Good day, ladies and gentlemen, and welcome to The Manitowoc Company’s Second Quarter 2019 Earnings Call. Today’s call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the call over to Mr. Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead, Sir..

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

With me today are 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 under events and presentations.

We will reserve time for questions and answers after our prepared 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 I will now turn the call over to Barry..

Thanks, Ion, and welcome, everyone. Our sales growth in the quarter was primarily driven by the North American market due to increased shipments into the commercial construction, utility and energy end markets and we benefited from improved pricing.

Our aftermarket business in the Americas remain very strong and contributed to the year-over-year sales growth. This quarter marks our ninth consecutive quarter of year-over-year adjusted EBITDA margin improvements. These results were accomplished to strong operational performance and our continued implementation of the Manitowoc way.

We’re however observing a broader softness in global markets as trade disputes and other macro-economic factors continue to create uncertainty. Additionally, U.S. and European construction markets are slowing and U.S. rate counts have declined. All these factors are negatively impacting customer sentiment.

Despite the headwinds, we remain steadfast in our efforts to manage what we can control. Strong cost containment, ongoing caissons to improve our productivity, new product development and a growing effort to get closer to our customers in order to increase our aftermarket share.

Despite these challenging times, we remain committed to the principles of the Manitowoc way to continually improve our financial results. I’ll now turn the call over to David to walk us through the financial results and updated guidance..

Thanks, Barry and good morning, everyone. Let’s move to Slide 3. Net sales were $505 million for the quarter which represented a $9 million or 2% increase. On a currency adjusted basis, net sales for the quarter increased $23 million or 5% year-over-year.

The increase was driven by higher shipments in North America partly offset by lower revenue in the Middle East. Our non-GAAP adjusted EBITDA on the quarter was $53 million versus $38 million in the prior year of 42% increase. The current quarter adjusted EBITDA includes a $9 million benefit associated with the settlement of a legal matter.

This amount represents a recovery of administrative expenses that were recorded in previous periods as part of adjusted EBITDA. In addition, global pricing initiatives, favorable mix and cost reductions all contributed to the strong second quarter adjusted EBITDA performance.

GAAP net income in the quarter was $46 million or $1.29 per diluted share as compared to $10 million or $0.27 per diluted share in the prior year. Second quarter net income included a $25 million benefit from the settlement of a legal matter. I just mentioned $9 million or $0.26 per share was reported as a benefit in administrative expenses.

The remaining $16 million or $0.43 per share was reported in other income. In addition second quarter 2019 net income included restructuring expenses of $3 million predominantly related to headcount reductions in India and Europe.

Adjusting for the $16 million settlement reported in other income, restructuring expenses and the related tax impact, non-GAAP adjusted net income for the quarter was $34 million or $0.94 per diluted share, an improvement of $20 million or $0.54 per diluted share as compared to the second quarter of 2018.

Cash flows provided by operating activities on a GAAP basis were $32 million for the quarter. The generation of cash in the quarter was driven by strong net income in the receipt of funds from the legal matter previously discussed.

Partially offset by investments in working capital primarily related to the timing of shipments in the quarter and increased inventory levels. We have several initiatives underway to right-size our global inventories with current demand. Barry will comment on these initiatives shortly.

As of June 30, our total liquidity was $340 million with no borrowings outstanding on our ABL revolver. The net debt to adjusted EBITDA ratio was two times. Our capacity and low net debt ratio provides us with ample capital to execute on our growth strategies while meeting ongoing operational needs.

As we announced last quarter, our Board approved a $30 million share repurchase program. During the second quarter we purchased approximately 473,000 shares for $7.4 million. Our second quarter orders of $372 million resulted in a 14% year-over-year decline, 12% on a currency adjusted basis.

We continue to see our order rates slow especially in our mature markets reflecting our customers’ cautious approach to uncertain market conditions. Turning to Slide 4, we have updated our 2019 full-year guidance to reflect our first-half results and current market conditions as follows.

