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

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

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's second quarter 2024 financial performance and business update as outlined in last evening's press release. Participating on the call today are Aaron Ravenscroft, President and Chief Executive Officer; and Brian Regan, Executive Vice President and Chief Financial Officer. Today's webcast includes a slide presentation, which can be found in the Investor Relations section of our website under Events and Presentations. We will reserve time for questions and answers after our prepared remarks. [Operator Instructions] Please turn to Slide 2. Please note our safe harbor statement in the material provided for this call. During today's call, forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, are made based on the company's current assessment of its markets and other factors that affect its business. However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings. The Manitowoc Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or other circumstances. And with that, I will now turn the call over to Aaron.

Thank you, Ion, and good morning, everyone. Please move to Slide 3. Before jumping into my update on the crane market, I would like to provide some color from our Crane Days event in May. First and foremost, it was a very successful event with over 850 customers and dealers visiting our Shady Grove campus. We hosted attendees from 18 countries and we showcased 35 cranes, garnering excellent feedback. It takes an enormous team effort to pull one of these events off, a huge thank you to the team involved and a big thank you to our customers and dealers that showed up in force. Although there was plenty of banter regarding the next 6 months around the impact of the presidential election cycle, I had multiple customers tell me that they see a wave of infrastructure work on the horizon in the U.S., and they expect a strong market for the next several years. While not reflected in all the public data, crane folks are actively quoting projects for road work, bridges, rail, power generation and power transmission. And of course, everyone is seeing incredible momentum to build data centers to support the AI boom. These centers will consume massive amounts of electricity, and folks see this as a potential second leg of demand. Unfortunately, however, we haven't started to see this good news translate into orders yet. The current operating environment remains very challenging around the world. For sure, the geopolitical environment and high interest rates are taking their toll, and elections around the world have created even greater uncertainty. Consequently, customers are slow to move forward on orders. In addition, issues such as parts shortages and shipping vessel disruptions have improved since the peak of COVID era, but they surely haven't gone away. To recap the second quarter, orders were down 22% year-over-year and total backlog ended the period at a still strong $836 million. Please turn to Slide 4. Starting with the market overview in the Americas, the mobile crane industry remained solid with good utilization. Many of the big crane rental houses are talking about buying new iron and our quote logs are very strong. Nevertheless, this positive momentum hasn't yet resulted in customer purchasing activity. First, many customers are struggling to find crane operators. I had multiple customers tell me recently that they can't grow their fleets until they can find additional operators. Second, we, as well as our dealers, have seen an abnormally large number of requests for RPOs or rent to purchase deals. I speculate that folks are hesitant to lock in the current interest rates with the expectations that rates will decline. As I've stated many times, the crane industry always slows down as we approach a U.S. election. We clearly saw this in our orders during the second quarter, and I expect to see more of the same in the third quarter. Moving to dealer inventory. Current levels in the U.S. are mixed. Rough terrain and all-terrain cranes have been at the high end of the range for several quarters. On the other hand, boom truck dealer inventory is at low levels. In conclusion, crane operators are clearly gaining confidence in the business and interest in ordering new cranes is strong. At this point, however, we need to get through the election and any reduction in interest rates would help. It sure feels like a crane renaissance, particularly in the U.S., is just around the corner. Turning to Europe. It was a tough second quarter. As if the Ukrainian situation wasn't enough upheaval in the region, snap elections and a general concern for previous coalition governments in the U.K., France and Germany have led to more uncertainty. Starting with mobiles, although orders were surprisingly light during this period, train activity at large crane rental houses remained strong. Similar to the U.S. situation, everyone is talking about large infrastructure projects for energy and rail. While the local daily crane activity has been okay, the continued slowdown in residential and nonresidential construction markets, combined with an unclear political environment and higher interest rates, are making it harder and harder for smaller crane rental houses to make purchasing decisions as they look forward. In terms of the European tower crane market, I'm hopeful that we're at the bottom. New crane orders were down 21% year-over-year, and adjusted EBITDA was roughly a $14 million headwind in the quarter. Looking forward, I don't expect any major news in the third quarter given the nature of the summer months in Europe. The fourth quarter should give us some indication of what 2025 will look like. My gut says that the best that we can hope for is a slow recovery. In the Middle East, although there's been some negative reports in the press on project postponements, quoting activity remains extremely high, particularly in Saudi. Orders were slightly up year-over-year. While many pundits are skeptical of Saudi's current cash flow, we need to keep in mind the immense scope of Saudi Vision 2030. Even if Saudi adjust projects over time to address its cash flow situation, it's important to keep in mind that projects like Trojena are underway and the 2029 Asian Winter Games are only a couple of years away. Moreover, Trojena is more than just a ski hill, it's multiple massive projects, of which the centerpiece is a 2.8 kilometer manmade lake that requires building 3 large dams. The main dam will be 145 meters high and 475 meters long. This is a huge engineering feat. In addition, luxury companies such as Raffles Hotels and The Ritz-Carlton have begun to make commitments to build accommodations. The transformation of Saudi will surely have its ups and downs, but it's underway and happening. Moving to Asia Pacific. I recently returned from a 2-week visit to the region. The local China market remains very muted without much new news to report, and this continues to overshadow the region. In addition, delays in the South Korean semiconductor facilities and commercial construction projects throughout Southeast Asia have contributed to the regional slowdown. It was good, however, to see that Vietnam and Hong Kong are starting to turn the corner, and I'm optimistic that South Korean market will begin to turn in 2025. In Australia, customer sentiment is very similar to the U.S. Train activity is good and excitement is starting to grow around the 2032 Olympics. The customers are slow to place orders as they juggle high interest rates and wage inflation. Please turn to Slide 5. The most exciting news from trip to Asia was our China team's progress on our large tower crane strategy. From a product standpoint, we've sold 14 MCT 1105s, which was the first large crane that we launched last year. We erected the prototype MCT 2205, which is currently being tested, and I saw several prototype components for the MCR 815, which will be erected in the fourth quarter. To manufacture these massive cranes, the team has held several kaizens, including our annual global kaizen, to increase our physical capacity and to improve our overall productivity. A big thank you to [ Zhang Huaxi ] and his team. On the left side of this slide, you can see some pictures of the area in the factory where we retrofitted the plant to meet the lifting requirements for the big cranes. On the right is a picture from our recent global kaizen, which was focused on improving our flow, hitting material presentation to increase our output. Turning to our aftermarket business. It continues to do well considering the softness in the global tower crane market, which underscores that our strategy is working. Our non-new machine sales in the second quarter were $147 million, only slightly down year-over-year. During the quarter, I visited our MGX Phoenix and Salt Lake City branches, and I was extremely impressed by how these teams are servicing customers such as the local mines through superior field service support. A big thank you to Robert Thomas and Leon Cornaby, our branch managers and their teams. I think this is a good point to summarize where we sit for the balance of the year. Orders were lower than anticipated in the second quarter and I expect order levels to remain depressed until we get through the U.S. election. After weighing the lower demand with our elevated inventory, we adjusted our build schedule to support our year-end free cash flow target. Although this decision will negatively impact our short-term financial performance, which is reflected in our updated guidance, it will better position us as we enter 2025. With that, I'll turn it over to Brian.

