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

Good morning, everyone. We have -- today, we have Manitowoc joining us. And up here with me is CFO, Brian Regan. If anyone has a question, please raise your hand. We'll pass the mic around to you. And to kick it off, we'll have Brian introduce the company.

Thanks, [ Hayden ]. So Brian Regan, the CFO with the Manitowoc Company headquartered in Milwaukee, Wisconsin. We're a crane business, we make cranes and service cranes, sell parts, rent cranes. So I'll get into just a little bit of an overview of who we are from a financial perspective. This is all 2022 data. So we are global. You can see our sales by geography, 50% the U.S. When I look at 2023, it's a little bit more than that as we've seen softness in Europe. Our 2022 adjusted EBITDA was $143 million or 7% of sales. As of the trailing 12 months, September, our adjusted EBITDA was $190 million, which is about 8.4% of sales. So significant improvement year-over-year. Our net leverage ratio was 2.2x, it's now 1.9x. As I mentioned, significant global footprint. We manufacture in the U.S., in Europe, we have a number of locations and in Asia. So definitely a strong global plan to service the crane world. Just going to our vision for the future. So this really is our strategy that drives our company and drives what we do. I know [ Hayden ] is going to ask me questions in a little bit about the Cranes+50 but I'll preempt them a little bit. So Cranes+50 was our mantra that we issued in 2022 about trying to get closer to our customers and increase what we call our non-new machine sales or our aftermarket sales by 50%, which was off of a base of $450 million in 2021 and as of September 30, our trailing 12 months was just over $600 million. So we've reset our aspirational targets associated with the Cranes+50 or non-new machine sales to $1 billion, our revenue to $3 billion and adjusted EBITDA to 12%, which translates to about a 25% conversion rate on that incremental revenue. And that's going to be driven by our 4 strategies. And you can see them there. And if you've listened to any of our calls, we always talk about these 4 strategies that drive our business and really what's going to drive the growth in those strategies is the macro trends that we believe are real, associated with the crane business.

Kicking off. When a lot of people think about your company, kind of people think about the crane industry as being pretty cyclical. I guess what's changed recently? And maybe how you've transformed the business, especially within your core crane business?

And really, that's about that Cranes+50 strategy is, we've historically been a product company and now we're adding services and that service side of the business and that aftermarket side of the business tends to be less cyclical. So as I mentioned, we were at $450 million in 2021. We made a couple of acquisitions that got us closer to our customers in the U.S., in particular. And we acquired a business called Aspen Equipment, which was a dealer of ours, as well as the crane business of H&E Equipment. And we now brand that as MGX. And those acquisitions allowed us to go direct in the U.S. and the H&E business, in particular, that we acquired had about 120 service techs, which drives both service and parts revenue. And I think that aftermarket business tends to be less cyclical. There's still cyclicality in it but it's less cyclical than the crane business.

So you were alluding earlier where we started with a base of $450 million. We're doing about LTM $600 million within your Crane 50 strategy. And I think you updated your target to $1 billion. What caused you to update that target? And how is -- how are we getting from today to there?

Yes. So the way we've modeled it is, we think about 50% of that growth is going to come from acquisitions and 50% organic. And when I say organic, I mean not just organic on what our business is today but organic on those acquisitions as well. So growing them. And we've seen great success in the acquisitions we've made and we've been able to grow those businesses since we've acquired them. And we feel like having -- or making additional acquisitions, we'll be able to do very similar work. And some of the things that we've done in those acquisitions, we've been able to bring over to Europe and Asia. We opened up a service center in Peru, so South America as well, where we announced in our earnings call in September, a deal with Maxim Crane Works to do refurbishment of cranes. So all of that, all of that view of how to get closer to our customers and solve their issues relative to cranes is really what's going to drive that growth and like I said, acquisitions as well.

