Good day, everyone, and welcome to The Manitowoc’s Fourth Quarter Full Year 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn today’s call over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead..

Thank you, Dave. Good morning, everyone, and welcome to The Manitowoc conference call to review the company’s fourth quarter 2018 performance and our 2019 full year business outlook, as outlined in last evening’s press release.

Conducting the call will be Barry Pennypacker, President and Chief Executive Officer; and David Antoniuk, Senior 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. We will reference these slides throughout the prepared remarks.

We will be sure to reserve time for questions and answers after our remarks. I would like to request that you limit your questions to one and a follow-up, and return to the queue to ensure everyone has an opportunity to ask their questions. Please turn to Slide 2.

Before we begin, 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 statement, whether as a result of new information, future events, or other circumstances. And with that, please refer to Slide 3, and I will now turn the call over to you, Barry..

Thanks, Ion, and welcome, everyone. I’m very pleased to report our fourth quarter results, which showed exceptional performance against very tough year-over-year comps. These results demonstrate that we are a standalone crane company that continue to deliver operational improvements and value creation by utilizing the principles of The Manitowoc Way.

We achieved our seventh consecutive quarter of year-over-year adjusted EBITDA percentage improvement and generated $40 million of cash from adjusted operating activities for the year. These are significant achievements in light of the recent market-driven headwinds.

This was an outstanding team effort by all of us and I would like to thank all of our 5,000 employees for a job well done. For the full year, we delivered 17% increase in sales, along with over 150 basis points of adjusted EBITDA margin improvement.

This is a result of increased crane shipments across all regions, primarily due to recovery in the commercial construction and energy end markets.

The all-too- familiar headwinds such as material costs and tariffs, skilled labor shortages, rising logistic costs and a constrained supply chain were effectively managed and evidenced by the aforementioned EBITDA margin improvement. Looking forward, market conditions are mixed.

However, as I said in the third quarter conference call, we finished the year with a healthy backlog of $671 million and a 11% year-over-year increase. Our U.S. customers continue to be optimistic about planned project work in the end markets they serve.

We are also seeing encouraging rental utilization rates in the U.S., but still well off of historic highs. At the same time, we are experiencing a slower growth rate in Europe after a healthy demand environment in prior years. Presently, we’re cautious in Europe where we saw an order slowdown in the second half of 2018.

Construction data in France and Germany has shown some deceleration and we’re tracking these markets very closely. Despite the challenges in certain end markets, our transformation using the principles of The Manitowoc Way, has us well positioned to drive continued growth and margin expansion in 2019 and beyond.

And with that, I’ll turn the call over to David to walk us through our financial results and 2019 guidance..

revenue of approximately $1.85 billion to $1.95 billion; adjusted EBITDA of approximately $125 million to $145 million; depreciation of approximately $37 million to $39 million; restructuring expense of approximately $12 million to $15 million; interest expense of approximately $28 million to $32 million, excluding debt refinancing costs; income tax of approximately $12 million to $16 million, excluding discrete items; and capital expenditures of approximately $35 million.

With that, I will now turn the call back to Barry..

Thank you, David, and moving to Slide 6. 2018 was a very good year for Manitowoc as we delivered higher sales, positive adjusted diluted earnings per share, a first for us since becoming a standalone crane company and over a 150 basis point improvement of adjusted EBITDA margin under challenging market conditions. Our goal is simple.

We are committed to delivering improved returns to our shareholders by executing on our four key strategic priorities, utilizing the principles of The Manitowoc Way. Starting with margin expansion. I’d like to recognize our team in Wilhelmshaven for their turnaround efforts over the last 12 months.

As I’ve mentioned in the prior conference calls, we made a significant capital investment in this facility to improve its overall operating results. I’m proud to say that in 2018, this facility improved its manufacturing variances by over 50%, while producing 50%, while producing 20% booms – 20% more booms year-over-year.

This is just one example, of the powerful principles of The Manitowoc Way and how they drive improvement in our operations. We are not immune to costs increasing in 2019, albeit at a lower rate. While we continue to fight hard to fully offset these increases through efficiency gains, we decided it was prudent to take additional restructuring actions.