Thanks, Aaron, and good morning, everyone. Please move to Slide 6. During the period, we had orders of $428 million, a decrease of 22% from a year ago, bringing our June 30 backlog to $836 million. The lower order intake was primarily in our Americas and European businesses. While midterm and long-term customer sentiment remains high, the prolonged higher interest rate environment and the political uncertainty around the world has negatively impacted the near-term demand. Net sales in the quarter were $562 million, a decrease of 7% from a year ago. As it relates to our expectation going into the quarter, we missed our net sales significantly. This was driven by 4 major items: number one, parts shortages; number two, logistics and vessel disruptions; number three, a variety of customer financing issues; and number four, lower-than-expected demand for certain products. Our non-new machine sales were $147 million during the quarter, slightly down year-over-year. This was a great accomplishment considering the European tower crane market is at 2009 levels. After adjusting for charges related to the EPA legal matter, SG&A as a percentage of sales was 14%, and up 120 basis points year-over-year. This was primarily driven by lower sales in the period. Our adjusted EBITDA for the second quarter was $36 million. The adjusted EBITDA margin was 6.4%, a decrease of 360 basis points from the prior year. European tower crane business continues to be the major headwind, with the year-over-year impact to adjusted EBITDA of $14 million. Our GAAP diluted income per share in the quarter was $0.04. On an adjusted basis, diluted income per share was $0.25, a decrease of $0.50 year-over-year. Please turn to Slide 7. We Net working capital ended the quarter at $517 million, 24% as a percentage of trailing 12-month sales. The main driver for our increase in working capital continues to be inventory driven primarily by the sales miss in the second quarter. As Aaron mentioned, we reduced our 2024 build schedule, which will take effect in the second half to help us achieve our year-end inventory target. Moving to cash flows. We generated $11 million of cash from operating activities during the quarter. Capital expenditures were $13 million, of which $6 million was for our rental fleet. During the quarter, we repurchased roughly 478,000 shares for $6 million, effectively buying back our [indiscernible]. In the second half, we will opportunistically look to repurchase additional shares while managing our leverage. We have $29 million remaining under our current authorization. Our cash balance was $38 million and total liquidity was $226 million at the end of the quarter, relatively unchanged from the first quarter. Our net leverage ratio was 2.8x, which is a reflection of the lower trailing 12-month EBITDA and the higher working capital. As it relates to our debt, our high-yield notes are due in April 2026. And [indiscernible] to provide specifics, we continue to evaluate our options. Please move to Slide 8. When we set our budget, we expected difficult comparisons in the first half as a result of the slowdown in our European tower crane business. We also assumed a slight rebound in this part of the business in the second half and expected strong mobile demand throughout the year. At this time, it's pretty clear that the European tower crane business will remain at low levels for the remainder of the year. In addition, mobile crane orders across our segments have tempered. As such, we've adjusted our full year 2024 guidance as noted on Slide 8. Net sales of $2.175 billion to $2.25 billion (sic) [ $2.225 billion ], adjusted EBITDA of $125 million to $140 million, adjusted diluted earnings per share of $0.45 to $0.90, free cash flows of $30 million to $50 million. With that, I will now turn the call back to Aaron.