So right now, you have the MGX Equipment Services, that's primarily North America-centric. Is the plan -- and you kind of alluded to your opening up a location in Peru. I guess, of that $600 million today, how much is North America versus rest of world? And then if we go to the $1 billion target, how does that shift? How are you thinking about that, that mix?

And the strategy slide is up, which is Slide 7. If you look at the far left, the tower crane side, I think that's far left on the screen. So the tower crane side, we've been investing organically in our tower crane rental fleet in Europe. So a good portion of that Cranes+50 will be an acquisition in that space likely, if we had our druthers, that's where we're really focused on probably the next acquisition to really drive that part of the strategy which will also grow that Cranes+50 piece because there's a big part of that, that's rental and service work on the tower crane side. So from a global perspective, it's tough to say right now because a lot of it will be contingent upon where those acquisitions occur. And the reason why we don't give a time line on these aspirational targets is some of that is really dependent upon timing and we're being opportunistic relative to those acquisitions really because these are dealers of ours. We have a relationship currently with them. And part of it is about what's the succession plan for them. A lot of these companies, both in the U.S. as well as in Europe are family-run companies that it might be second, third generation that may no longer want to be a part of the business and we'll be opportunistic about making those acquisitions.

What's the feedback you're getting from your dealer customers now that -- I mean, one could view it like you're competing with them. Is there any pushback you're receiving? Yes, kind of anything along those lines and..

Yes, not really. I mean when I look at the U.S., our dealers have specific territories that they're responsible for. So the dealers that we've acquired we're staying to that territory. And we value our dealers and the ones that want to stay dealers we're holding them accountable and they're doing good work for us. And we're giving them an option to be able to, a succession option for them if they're not looking to get out of the business. In the past, we saw a lot of consolidation with our dealers and it's something that, obviously, as the OEM, you don't want your dealer to be bigger than you because they drive behaviors that might be different than what we would do. And I'll go back to the acquisition of the H&E crane business. H&E was a great dealer of ours. You can -- public company, they operated the business well. They started to make decisions that for them was the right decision but maybe not the right decision for us as a crane company and how they were operating that. And we thought it best that we work with them to acquire the business and I think they've felt the same way. And I would say that acquisition was a success for H&E and for us. And I don't -- there hasn't been pushback from the dealer group at all.

Can you maybe describe like what's creating this opportunity? So you kind of mentioned like there's been some dealers that have been consolidating. You have some dealers that are family run that are entering the second, third generation. You maybe have a shift to the rental side or maybe there's some companies that used to be rental dealers. What is creating this opportunity? Like why now? And yes, what's your role in that? There seems to be a lot going on in that space.

Yes. I mean I think part of it was there's -- quite frankly, there's not a ton of margin in the crane business. So when you're selling to dealers and then they sell, there's just not -- there's not enough margin to be shared amongst that. So for us, it makes sense to get closer to our customers. So even just from a new machine sales perspective, it makes sense to consolidate within us, we believe, at least opportunistically, like I mentioned. When I look at the progress of the business and if I go back to 2016, when the company had both foodservice and crane, we spun off the foodservice business, it shed a light on, hey, we need to be a more profitable business. And for a period of time, the company was really cutting costs. And I think that was the right thing to do at the right time and it got us through COVID. Because we were a sub $1.5 billion revenue business and still had $83 million of EBITDA. And I don't think we would have been there if it wasn't for the cost cutting. And we really shifted to try to be growth oriented. And I think that's part of it, where, hey, we needed to have, one, the right debt structure and two, the right cost structure to be able to take advantage and shift our focus from cost cutting to growth. And I really think that was a big part of that. And these 4 strategies were something that we looked at back in 2021 and we're executing on. And it really -- those acquisitions allow us to accelerate these strategies.

So this leads me to my next question on growth and M&A. It's clearly been a key part of this strategy. What's the M&A environment looking like right now? Are you seeing differences in the competition you see in the M&A, the opportunities, the multiples, what does it look like out there today?