In particular, we’re in the process of streamlining our overall European organization, which we expect to have favorable impact on our SG&A going forward. While I’d love to quantify these results for the year, I’m not in a position to do so as we’ve not reached full agreement with all the associated parties in Europe.

Consistent with best practice, we will inform you on a quarterly basis of our progress and our associated costs. We are also taking actions in other regions, including the U.S. to align our cost base with our go-to-market strategy. Our next strategic priority is growth.

This past November, I attended the Bauma China Trade Show to meet numerous customers and dealers from across the Asia-PAC region. I was encouraged to hear their general positive attitude and sentiment on future demand. And they reaffirmed that our growth strategy in Asia-Pac is working.

It has been my experience over the years that in order to be successful in markets like China, you must develop the products in the region you’re serving to ensure that the costs are aligned with market expectations.

For the first time, we introduced the tower crane developed in China for the Asian market, called the MCT 565, which we launched at Bauma, China to a great reception. We are now in the process of developing an entire range of tower cranes in China for the Asian market, which will enable us to grow organically in the region.

Our third strategic priority is innovation. Our culture of continuous innovation is built around Manitowoc Way using the voice of the customer, process, to bring excellent value to our customers. Nowhere will this be more evident than at the Bauma Trade Show in Munich, Germany, this April, where we plan to introduce six new cranes.

I encourage you to go to our website at www.manitowoc.com to learn more about these exciting new products. I look forward to connecting with our customers at Bauma to further demonstrate that our product revolution is real. Our fourth strategic priority is velocity.

I recently visited our tower facility in Baltar, Portugal, which has been ongoing transformation for over the last 18 months. We’ve completely changed our manufacturing approach at this location by outsourcing noncore activities and focusing on core production processes.

This has led to a 21% increase in units produced in 2018 with minimum capital investment. The rigorous Kaizen, the team has completely changed the flow of the factory and significantly increased our capacity. Much to my surprise, the team is already well ahead on the next phase of the program and I’m excited to see what the team can achieve in 2019.

This quarter was a strong finish to the year. Our expectations for 2019 reflect another exciting year, while global trade tensions and customer demands are at times unpredictable, we are optimistic about the future and our ability to execute our strategic vision as an agile, standalone crane company.

In closing, our results are indicative of a company that’s still in the early stages of transformation. I’ve always said that a LEAN transformation of a company can be compared to a race. The good wins have a tendency to approach the race more like a marathon as compared to a sprint.

Demonstrate quarters of improved financial performance indicates that we are aligning our cost structure with the expectations that we will continue to outperform our peers regardless of the market environment. Please continue to stay tuned for the updates as the Manitowoc Company continues to set the pace throughout the race.

With that, I’ll turn the call back over to the operator to open up the line for questions..

[Operator Instructions] We will hear first from Seth Weber with RBC Capital Markets..

Hey, good morning guys..

Good morning, Seth..

Good morning, Seth..

Good morning. I’m wondering if you could just comment on the results came in better than what we were expecting, and I think a little bit better than what your guidance had suggested.

Can you just comment on where the upside came from? Was it better price cost? Was it better mix? It sounds like execution has been good, but just relative to your expectations, I think you had sort of message on the last call that price cost was going to be pretty onerous here in the fourth quarter and then, again, into the first quarter.

So maybe was that the swing factor or anything else you would call out?.

I try to say in my prepared remarks when I talked about our strategic priorities that our plants are really performing. We are now three years into the transformation of our plants through utilizing the principles of The Manitowoc Way.

And when I look at our global variances and I see what is happening in our plants, we’re getting pleasant upside from as a result of these activities. I truly expect that to continue. Your question about price cost is neutral. We continue to think that in 2019, in our guidance that it’s neutral.

But overall, I would say that the margin improvement, the incremental earnings truly came out of performance in our operations..

Okay, thanks. And then you have a pretty big range for next year for 2019 on the EBITDA side relative to the revenues.

So can you just talk about what are some of the swing factors could be to get to the upper end of the range versus the lower end, I guess, as your – I mean, do you expect mix to change at all through 2019 versus what we’ve seen this year or last 2018?.