Revenue of approximately $1.88 billion to $1.92 billion, adjusted EBITDA of approximately $140 million to $160 million, depreciation of approximately $35 million to $37 million, restructuring expenses of approximately $10 million to $12 million, interest expense of approximately $29 million to $33 million excluding debt refinancing cost, income tax expense 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. First of all, I'd like to thank our team for delivering a very strong first half of the year. Moving forward, we do have some headwinds. Orders have started to temper and the second half mix is not as favorable as the first half.

If I had one disappointment in the first half of the year, it was the growth of our working capital particularly our inventory. We have three major initiatives in place to reach our year end targets for inventory.

Number one, we are aggressively managing our used trade in stock that is accumulated as a result of competitive dynamics in the current market. Number two, we are executing our new product introductions that begin to ship in the second half of the year which will have a dramatic effect on our current inventory levels.

Number three, we're adjusting our build schedules in our supply chain to match current market conditions. As we noted on our last quarter call, our new capital structure unlocks exciting new options for long-term profitable growth to reach our stated goal of becoming the world's leading crane company.

We now have the ability and flexibility to pursue acquisitions to grow Manitowoc in a number of ways. As I mentioned last quarter, the acquisition targets need to provide us with the ability to continue to expand our margins while providing stable recurring revenue streams.

We continue to evaluate opportunities and will remain resolute in our disciplined approach to deploying our capital.

As far as our outlook is concerned while current market conditions and geopolitical activities remain in the forefront of all the thinking, we remain resolute in executing on our four strategic initiatives being growth, margin expansion, innovation and velocity.

I believe over the long term that our future remains bright and we remain committed to expanding our margins to 10%. With that Greg, please open up the lines for questions..

[Operator Instructions] And first from Jefferies, we have Stephen Volkmann..

Good morning guys..

Good morning, Steve..

Barry, can you just say a little bit more about what you're seeing relative to the sort of end markets and we're obviously seeing this fairly broadly, but I'm curious specifically if there's certain segments that are kind of more concerning than others or if you actually have any growth still anywhere just any color like that would be great?.

Yes. I mean, there are a lot of factors that are affecting the things that affect our customers buying decisions. We continue to hear people thinking about the election. We hear a lot of talk about China and the affect of China's devaluation of one is having we hear about tariffs. We hear about Japan and Korea, Brexit keeps raising its ugly head.

So, all those factors when you put them into a global economy, really is showing signs of slowness and lack of confidence just about everywhere in the globe. But I will say that if you look at our order rates in the quarter, Europe by far decelerated the most.

The Middle East continues to virtually be non-existent although there are a lot of programs that are continuing to be discussed. Within Asia-Pac we're doing very well and continue to see growth and not only in China, but in places like Vietnam as well as Australia..

That's helpful and then just on your build schedules that you said you've adjusted, can you just give us a sense of those adjustments in sort of the quantity as we think about exiting the year?.

Yes. So what we do at the beginning of the year for instance, if we're manufacturing our 80s in Germany, we pick a number and say this is the number we're going to manufacture for the year based on our plan and then we get the supply chain geared up, we get the plant geared up, we get the people geared up.

And then, if we have to take 20 or 30 out of that plan by looking at current market conditions halfway through the year, we have to adjust the supply chain first to ensure that their shipments to us match our current needs in the plant.

But we also have to adjust the amount of people that we have in the plants operating the machines and doing the assembly in order to ensure that our inventory targets for yearend are met..

Maybe just can you give us a sense of how much below deliveries you'll be producing, just roughly?.

We do not intend to build inventory. So I would say that our build rate exiting the year will match our current levels of demands..

Thank you..

You're very welcome..

And moving on we have Jamie Cook with Credit Suisse..

Good morning Jamie..

Good morning. I guess two questions. One here, how we should think about the order trajectory for the second half of the year just given the weakness that we're seeing.

So if you could talk to that just sort of over the next two quarters and whether we should expect normal seasonality I guess would be my first question? And then, you also did mention obviously wanting to reduce inventory. I'm not sure if I missed this, but can you tell us what the actual target is to reduce inventory by year-end? Thank you..