Thanks, Brian. Please turn to Slide 9. Entering the year, we knew that 2024 would be an uphill battle, particularly after a great 2023. While the year hasn't played out as expected, I'm very encouraged by the resilience of our non-new machine sales and the growing positive sentiment in many of our core markets. And although we haven't seen the European tower crane business turn the corner yet, as John Templeton said, bull markets are born on pessimism and grow on skepticism. Regardless, Manitowoc is a significantly better company today than when we became a stand-alone crane company 8 years ago. The Manitowoc Way, combined with our Cranes+50 strategy has transformed the company, and we are still in the early innings of the game. I would remind everyone that since we launched Cranes+50, we've grown our higher margin, less-cyclical aftermarket business by 34%. By any standard, that's a great accomplishment and puts us in a much better position to drive shareholder value long term. With that, I'll open it up to questions.

[Operator Instructions] Your first question comes from the line of Steve Volkmann with Jefferies.

So kind of interesting sort of near-term, long-term dichotomy here, because it feels like things really sort of zagged on you in the quarter here. So I guess my first question is what really changed in the last 90 days that really moved this so aggressively? And the second thing is, Aaron, it feels like you're actually more optimist of sort of the out-years, and I'm curious what's pivoted there that's made you kind of more optimistic if I'm reading your tone right.

Yes. I mean we still continue to have all these big opportunities for large infrastructure projects. I mean you saw yesterday, there was a bill that came out for, I think, $2.2 billion for power transmission. So when we talk to folks in the business, I mean, we -- talking about power transmission specifically, in our dealer in the Northeast total states, see work in that space for the next 10 years potentially. So I mean these big bills are finally starting to come through, and those big activities also are big generators of crane activity. So long term, we remain optimistic. I think that hasn't changed. It's good to hear that the crane operators are actually starting to see some of this activity, which we hadn't really seen or heard much about. But in the short term, really, it's the election curves, as I see it. I mean business just sort of tapped off in May and it's still really been depressed. I mean our July orders were $121 million, just to keep it in perspective. So -- and of course, with all of the things that we've seen in the U.S. election and interest rate discussions in the last couple of weeks, I think that just really hurts confidence in the short term for people to pull the trigger on new orders.