I think mix, Seth, is going to probably be about what we expected and pretty much consistent with this year. We’re not expecting a substantial recovery in North America of RTs and crawlers, as we beat that drum to death, I mean, that we’re still waiting for that portion of the market to come back.

So basically for 2019, our mix really hasn’t changed very much. We will have more U.S. than Europe. As for the range, I mean, the uncertainty in the range is primarily Europe.

You’ve got all the things going on with Turkey, you got the yellow jackets in France, you got Brexit, you got all kinds of different factors that are just stimulating demand to be put on hold and moved out some.

So I mean, I think if you really wanted to know the range of possibilities that we take into account in our guidance, recognizing, again, that we are a very conservative management team, it primarily centers around Europe.

David, do you have anything to add?.

No. Seth, I would echo the same comments that Barry made. With the uncertainty at this point in the year a wider range we felt was more prudent than a narrow range and keep adjusting it. So I would suggest that as the year goes – falls into place, we’ll look at that range and narrow it accordingly..

Seth Weber:.

.:.

Thank you..

You are welcome..

And we’ll hear from Ann Duignan with JPMorgan..

Hi, good morning. It’s Ann Duignan..

Yes. Good morning, Ann..

Hi, Ann..

Hi guys. Just talking about the path through innovation, et cetera, et cetera. Zoomlion is making a big splash in the trade magazines around the new facility they built in China for tower cranes and they expect to double their sales of total cranes from about $750 million to $1.5 billion in the near-term.

Can you just talk, Barry, about competition and particularly, some of these Chinese competitors who think they would be gaining strength and really building world-class manufacturing facilities in China for the rest of world distribution?.

Yes. That’s a – that’s an excellent question. And it’s a long and complicated answer, but I will try to do my best. When we segment the market in China, we really believe that 80% of the market is not addressable by our products.

So when we look at the tower crane market in China, in particular, we believe that 20% of the overall demand is demand that the Potain brand has the ability to serve. And when I say it has the ability to serve, it is that these particular cranes are developed with standards that are completely in excess of what the Chinese do.

And when the large international companies that are doing development in China want to ensure that they have the best-performing, highest-quality cranes on their job sites, they look to the Europeans. Now, as I said in my prepared remarks, there is a large market there that we don’t currently address.

We’re not going to develop our products to address that 80%, the full 80%. But even if we are able to address 10% of that in China’s market, it’s pretty much equivalent to the entire market in Europe. So it isn’t a strategic focus for us.

It’s one that’s taken a little longer than what I would have like to have had, but I do believe now that we have the management team in place. We have the engineering capability that we need in order to take full advantage of this wonderful organic opportunity..

And could you address the opposite, Barry, now that Chinese are building European standard manufacturing facilities with European standard product.

What about the accelerating competition from the Chinese players in the rest of the world?.

Where we have seen accelerated competition from the Chinese in the rest of the world has been primarily in Northern Africa and the Middle East. And we’ve never really had a very strong presence in Northern Africa. So, it really hasn’t affected us yet.

The Middle East, I mean, they have a substantial presence in the Middle East, but the overall market demand for product is at such a low level that we haven’t really seen that as a competitive disadvantage at this point..

Okay. And if I could just really quickly follow up on just a point of clarification. Maybe $2 million impairment charge this late in the cycle. Can you explain what that was? And then the restructuring in 2019, you had anticipated being finished restructuring at the end of 2018.

So could you just reconcile both of those, I would appreciate and I’ll get back in line..

Sure, Ann. So with regard to the goodwill impairment, there is a – in the accounting rules, there’s a rule whereby you have to look at your market capitalization compared to the net book value of your balance fee. In the Q3, we said with the deteriorating stock price and the market value of the company we had that there may be an impairment.

And as the stock price continued to decline in Q4, we did the calculation and ended up with an impairment of what we booked into our European segment, a more mathematical calculation than anything. I don’t think it impacts any of the operations or what we’re saying going forward.

With regard to our restructuring, Barry?.

Yes. Ann, I think as a point of clarification, when we said we are pretty much done with restructuring, we really met that toward North America..