Yes. So Jamie, with regard to the first question, seasonality wise Q4 we run a winter campaign in Towers. So we would anticipate normal seasonality where Q3 orders are going to be lower and Q4 orders will pick up because of the seasonality as well.

With regard to the inventories, we don't give particular targets, we kind of look at our inventory turns and internally, we have internal metrics that get better on a year-over-year basis. There is no doubt that as Barry mentioned.

We will be adjusting our build schedule which also affect what I'll say is our factory overhead absorption in the quarter. So what we want to do is, we want to come out and match our inventory levels with what I'll say, is the projected market conditions going into 2020..

So Jamie, we expect to take $80 million out of inventory between now and the end of the year..

That's very helpful. Thank you. I'll get back in queue..

You are welcome..

And moving on we have Jerry Revich with Goldman Sachs..

Good morning everyone. This is [Indiscernible] on for Jerry..

Good morning..

So you guys have had really strong margin expansion year-to-date around 300 bps year-over-year in 1Q and 2Q and your guidance embeds, let's say about 150 bps of expansion in 3Q, 4Q.

I guess two parts, can you kind of speak to what's driven the strong expansion in the first half and then can you give us the puts and takes about what's tempering in the back half in terms of mix and other dynamics you're seeing?.

Yes. In the first half, we had very strong execution in our plants and we were also very successful in holding on to the pricing that we put into effect in the fourth quarter of last year. We expect to remain disciplined in that approach.

However, it all depends upon how irrational some of the competition comes whether or not we'll be able to hold that. But it's certainly our intention to hold that as time goes on. With regards to the mix in the first half and second half, I already described that we have an inventory reduction plan of $80 million.

Part of that inventory reduction plan as I said in my prepared remarks includes a level of used equipment that we've accumulated as a result of doing some deals according to current market conditions.

We have to liquidate that over the course of the second half of the year and as you can imagine, they use cranes that we take in old trade were not going to get the types of margins that we would normally get from a brand-new crane.

You have anything to add David?.

Yes. And apart from that I'd say the only other item is the seasonality associated with the sales that we're looking at first half, second half as well. But Barry had all the highlights that are the main drivers of why we're seeing the difference in the operating margin percentages..

And then, on pricing obviously been a bright point particularly in aftermarket based on that and what you guys just step through.

Can you kind of give us an idea of where pricing is strong around the globe and maybe in light of your comments just now Barry, where you're seeing maybe some pressures?.

Well, pricing we felt like in the Americas, we were way behind what the value we are providing to the marketplace with our new innovation, our new products. For the North American market a substantial portion of what we have developed over the course of the last 2.5 years was designated for this market.

Those being our new RTs, being our new truck mounted cranes, being the investment that we've put into our boom truck product line; all those we expect that if we're listening to our customer and providing them with superior value and superior performance over the competition then we should be able to get a premium for that and that's our philosophy and as long as we continue to try and innovate the industry which we're doing, we got plans to introduce five to six new cranes in the second half of the year.

We'll start shipping some of the innovative products that'll get to the market in the second half of the year. So customers can start to see that for instance, there will be shipping for the first time in the second half of the year, a three axle 165 ton RT. That's not been done by us in the past.

We resisted that but our customers have asked us for it and now we'll start shipping it in the second half of the year. So we're focused. We remain resolute and we're going to try to hold on to as much as we possibly can. But, I will say that most of the pricing activities that we enjoyed in the first half of the year have been in the Americas..

Understood, thank you..

You are welcome..

And moving on from JPMorgan we have Ann Duignan..

Maybe you could give us a little bit more color on what you are specifically seeing in the U.S.

and the Americas in terms of how the quarter ended up versus your commentary that customers are becoming increasingly anxious?.

Yes. I think the Americas performed below our expectation in the second half of the quarter from an incoming order standpoint. I can directly attribute that to the sentiment that exists out there with all the issues surrounding China and tariffs and oil prices and the effect of the Middle East on oil prices in the U.S.