Okay. All right. Anything to call out sort of on competitive dynamics or price cost, any headwinds there we should know about?

Yes. I mean on Asia Pac and in the Middle East, where we compete with the Chinese, that definitely has gotten more aggressive. So there's been a little bit of price compression. In terms of our normal Western markets, I wouldn't say anything has changed.

Yes. I'd say just it was nice to see the Bank of Japan raise interest rates and the yen strengthened a bit, but it's still a pretty high. And so from a competitive standpoint, that's definitely still impacting us.

Your next question comes from the line of Mig Dobre with Baird.

I apologize I'm a bit sick here, so hopefully, you can hear me okay. I guess my first question, just a little bit on understanding the cadence here for the back half 3Q versus 4Q, you had to adjust your production and we understand that. But is there a more pronounced effect in 1 quarter versus the other? And what's the right way to think about margins also?

Yes. seasonally, Q3 is always our weakest quarter. So I'd say that's definitely going to still happen, in particular in Europe. And obviously, the tower crane business continues to be soft for us. So Q3 is going to be a lower quarter than Q4. Q4, we tend to be a bit stronger. So just from a cadence standpoint, I'd expect Q4 to be higher revenue, higher margin quarter than Q3. And we don't -- obviously, we don't give quarterly guidance, but I'd say just directionally, that's what I would expect.

Okay. Okay. And then maybe, I guess, to follow up on Steve's questions about the tone, Aaron's tone longer term. And I don't know maybe to challenge that a little bit, I guess, if we're -- if we're looking at what we've experienced here in, say, 2023 and into 2024, this period has really been some of the strongest level of activity in nonresidential construction in the U.S. that we've ever seen. The manufacturing vertical has grown materially because of mega projects. Even on the public side, we have seen very, very robust spending in street and highway in '23. And all of this is now decelerating in '24. And certainly, the starts seem to be pointing to lower levels of activity. So I guess I'm curious on 2 things. First, why do you think we haven't seen a more robust level of ordering and crane demand despite construction being as good as it's been? And then how comfortable can we be with this notion that from current levels, there's going to be yet another leg up, yet another reacceleration that can support demand? And I'll leave it there.

Yes. So first of all, with respect to commercial construction, if you go back to '16 and '17, it was up 20%. Meanwhile, crane orders were flattish. I mean that was a pretty weak period for us. We got a lot of questions during those days about that level of activity. So -- and there's no real strong correlation when we look through the data relative -- to the crane business relative to nonresidential segments. So yes, we definitely see the data is unfavorable there, which was more favorable. Relative to why did we not see stronger demand, I think that's largely driven by the interest rate environment in the last 12 months. So longer term, there are still lots of these big projects that have not been executed. I mean it's taking forever to get permitting for these big projects. And if you look overall, rental -- the fleet age still remains in that mid-teens at all the large crane rental houses. So at some point, that has to be addressed.

And we've said in the past that our customers buy on confidence. And we had Crane Days during the quarter and the sentiment was very positive. As Aaron mentioned, we visited a customer in the Northeast, and there was huge positivity coming out of it about these projects and really the extent of what they see as demand. So you can look at all the data and, as Aaron mentioned, we don't have -- we've not seen any correlation between our order rates and that data, but it's really about customer confidence, and we see it as pretty darn positive.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

This is Clay on for Jerry. A quick question on the rent-to-purchase options. How high are those relative to normal levels? And then what are the typical conversion rates around the rent-to-purchase that is interesting to see if the levels are higher there than normal, if we can those going to improve on the conversions once we get past the election or if interest rates change?

Yes. That's much more anecdotal in terms of having data to specifically answer your question. But I mean, in a normal course, there are certain crane rental houses that just like to do RPOs as part of their financing. So that normal has changed where you've got a lot of folks who normally just buy the cranes, they are actually asking for RPOs. I'd say it's a discussion that comes up almost every single day or single orders.

Yes. Yes. Even with some of our dealers, we know that they do RPOs as well.

Yes, that they do RPOs, yes.