Okay. That’s helpful. I appreciate the color. Thank you. I’ll get back in line..

You’re welcome..

We will now hear from Steven Fisher with UBS..

Thanks. Good morning guys..

Good morning, Steve..

Good morning. Just thinking about the 3% revenue growth target for 2019, clearly you mentioned some pricing.

So what do you assume for volumes in this equation?.

Yes, Steve. Generally speaking, when you look at the range, we have a pretty wide range of volume. There is number of factors that are going to impact that. But I would say, if you’re looking at true volume, our anticipated is a slight uptick in volume on a year-over-year basis..

Okay.

And would that reflect sort of up North American, down Europe?.

Correct..

Okay. Next, a bigger picture question here, Barry. I’m curious how you’re thinking about the overall portfolio, the scale of business and M&A, I think, you guys did last quarter. Your intended refinancing would currently – would raise more debt than you currently have.

So just kind of curious how you’re thinking about some of those factors and what might make sense going forward?.

Yes. I mean we really will be in a position after this debt deal is completed to use various options for growth in our earnings going forward. As you know, we are very restricted from doing anything right now as far as dividends are concerned and/or share buybacks and/or acquisitions.

So we want to make sure that as we go through this debt deal, we have the flexibility. And I will say, Steven, that we will look at as always based on current market conditions, where the best deployment of that cash is. I would like to hope that there are opportunities for us to grow where we can add EBITDA.

But also, we have to take into account our current share price when we look at the overall deployment of our cash going forward..

Fair enough. Thanks a lot..

You’re welcome..

And now, we’ll move to a question from Jerry Revich with Goldman Sachs..

Hi, good morning everyone. This is Ben Burud on for Jerry..

Hey, Ben..

Just had a question on orders. So we’re coming off a quarter, where they were down as you guys mentioned 22%, obviously against a tough comp. But still want to on a sequential basis, they were by our estimates 13% worse than normal seasonality.

Can you just kind of give us some color as to how the winter campaign went after what you guys said was a strong October? And then, how is the table set for maybe the first six months of 2019?.

Yes. So, Ben, I think generally speaking, one of the things we talked about is the volume of stocking orders, particularly from our U.S. customers that occurred in 2017 versus 2018 and that was a significant delta over there. I would say the winter campaign performed as expected. We didn’t have any issues with that.

The go-forward, I think the go-forward in orders is the question is there is why we – or the answer is why we have such a large range. We’re waiting to see how the market plays out with all the factors that are influencing in more general global economy.

So I’m not going to comment as to where we think orders are going to be in the first half of the year versus second half, but because that’s the reason we have such a large range in our guidance right now..

Got it. And can you guys give us a sense of maybe what’s embedded in your outlook in terms of new product introductions? So I think last spring, you guys had very strong lineup, you filled bunch of holes in the portfolio. Can you give us an idea of the six to 10, they’re going to highlight at Bauma.

Are those just refreshes, is there anything like what’s new and captivating that could really drive upside for orders?.

Well, what’s new and captivating about those products are that our customers ask for them. And it’s a good mix between mobile cranes as well as tower cranes. One of the biggest opportunities that we see for growth in towers is refreshing the overall line itself from on the higher capacity end.

On the higher capacity end, we have some opportunities to do things that will enable the setup much easier and teardown much easier as well as increase the capacity for these cranes.

I want to be – if you feel like I’m being a little evasive in that comment, you are reading it absolutely perfectly because I don’t want to give everything away that our customers will see at Bauma. But rest assured that this is not just changing the tires, put fancy wheels on and painting them a different color.

These are new products from the ground up that our customers have asked for..

Got it. Thank you..

And now we’ll hear from Mig Dobre with R.W. Baird..

Hey, good morning, guys. It’s Joe Grabowski on for Mig this morning. Question on incremental margins at the midpoint of your sales guidance and the midpoint of your EBITDA guidance, there’s an implied 35% incremental margin.

What are kind of the puts and takes of that price cost mix, operational improvement? How do you kind of think about the 35% incremental in the guidance?.