I think our M&A strategy is a little bit different than other companies in that we know these companies. These are our dealers. It's -- so there's not -- I don't want to say there's no competition but I think it's -- like I said, it's very opportunistic. A lot of times, it's not through a normal deal process. It's relationships with the folks and knowing that, hey, the next generation may not want to take on the business. So when I think about it that way, it's a little bit different than a lot of other companies when you look at the acquisition strategy and the companies that we're looking at. As it relates to multiples, I think between 4 and 5 is really what we target as far as the multiple goes from an EBITDA perspective. And a lot of these -- if I take the tower crane businesses, a lot of assets in there. And part of it is, hey, you got a family-run business that might have some debt, they want to retire. So it's a matter of those negotiations. And that's why sometimes that timing could be extended, the negotiation timing and the emotional understanding of, hey, this is selling your grandfather's business and that kind of stuff. So I think it's -- we're taking it very slowly and opportunistically. We want to make sure that we're not buying at a peak, which when I look at the tower crane side, in particular, in Europe, where we've been very transparent around how that side of the business is doing. And I think it could be a good time to make acquisitions in that space.

When thinking about acquisitions, is there a max size you would kind of go to or like a max leverage you would kind of increase to for the right acquisition? And kind of what are the criteria that it would have to follow?

Yes. I think from a leverage perspective, I mentioned we were at 1.9x. We still -- as much as we've grown the Cranes+50, we are still cyclical. So we talk about not wanting to exceed 3x. If it was the right deal knowing that we had line of sight that we could get below 3x again, we might look at that. But again, I don't see anything in our funnel right now that's big. If I look at the 2 acquisitions we made previously and trying to size what the next ones that are in the funnel look like -- they're on the smaller side. So Aspen was -- I'm rounding here, Aspen was about $50 million. I'd say it's that size or lower at this point in time as we look at the acquisitions that are in our funnel.

Got it. That makes sense. I was going to ask about capital structure. I guess why the 3x target? Like how do you think about that in terms of where we are in the cycle, economic cycle, kind of with your Crane 50 strategy, kind of how you're valued in the market. Why the 3x, how you think about moving around your leverage kind of through a cycle?

Yes. And I think 3x is where, knowing that we do have that cyclicality. 3x is where we feel comfortable getting up to, maybe not now where $190 million in EBITDA, while I don't believe that's the peak as I think it is a good EBITDA number that we're churning right now. We're not at the bottom of a cycle. So we need to be cognizant of that as we set the targets for our leverage, knowing that, hey, where are we in the cycle and what do we feel comfortable in. So I mentioned, the 3x is somewhere where we do modeling and look at where we are in the cycle and are comfortable that, yes, that's an area that even at the low end of the cycle, we'd be comfortable with.

Do you have a ratings target, especially when you speak with Moody's or S&P, what's the feedback you're receiving? How is your discussions going there? I think you're currently rated B2, B.

Yes. So Moody's upgraded us this year. So feel good there. And S&P, I mean we've got good discussions with them. I don't anticipate a raise at this point. I mean anything can happen. But at this point, I think we're comfortable with where our ratings are and I think they'll stay that way.

So this is a credit conference, obviously and you do have the second lien notes that mature, not next year but April 2026, I guess. What's your thought process, your initial thought process on kind of addressing that upcoming maturity? What factors are you considering, et cetera?

Yes. I mean, I think we have a premium that expires in April. I believe it's a 2.25% premium that if we retire them early, we'd have to pay prior to April of '24. So obviously, starting to understand what the market looks like and see what rate it is. Our bonds are at 9%, I believe we're just below par right now with what they're trading at. So we're -- I think it makes sense for us to start to understand what the market looks like and be, again, opportunistic. 2026 sounds like it's way out there but it's really not when you think about it. So I think we want to make sure that we're able to get a debt deal done and do it at a decent rate. And I think that's really where we're kind of starting the process.