And we -- again, anecdotally, we just equated to the fact that they don't want to commit to purchase if they feel like interest rates are going down, and it feels like interest rates are coming down. So I would anticipate kind of in line with the election cycle that post-election, there should be more repurchases than rent to own.

And separately, how big of an impact were the parts shortages you called out in the quarter? And what could non-new machine sales have been assuming a normal supply?

Yes. I'd say -- I listed out about these 4 different impacts to our quarter based on where we forecasted. And when you look at across book-to-bill, commercial logistics and execution, with parts shortages being part of execution, it's about 25%, 25%, 25%, 25%. So it's sort of even. And our internal miss during the quarter was just under $100 million.

Your next question comes from the line of Steven Fisher with UBS.

Just to follow up on the last question there about the parts shortages and other operational challenges that you mentioned. What kind of visibility do you have to any improvements in those areas?

Yes. I mean the commercial items and the financing is something that we always it's something we always have to manage through because they're big expensive pieces of assets, and that's a process that's just gotten worse. And I think that will continue probably the remainder of the year, that we'll continue to battle getting to make sure we have all the paperworks. Of course, the banks are also asking for more information than they had in the past. In terms of parts shortages, the [ 6,000 ] parts on GMK, it only takes one to stop the crane, and we still have as many shortages as we had a year ago, I'd say.

And we're still seeing for certain -- for our boom trucks, some chassis issues and things like that. So that's an area where demand has continued to be strong, yet there's issues with parts and chassis.

Okay. That's helpful. And then just a couple of quick clarifications. Did you have any order cancellations or deferrals during the quarter? And from a pricing perspective, are you expecting any pricing declines year-over-year in the second half of the year?

Yes. We had one crane that was canceled, but it was -- I wouldn't say that was abnormal. That happens from time to time. So I'm not too concerned around cancellations. And in terms of pricing, I mean, I think where we compete with the Chinese will continue to be aggressive. But in terms of the core product lines in the West, I don't expect any degradation in the near term.

[Operator Instructions] Your next question comes from the line of Tami Zakaria of JPMorgan.

So 2 quick questions. One is, I think I remember last year you -- in one of the calls you mentioned that cranes are now, call it, 20% plus more expensive because of cost inflation, and then you add on the increase in interest rates, so that whole cost burden sort of dampened demand relative to the prices we've seen for crane pre-pandemic. So I was wondering, can you update us where we are now in terms of pricing, including the financing cost for cranes? What I'm trying to understand is what degree of rate cuts is needed for cranes to see a pickup in demand again?

Yes. I mean I would say it hasn't really changed from a pricing standpoint. I mean you have to do the math, I mean, you had 0% to 1% interest rates a couple of years back, and now you're talking 5%, 6%.

So you'd have to go back to when we actually set it and updated the model. But like over the last year, I mean, you could look at what interest rates have done and do the math. But I think part of it is just that expectation that interest rates are going to come down, so why would you do it. I mean when we talked about the U.S. in particular, where we were surprised to see order rates stay as strong as they were because of those interest rates and because of those dynamics.

I think the much bigger issue we have right now is certainty. I mean the election is -- turned into the election situation and the worse continuing in Ukraine and the Middle East. So until we get some certainty around those items and even the interest rates, we don't really know where we're headed. So...

Got it. Got it. That's helpful. And then the other question is non-new machine sales, I think I heard you say it was down a bit in the second quarter. How did that trend versus your original expectation? And do you expect non-new machine sales to stay down for the rest of the year?

Yes. I think we're pretty proud of where we are from a non-new machine sales perspective, in particular with the tower crane business where it is. There's -- they are definitely down in tower cranes, but not as far down as where you'd expect it relative to where the new machines are. So I think it's around where we expected, a little bit shorter really based on some timing on some used machines. But year-over-year, the down is really related to our towers business.

There are no further questions at this time. Mr. Warner, I turn the call back over to you.

Thank you. Before we conclude today's call, please note that a replay of our second quarter 2024 conference call will be available later this morning by accessing the Investor Relations section of our website at manitowoc.com. Thank you, everyone, for joining us today and for your continuing interest in The Manitowoc Company. We look forward to speaking with you again next quarter.

This concludes today's conference call. You may now disconnect.