There's just a pause I would say because utilization in the Americas remains very strong. Rates as far as we can tell are remaining. Cranes are working and in a normal cycle we would expect that in the second half of the year we see a rebound in that..

But I think you're saying now that you sit here in early August, we're not in a normal environment and likely things are probably worse today than they were a month or two ago?.

I would say from a customer sentiment about pulling the trigger on making an investment, I agree with you a 100%. From the underlying market conditions and demand for cranes, I don't believe that's degraded at all in the quarter..

That's helpful and then under used equipment inventory liquidation, is there a risk that you will have to take a loss on those sales and if yes, would they be material or they're so few of them it's not important?.

So Ann, typically unused, they will be at lower margins than we enjoy for new products, but you're going to have the mix issue that we've talked about in the cranes, but we mark it so that it's a market value machine. So no, we don't expect losing money on those used equipment.

It's just that we will not enjoy the typical margins that we have and most of our inventory unused is within Europe..

And it's currently reflected in our guidance..

Correct. .

Perfect, thank you. And if I can just one final quick one, Barry you were pretty vocal and pretty bullish on an imminent type acquisition, last quarter you even described what kind of mix you were looking for etcetera, etcetera.

Could you just update us on, are we still looking at something being imminent or did something disappear during the quarter?.

I guess when you're doing an acquisition, you should be very careful about using the word imminent because there's nothing really I mean that word is like today right.

And I should have known better to say the word imminent because quite frankly I know it takes a while to negotiate and fully understand what the potential acquisition is going to do to your overall business. And the answer to that question is, we are actively pursuing multiple targets.

We are negotiating with multiple targets and I'm looking so forward to being able to release that press release at some point at the end of a day saying that we've done our first one.

But, I remain resolute and I remain very disciplined in the approach that we're having with regards to capital and where we get the best return is where we will deploy our capital..

So never call it imminent until the deal is done?.

And imminent was not a good word, I admit that. It's a little over-aggressive but that's just who I am..

Well, I think that's a fair call. So I leave it there. Thank you..

You're welcome..

And next from RBC Capital Markets we have Seth Weber..

Hi guys..

Good morning Seth.

How are you?.

Good morning..

I'm very sorry Operator, we cannot hear..

Hello?.

Yes, we are here but we are having a difficult time hearing you. You are cutting out. Now I can..

Is that better? Sorry..

Yes, much better, thank you..

Sorry about that. Yes I know, sorry Barry.

So nice job on the margins in the quarter, my question is really in a scenario where revenue is call it flat to down next year, do you think you could still get call it a 100 basis points improvement and EBITDA margin next year?.

Absolutely. We do..

And then, I guess, I noticed the restructuring expense number for this year came down a little bit and I'm just given all the kind of the description that puts and takes in the end markets. I'm curious that's just a timing hiccup or how are you thinking about needs to restructure further given the market dynamics? Thanks..

Yes. So Seth, our guidance on the restructuring cost has come down because from a cost standpoint our execution on restructuring has been less costly than we anticipated. So that benefit is now rolled into the guidance..

We have not changed anything on our restructuring program..

The program is unchanged..

Right and it really relates to social programs out because most of this stuff takes place outside the U.S..

Could I just slide another one in.

On the aftermarket growth you guys talked about, can you just size that for us, how big of a percentage of the business is it today and kind of how fast is it growing?.

Yes. So I mean obviously, we've always been around that 20% category. I'd say our growth in the aftermarket has been in North America. I'd say our European and Asia-Pac business has been flat. However, I think that overall, we've been able to increase our margins in the aftermarket products as well..

So that's growing I don't know is it high single low double-digit kind of an aggregate or it's not a fair way to think about it?.

Yes. We look at it in a full year because you're going to have puts and takes with large orders in the parts business, so we look at it 18% to 20% typically. But, we are off on a year-over-year basis in both our margins and in our dollars..

Thank you very much guys. Appreciate it..

You are welcome..

[Operator Instructions] Next we have Steven Fisher from UBS..

Thanks. Good morning guys.