And then with regards to that, how do you think about -- because right now, those are second lien, how do you think about secured versus unsecured? What kind of capacity do you want for additional liquidity through revolver or just any potential additional secured capacity? How do you think about that as well?

Yes. I mean, I think we've -- we have an ABL that's the first lien secured by our assets in the U.S. and in Germany and it's a max of $275 million right now. I think we're comfortable with that. But we're continuing to grow, and our working capital with the distribution business has increased a bit because it extends the cash cycle. So I think liquidity is good. I'm not -- I don't have to tell this group that. So we're looking at what makes sense relative to our next refinance. And I think we're comfortable with the second lien notes and we'll look at the market and see really what makes the most sense. The ABL is a nice liquidity feature for us and we've got working capital that supports it. So I think right now we're -- we like the structure that we have. We'll look at the market and see whether or not it makes sense when we do refinance to increase that liquidity.

I guess looking to the future outlook. It's been quite an interesting economic environment. I think we've been talking about a recession for the last year. We've been waiting for it. It does feel like maybe on the industrial side, things maybe slowed down between 2Q to 3Q but you do have quite a few kind of these macro trends, a lot of federal programs coming onboard. Kind of what's your maybe high-level outlook moving forward? The pluses, the minuses, you're global -- maybe most of us have more of a U.S. focus but just maybe high level kind of talk about the various trends you're seeing.

I think long term for the crane business, I'm very optimistic about it and it's really driven by those macro trends. And I think we'll have bumps in the road to get there. In particular, we're dealing with one now in Europe and residential construction is anemic right now in Europe and we see that impacting our tower crane business. Like I said, I think that's a near-term issue that we're working through. Long term, the demand for housing in Europe is strong but I just don't think anybody is investing right now because of the dynamics. And so again, from a macro trend standpoint, I think it's a positive but near-term headwinds. From a U.S. perspective, we continue to look at where our dealer inventory is and monitor that. Our backlog is strong in the U.S. and we feel good about it. But generally election years, we start to see some slowdowns when the Infrastructure and the CHIPS bills start to spend, we'll see. We've not really seen much of that right now. So again, from a long-term perspective, very optimistic. Not sure how '24 rolls out. Like I said, we're going to likely enter '24 with a pretty strong backlog. We entered Q3 with a strong backlog. So I think, again, long term, feel really good about it. I'd be remiss if I didn't mention the opportunities in the Middle East. Saudi Vision 2030 is real. There's ground being broken for NEOM, the City of the Future and Trojena, which is a ski hill that's being built. And those projects, we're really excited about. And again, there's going to be build up to that. So I think long term, I'm very optimistic about where we are and that's why we felt comfortable updating our aspirational targets and going from $2.5 billion to $3 billion in revenue. And like I said, some of that will be driven by acquisitions but some of it's going to be market growth as well.

You kind of made -- you were talking about the U.S., and I think you mentioned you're looking at the dealer inventory levels. I guess, from our perspective, we're very downside focused and everyone has been, again, worried about a recession. What are some of these like indicators you look at that kind of give a warning to downturns? I don't know what you call, like a canary in the coal mine? And what are you seeing in some of those indicators that you typically foresee a downturn?

So I mean, quite honestly, the U.S. market has been more stable than we would have expected just when you look at both inflation and interest rate. Our product is capital intensive and most customers would need to borrow in order to buy. So interest rates, we thought was going to slow the market and it's been strong in spite of that. It's really difficult to look at one item relative to the crane industry and say, yes, that's the canary in the coal mine, as you suggested. There have been times, like I mentioned, the residential construction in Europe. There have been times where that's been slow but the market was still strong because of the commercial construction. So it really isn't one item. And quite honestly, a lot of it is the discussions with our dealers and our customers to understand the confidence they have in the market. And that's where, I think, once the spending starts with infrastructure and once I think interest rates in Europe come down a bit, or the government does something around residential housing, I think that drives the confidence for our customers to feel comfortable about reinvesting in their fleets and reinvigorating the crane business.

