.