Yes. Generally the answer is going to be all of those, right. It’s a matter of how well our plants perform. Where the order book takes us. I think from a price cost standpoint, we’re in reasonably good shape, given the current market dynamics. So from that perspective, I think we’re pretty good. It really comes down to where we’re going to be.

And the other part is restructuring. We’re going to be looking at restructuring as an ongoing item and that’s going to impact our bottom line as well. And we can’t talk about it now as to the impact, but stay tuned and in the first quarter, we’ll probably have some updates on that as well..

Got it. Okay. Thanks. And then, my follow-up question would be, on the inventory levels they were somewhat elevated exiting the year impacted free cash flow for the year.

How much of that was perhaps the Tier 4 engine prebuy in Germany or what were some other factors in the inventory levels?.

I would say, the Tier 4, 5 factor in Germany was not material. I’d say generally the increases associated with the increase in production and the output that we have to do. So that’s really the main driver of the inventory. When you look at the composition of our inventory, we think that the composition is improved as well. So we’re in good shape there.

And if you look on the liabilities side, that was offset to a large extent by the increase in liabilities, which is some of the products that we brought in at the end of the year, which is still sitting in payables..

Got it. Okay. Thanks for taking my questions..

Now we will hear from Stephen Volkmann with Jefferies..

Hi, good morning, guys. May be Barry, maybe couple of kind of big picture longer-term type questions. How are you feeling about the 10% EBITDA goal? And I guess, I’m trying to figure out you guys have had some success in making progress there.

Is that number is still the right number to think about? Do you need significant volume to get there? Just sort of reset how you’re thinking about that for us, if you would?.

Excellent question and I’m glad I have an opportunity to talk about that. Yes, believe me, believe me, there isn’t a single day, maybe single hour within this company that, that 10% goal isn’t talked about.

We have encountered some roadblocks that have gotten in our way with tariffs and material change charges that we didn’t anticipate, employee costs that we – that were higher than what we had originally thought. However, that’s no excuse for us for coming off of our long-term target and we’re still committed to that.

I think you heard me talk a little bit more about Europe than what I have in the past. As you know, we’ve closed a major facility and done a very good job, I would say, of restructuring in the North American market, but we’ve only really truly begun our restructuring activities in Europe. And that has been for a number of reasons.

One, and primarily, the driver of that is that the product portfolio quite frankly needed a lot more work than what I had originally anticipated. And so we’re investing in the product portfolio to ensure that we have a long-term company that our customers value and want to purchase from.

But believe me, there isn’t a single minute or day goes by where that 10% goal isn’t talked about and we are not revising that goal..

Okay.

So I guess, we’re looking at something around 100 basis points for 2019, is that the right cadence then to think about going forward?.

As I said, we are a very conservative management team. But as you saw in the guidance, it’s about 100 basis points for this year. That’s correct..

All right, I will leave that one and just add one more and then pass it on. I noticed you said a couple of times and I’m probably super-nitpicking here, but you said independent crane company. And I know you’re probably talking about the old Manitowoc model.

But at the same time, after you pay down this debt or refinance this debt, you may actually be potentially little more attractive to someone else.

So I guess, I’m curious how much it’s important to you to stay independent, whether you’d be interested in potential combinations with other companies down the road?.

I think we are a standalone crane company. We have to continue to look at our strategy going forward as a standalone crane company. And whatever happens in the future, we have to make sure that we’re in a position to capitalize on that.

And by saying that, I mean, that there is no intention internally at all to think that this isn’t going to be a long-term standalone crane company. That is our strategy. We want the ability to grow it. We want the ability to see it become much bigger than what it is today and let’s face it.

I mean, this management team has a very long history of making acquisitions that have been extremely accretive. And to be honest, I wouldn’t be in this role if I thought that, all I had to do or all we had to do was come in, pretty it up and then sell it. I’m here for a long-term.

I bought a lot of stock in the company and I want to see that grow overtime as do our shareholders..

Understood, I appreciate it..

[Operator Instructions] We’ll now take our question from Charley Brady with SunTrust Robinson Humphrey..