Yes. I mean, I guess maybe one more thing is, you said you're not seeing this federal spending right now but it's clearly out there. People keep on talking about it. It's -- I mean, I get that's another thing that we've been talking about for years. But it sounds like maybe it's trickling in right now and that should help kind of lead to your growth in your side. I guess how about the rental firms, the firms that kind of have these cranes and rent them out. What are you hearing from them? And what's the structure of the rental? I mean, I know you mentioned one large customer. I think they seem to be one of the larger leaders in the space and they seem to be talking about maybe some better pricing discipline, let's say, in kind of making a healthier market. I guess what are you hearing from kind of the rental firm side?

Yes. I think utilization has been good. Is it the best ever? No. But utilization has been good. Rates have been good in the U.S. So I think that's driving some of that market where it's okay right now. And so I think we're -- I think that aspect of the rental side is helping buoy the market and we feel good about it. When I look at the rental and I know we have our foray into the rental market but really where we do rent to rent or rent to own. So we rent to the big rental houses as a supplement to what their fleets look like. For instance, if they're going on a project that needs 20 cranes, they may have 10 of them in inventory, they may want to purchase 5, they may want to rent 5 from us. And that's really how we look at the rental fleet and utilization has been good in the U.S. I mean in Europe, like I mentioned on the tower crane side, again, that market's driven -- it has dried up a lot because of some of these issues and utilization is down and rates go down. And so it's what you'd expect in the rental market around demand and where construction projects are.

On the crane equipment side, what's the competitive landscape right now? And maybe how it's changed over the years?

Yes. So I mean I would say that from a competition standpoint and if you look at our product line, I would say we're either 1, 2 or 3 as far as the competition goes. Obviously, a strong dollar does impact pricing. And when we look at some of our competitors, that manufacture outside of the U.S. they may have a benefit from the FX rate. So we're definitely mindful of that. There's been, Tadano acquired some of the Terex assets. I think that was a good thing. However, the Japanese yen has been pretty weak relative to the dollar, which benefits them from a pricing standpoint. So when I look at the dynamics relative to our competitors, I mean they're all really good competitors and I think we are as well. And one of the things that I know I'm proud of, since I've been at Manitowoc, is our quality. And like I said, this Cranes+50 also allows us to be closer to our customers, allows us to service them better and really understand what they need and we can allocate our capital and our new product spend to answer what our customers need.

And like a better life of ownership kind of experience as well. Yes.

Exactly.

Maybe one more thing. There's been a number of articles and we've seen this in some of our other industrial companies of Chinese competitors essentially, government essentially kind of pushing to more of like an export driven. Are you seeing anything along those lines? The Chinese competition, has it increased in the recent -- because of that big push? Are you seeing anything along those lines?

Yes. I mean, in certain areas of the world, we're not able to compete with the Chinese, quite honestly. I mean, as I mentioned, it's heavy capital, a lot of debt, customers will borrow to buy our products. So if a competitor is backed by the Chinese government and they offer 2 years interest free and all sorts of other stuff, we can't really compete with that. With that said, I think our quality and our brand and really the service side, I think, sets us apart from the Chinese competitors. One of our strategies is to grow our Belt and Road presence, in particular, in the Middle East. So competing with the Chinese in the Middle East on the tower crane side, is something that we do. But our partner there -- and we manufacture in China, quite honestly, for that customer base. And we've got one of the largest tower crane rental houses in the world. That's our dealer in that area. And we feel really good about the products that we have and the quality that we have and how we're servicing the business to make us competitive with the Chinese.

And that's where that relationship kind of helps you in that market and kind of around the world in a better competition.

Exactly.

Okay. That's all the time we have. Please, everyone, let's thank Brian for speaking about Manitowoc. Thank you.

Thank you, everybody.