Wondering if you can talk a little bit more about Europe? What you saw happen in the quarter as it unfolds because it sounded like back in May things were pretty good coming out of [MoMA] so kind of where did you see the fall-off and maybe if you could talk a little bit about sort of by product category, is it more weakness in towers, all terrains? Would you differentiate between vertical and horizontal construction what you're seeing there? Thanks..

Yes. In Europe, it really truly boils down to France. France was extremely slow because of just a number of political factors that have happened. We are continuing this quarter to monitor that very closely. But I will say this, our orders in the quarter for Europe although they decelerated were in line with our expectations.

And as far as particular categories are concerned, I will tell you that from a towers perspective that continues to be where we expected and maybe a little higher than we expected especially going into the season that we're going into with regards to large vacation times.

I will say that I thought mobile was a little softer than what we had expected particularly with the new products that we introduced at MoMA. So we have to watch that very closely..

That's helpful.

So as you think about sort of the second half of the year in Europe, are you anticipating that orders would be up year-over-year down or flat?.

Flat to up in saying that where we are..

And then, I guess similarly in North America, is there any differentiation that you would make in terms of public sector versus private sector in terms of that now I assume that the hesitation and trigger pulling is more on sort of private markets but this morning what do you differentiate there if anything?.

Yes. I mean I think our dealer inventory continues to be healthy and we're at a good position to capitalize when the market conditions become more resilient. So, I think we're in pretty good shape in North America, we still have a great backlog that we have to execute on in the second half of the year. But we just have to watch it very carefully..

Okay. Thanks a lot..

You're very welcome..

Okay. Next we have Mick Dobre with Baird..

Hello?.

Mick, if you can hear us, you may be on mute or unable to hear online..

Can you hear me now?.

Yes, now we can hear you..

Oh, my goodness. Great. Good morning. I just wanted a little more color on North America, Barry, if you would.

How demand has been progressing there through the quarter and what are you hearing from your customers going forward?.

Well, as I mentioned, dealer inventory's healthy and they're positioned for the inevitable confidence coming back. I think as you look at utilization, it's extremely high and continuing to approve quarter-over-quarter.

So, the customers I talk to just say that they have this feeling in their gut that they need to hold off and pulling the trigger till some of these other issues get worked out. But it I think the fundamental underlying market conditions particularly in North America remain very strong for clients..

Okay, that's helpful. And then, maybe going back to that question that was asked on margin, I'm trying to sort of understand the moving pieces here. I presume that your input costs are coming down, you're talking about good pricing that you're getting in the market still.

So, on that comment that you're able to you expect to be able to expand margins even in a more lack luster environment. What are some of the things that you can control and that you expect to be doing into next year that can add maybe a little more confidence to us that margin target the margin goal of yours is achievable if you would..

Well, one of the things that we really stepped up our effort on and we haven’t really talked too much about it is low country sourcing. We have a dedicated team that is working extremely hard to allow us to source things in a much more effective manner than we have in the past. That continues to provide me great confidence about the future.

Also, as I continue to visit all of our plants on a global basis, and we still have many triggers to pull with regards to the Manitowoc way to improve our overall throughput and our overall production capabilities. That remains confidence in line and I'm sure David has a few more things that he'd like to have..

And so Mick, I think generally speaking, Barry hit the big one on the inventory cost obviously commodity prices regarding steel have come down albeit in the last week or so they've spiked up at different levels.

We buy steel based upon a variety of methods embroiling averages in arrears and some of the steel we buy is price fixed for a period of time as we have ordered.

So, there's a number of dynamics in that approach but at this point in time we do believe that we've covered everything for the year and we believe that we can make continual efforts going into 2020..

Good, thank you..

You're very welcome..

[Operator Instructions] Okay, alright. And it appears that we have no further questions from the audience. I'd like to turn the floor back to Ion Warner for any additional or closing remarks..

Thank you, Greg. Before we conclude today's call, please not that a replay of our second quarter 2019 conference call will be available later this morning by accessing the investor relation section on 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..