Hey, guys. Thanks, good morning, guys. Barry, just a question kind of on a longer term basis. If you look at the SG&A or ESG&A, you got a – done a really good job bringing it down over the past couple of two, three years.

I’m wondering on a long-term basis, where do you see that going to? You’re talking about still doing restructuring in Europe, so there’s obviously something that comes out of there that you alluded to, but I’m just trying to a sense of, is there a longer term target where that as a percent of revenue kind of moves to over time?.

The longer term target I haven’t communicated yet because we’re still developing it. As I said, a little earlier, Charley, we are still in the middle innings of getting our innovation portfolio correct and it takes bodies and it takes minds to get that in a situation that we’re all comfortable with.

But we’re very, very quickly approaching the time where SG&A will be a substantial opportunity for us to grow our earnings. And what I tell you is stay tune for 2020..

Got it. Thanks. And just on the commentary around the Middle East and Europe, just wanted from a competitive standpoint, whenever those markets slow down, you got some private companies out there you compete with, you got some Asian competitors that tend to get irrational when markets get weak in those areas.

I’m just wondering from a competitive standpoint have you seen any of that irrationality start creeping into the market..

Not as of yet. Not as of yet. I expected in the Middle East, but again, I mean, our Middle East business is so low right now that I don’t think it would be detrimental to our overall results as a company if there becomes intense competition there.

So the Europeans are in a situation where they’ve got mouths to feed also and it will become competitive, but as of this point in time, as everyone continues to do what we’re doing and innovate the industry, and at least say they’re innovating the industry, you got to be able to pay for that.

And by decreasing your margins, you’re not going to be able to pay for innovation for the future. So I fully expect and I hope that discipline will remain throughout this cycle..

Actually one more in here.

On the Shady Grove facility, can you give us a sense of where you are on capacity utilization of that facility right now? I know it’s still not optimal until volumes get better, but kind of where is that running today?.

I mean, it’s in the – it’s between 50% and 65%. I mean, it’s still – we have still a lot of capacity in the Shady Grove facility. And those of you who have been there know that.

When you look at what this company used to produce in Manitowoc along with the combination of RTs that were produced in Shady Grove and you add those two together and you look at how much that is still down from 2015. We have a long runway to get that closer to 80%..

Got it. Thank you..

Now we’ll hear from Jamie Cook with Credit Suisse..

Hi, good morning. Just a couple follow-up questions. First, can you talk about what you’ve seen for sort of order trends in January and February and whether your assumption for this year seems with Bauma, that orders – you get some benefit from orders as you generally do, I mean, with trade shows, so if you could start there, that would be helpful.

And then, I guess, my second question just what you’re seeing in the markets, other industrial companies have talked about supply chain issues or higher freight costs et cetera like what your assumptions are as you think about 2019? Thank you..

Yes. With regards to freight costs and other increase that we talked about in our prepared remarks, we are absolutely resolute on making the price-cost ratio neutral. We think that we have already taken that into account with our pricing actions that we’ve already introduced into the market.

So I think from an overall increase in commodity prices as well as freight and/or any other tariffs, I think, we have pretty much taken that into account within our backlog and our guidance for the year. And I’m sorry, what was the second – first part of your – okay, David you go ahead..

So Jamie, just on the order side, I’d start of by saying that orders in Q4 came in accordance with our expectations, right. I mean, we knew they were going to be down year-over-year but – and that’s because for a number of reasons. One month doesn’t make a year as far as order goes when you look at 2019.

I would, again, say that January was in line with our expectations of where we thought we’re going to be. February, it’s too early to tell. But I will say that typically when you do have a trade show, orders tend to shift to that trade show. So it wouldn’t surprise me if we see some orders move out of Q1 into Q2 because of the Bauma Trade Show..

Okay. Thank you..

[Operator Instructions].

I don’t think we see any in the queue..

With no additional questions, I will turn the call back over to Mr. Warner for any additional or closing remarks..

Thank you, Jake. Before we conclude today’s call, please note that a replay of our fourth quarter 2018 conference call will be available later this morning by accessing the Investor Relations section of our website at www.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. Have a good day, everyone..

With that ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect..