Earnings Call Transcript - MTW Q2 2025

Operator, Operator

Good day, and welcome to The Manitowoc Company Second Quarter of 2025 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the call over to Ion Warner, Vice President, Marketing and Investor Relations. Please go ahead.

Ion M. Warner, Vice President, Marketing and Investor Relations

Good morning, everyone, and welcome to our earnings call to review the company's second quarter 2025 financial performance and business update as outlined in last evening's press release. Joining me this morning with prepared remarks are Aaron Ravenscroft, our President and Chief Executive Officer; and Brian Regan, our Executive Vice President and Chief Financial Officer. Earlier this morning, we posted our slide presentation on the Investor Relations section of our website, manitowoc.com, which you can use to follow along with our prepared remarks. Please turn to Slide 2. Before we start, 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 the result of new information, future events, or other circumstances. And with that, I will now turn the call over to Aaron.

Aaron H. Ravenscroft, President and Chief Executive Officer

Thank you, Ion, and good morning, everyone. Please turn to Slide 3. To start, I'd like to express my deep appreciation for the hard work of the Manitowoc team. While the great trade reset continues, I am really proud of how our teams continuously react to the ever-changing tariff landscape and focus on finding solutions to service our customers. During the second quarter, we generated $540 million in revenue and $26 million in adjusted EBITDA. Orders were $454 million and backlog ended the period at $729 million. Our non-new machine sales were $162 million, up 10% year-over-year. In terms of tariffs, during our first quarter call, we were modeling $60 million in incremental tariffs for the year with plans to mitigate 80% to 90% of these costs. Today, we believe the full-year gross impact of tariffs is $35 million. The change in our assumption is due to a combination of lower purchases and a different mix of various tariffs. We expect to mitigate 90% of these costs. Given the fluid nature of the situation and the price elasticity of cranes in the short term, we see a drag on demand in the United States. Moving to the Manitowoc Way. We recently held our annual corporate kaizen at Niella, Italy. For this kaizen, we organized four dedicated teams to focus on enhancing the information and material flow essential to building rough terrain cranes. As always, a good kaizen is a humbling experience. It reminds us that running a production line smoothly is only possible if all of the necessary parts are available exactly when needed. And sometimes that's a big if. The team walked away with a year's worth of action items, but what stood out most was the continued growth in collaboration and teamwork across the organization. It's inspiring to see how we keep getting better together. Also, I'd like to thank Ransom Research and Front Street Capital Management for their valuable participation in the event. Quickly touching on safety, I'd like to recognize our team's steadfast efforts to improve our working environment. For the first half of the year, we achieved a recordable injury rate, or RIR, of 0.67, which is another newer safety record. Our goal is zero, but I'm proud that we continue to make progress towards it. Please move to Slide 4 for my market update. Starting with Europe, we're seeing two distinct market dynamics depending on the country. In the U.K., Netherlands, and France, demand has been slow. In contrast, customers in Spain, Italy, and Germany are showing signs of optimism, and we sense that business is starting to rebound. Across Europe, we've recently seen three encouraging data points. Number one, the U.K. launched a GBP 39 billion housing program for the next 10 years with a goal of building 300,000 homes. Number two, last month in Germany, the government passed a new accelerated depreciation scheme, which complements the EUR 500 billion infrastructure fund that was recently created. And number three, in France, we saw May housing permits turn favorable, up 20% year-over-year. On a product line basis, despite great excitement following the April Bauma trade show, momentum in the mobile crane market moderated during the quarter. At this point, we need to wait until after the summer holiday to get a clear picture of demand. Conversely, however, the tower crane market has continued to be positive. While the market hasn't fully recovered, we still have easy comparisons, which is always the birth of a rebound. During the quarter, our new tower crane orders were up 104% versus the same period a year ago. This is the fourth quarter in a row that we have seen orders improve on a year-over-year basis. Turning to the Middle East, the market continues its dynamic growth with especially strong activity in Saudi Arabia and UAE. During my recent visit to the Middle East, I was struck by the remarkable pace at which infrastructure projects move in this region. Major luxury residential developers like Soba and Binghatti are reshaping the skylines of Dubai. In addition, the Stargate UAE data center project was kicked off outside of Abu Dhabi, starting with a 200-megawatt data center where we won an order for 16 large capacity tower cranes. Upon completion, the campus will span 10 square miles and is expected to host 5 gigawatts of capacity. Likewise, Saudi remains highly active with our local partner playing a key role in several major stadium projects. The overall pipeline remains very strong. Shifting our focus to Asia, China continues to face economic headwinds, and we don't anticipate a meaningful rebound in the near term. Elsewhere, however, sentiment is improving. During my recent visit to Korea, coinciding with the national election, a common view prevailed. Regardless of political preference, the new President is seen as pragmatic and supportive of pro-business initiatives. In addition, renewed interest in the Samsung Fab 5 semiconductor project has boosted confidence. We anticipate the Korean market could regain traction within the next six months. In Vietnam, we secured crane orders for multiple projects this quarter, an encouraging signal of the market reawakening. Meanwhile, in Australia, conditions remain mixed. The Australian dollar has been hovering at 0.56 to the euro, which has hindered the market, but crane activity has been strong with early signs of activity emerging in preparation for the 2032 Brisbane Olympics. Finally, in North America, the market remains in a hold pattern with significant uncertainty around how various tariffs may unfold; both dealers and crane rental houses are delaying purchasing decisions until there is more stability around tariffs and pricing. Overall, crane rental houses remain busy, and we've seen success with some of the bigger players reducing the age of their fleets. This is encouraging for the health of the overall industry, and I remain cautiously optimistic about long-term demand in the region. Looking at the next 12 months, however, I have two views around U.S. demand depending on the time horizon. For the next six months, it's hard to see a scenario where demand accelerates. Crane buyers can afford to wait. And at the moment, they prefer to buy units that are sitting on the ground at pre-tariff prices. If I consider the European reciprocal tariffs, lots of buyers have been hoping that the tariff would drop below 10%. So we'll have to see how customers react to the 15% tariff. On a $2 million all-terrain crane, that's significant money, and rental rates would need to increase to financially justify a buying decision. Moreover, dealers are reluctant to place new orders, and dealer inventory has been declining. Looking beyond the next six months, dealer inventory in the U.S. could reach all-time lows if current trends continue. As a result of the One Big Beautiful Bill, 100% accelerated depreciation has been reenacted. The previous program stimulated demand in December, and this could drive dealer inventories even lower. Point being, dealer inventory could be exceptionally low, which is a classic signal for the market to accelerate at the beginning of next year. Unfortunately, we cannot turn our manufacturing on a dime, and we must align our build schedules with current demand. This adjustment will impact our financial performance in the second half of the year, which is why we are guiding to the low end of our EBITDA range. With that, I'll pass it on to Brian to walk you through the financials before I close with our strategy update.

Brian P. Regan, Executive Vice President and Chief Financial Officer

Thanks, Aaron, and good morning, everyone. Please move to Slide 5. During the period, we had orders of $454 million, an increase of 6% from a year ago, resulting in Q2 ending backlog of $729 million. The higher order intake was driven primarily by our European tower crane business, where new machine orders were up 104% year-over-year. In addition, we saw an increase in our non-new machine orders. As Aaron mentioned, our third-party dealers in the U.S. are reluctant to commit to orders at this time due to the uncertainty around tariffs. For the quarter, this slowdown in demand was more than offset by higher orders in MGX, our wholly-owned distribution business, as end customers placed orders to lock in pricing on in-stock units. Net sales in the quarter were $540 million, a decrease of 4% from a year ago. We missed several deliveries due to supply chain constraints and last-minute commercial delays. Our non-new machine sales were $162 million during the quarter, up 10% year-over-year demonstrating the momentum we continue to build around our Cranes+50 strategy. On a trailing 12-month basis, non-new machine sales were $659 million, another record. SG&A was $87 million in the quarter, up $4 million year-over-year. On an adjusted basis, SG&A was up $9 million year-over-year. Foreign currency accounted for $2 million with the balance driven by the Bauma trade show and other employee-related costs. Our adjusted EBITDA was $26 million, down $10 million year-over-year. This was primarily driven by the lower sales and the higher SG&A. The net headwinds from tariffs in the quarter was approximately $1 million. Our GAAP diluted income per share in the quarter was $0.04. On an adjusted basis, diluted income per share was $0.08, a decrease of $0.17 year-over-year. Please turn to Slide 6. Net working capital ended the quarter at $580 million, up $63 million year-over-year, of which $43 million was due to the payment of the EPA matter in April. Additionally, foreign currency accounted for $14 million of the increase. Moving to cash flows, we used $68 million of cash in operating activities during the quarter, which includes the $43 million payment to resolve the EPA matter. Capital expenditures were $6 million, of which $3 million was for our rental fleet. Our cash balance was $33 million, and total liquidity was $238 million at the end of the quarter. As anticipated, our net leverage ratio increased to approximately 4x. We are focused on bringing our leverage back below our targeted 3x by year-end. Looking to the full year, between the tariffs and the build plan reductions mentioned by Aaron, we have line of sight to achieving the low end of our previously issued adjusted EBITDA guidance of $120 million to $145 million. With that, I'll now turn the call back to Aaron.

Aaron H. Ravenscroft, President and Chief Executive Officer

Thank you, Brian. Please turn to Slide 7. While we anxiously wait to see how the global trade reset plays out, we remain steadfast in our Cranes+50 strategy. During the quarter, we continued executing our strategy to strengthen our aftermarket business. We opened a new service branch near Warsaw, Poland, and we expanded locations in Sydney, Australia; Nance, France; and Nashville. Our culture continues to evolve from being product-focused to customer-oriented. A good example of this is in Australia, where we started to offer aftermarket tires, outrigger pads, and rigging hardware to our customers, providing more of a one-stop shop. Every day, we get better at servicing our customers. In terms of improving our effectiveness as an aftermarket organization, we recently went live with ServiceMax. This system replaces over a dozen different legacy systems. It enhances technician productivity, significantly upgrades our ability to manage service contracts, and reduces administrative overhead. My favorite part of the tool is that it provides us global asset management so we can track every machine we manufacture from cradle to grave. It's a great repository for all of the maintenance and service work on any crane we sell, and it will keep us more closely connected to the iron when it gets traded or sold into the secondary market. Needless to say, ServiceMax is a big leap forward from the legacy ad hoc Excel-based systems our teams previously used. Our CRANES+50 strategy is driving growth in higher-margin recurring revenue streams and creating long-term value for our business. While the turbulent second quarter was hard on the ROE business, our MGX business in the U.S. posted great results. This is proof that our strategy is working. In closing, while the global political and economic situation remains unpredictable, our focus stays squarely on servicing our customers. The better we serve them, the stronger our partnerships become. When conditions improve, we'll be ready. In the meantime, we remain committed to executing our CRANES+50 strategy and creating long-term shareholder value. With that, we'll open the line for questions.

Operator, Operator

Our first question will come from Steven Fisher with UBS.

Steven Michael Fisher, Analyst

It sounds like a very challenging overall backdrop. But just wanted to ask you about the backlog and the cadence of EBITDA for the next couple of quarters. Within the context of that $730 million roughly of backlog, what's the duration of that? Is that all expected to be shipped within this year? Just curious how much coverage you have on your plan for Q3 and then Q4? And then if there's a cadence of the roughly $70 million of EBITDA that you still expect for Q3 versus for Q4?

Brian P. Regan, Executive Vice President and Chief Financial Officer

Yes. Steve, it's Brian. We always have seasonality with Q3 and Q4, with Q4 being the better of the two quarters. From a backlog standpoint, I'd say most of that backlog is expected to ship this year. That's pretty normal when you look at our backlog, with the vast majority of it being for Q3, and then we've got some good coverage in Q4 as well.

Steven Michael Fisher, Analyst

Okay. That's helpful. And then just want to understand maybe a little bit more about the regional dynamics on the orders. It sounds like, obviously, pretty strong orders in Europe. Just kind of curious how to think about the book-to-bill here in the various regions within your sort of overall 0.8-ish, 0.9x. Like was U.S. like an under 0.5x and Europe was kind of north of 1x? How do we think about sort of that regional dynamics on orders?

Aaron H. Ravenscroft, President and Chief Executive Officer

Yes. So with respect to the orders, to me, the main area to focus on right now is the Americas, and we sort of live in two worlds because we have the MGX distribution business, which, of course, they had inventory sitting on the ground that's pre-tariffs. So demand there was really good and business was good. On the other side, the, I'll call it, legacy Americas portion of the business, which is much more dealer-oriented, that's where we're closely tracking what our orders are and what the challenges are.

Steven Michael Fisher, Analyst

Okay. And then just on the tariffs, it sounds like a lower overall impact, but I guess, lower units. I guess can you talk a little bit about the sort of the per unit tariff impact and kind of price versus cost dynamics you're expecting for both Q3 and Q4?

Aaron H. Ravenscroft, President and Chief Executive Officer

Yes. We cannot discuss every single model specifically, as each model varies based on the location of the crane and the origin of the parts. It's a complex mix. Additionally, most of our competitors are based in Japan or Germany, which influences how tariffs are implemented and subsequently affect the customer.

Steven Michael Fisher, Analyst

Okay. And then just lastly for me on the U.S. market. Can you just talk about some of the puts and takes? I mean, it seems like the general message from the broad value chain we're hearing, public sector is still pretty good in terms of demand on the private side, still lots of structural investment in terms of data centers and various other projects. Are you seeing those areas of strength? And is that what's sort of just causing people to buy the units that are pre-tariff, but there's just not enough confidence in that demand going forward to kind of put new orders in without knowing really what kind of the pricing dynamics are going to be? Is that how to think about it?

Aaron H. Ravenscroft, President and Chief Executive Officer

The other element you have to consider is people managing their fleets. And so they can choose to wait and see where pricing ends up. And that's what we're really seeing is folks managing their day-to-day. In terms of actual activity, crane rental houses are busy and positive, and that all looks good. It's just there's so much uncertainty around what the price of a crane is going to be. And as I said on the call, if you got a machine, it's $2 million or $3 million and all of a sudden, it's 15%, and you were hoping it was going to be 5%. That's a pretty dramatic change in terms of expectations. So and then likewise, in order to financially justify, you're going to have rental rates go up. So the market needs to play out in the next six months before we really get a good feel for where we land.

Operator, Operator

Our next question will come from Mig Dobre with Baird.

Mircea Dobre, Analyst

So just to pick up where Steve sort of left it here with his questions. So what's interesting to me is that in the U.S. market, right, I mean, if you're talking about this uncertainty around pricing that is impacting customers, wouldn't that create an incentive for customers to actually order ahead of these price increases and try to be a little more proactive at securing whatever units they have at pre-tariff levels? To me, it would have seemed like Q2 would have been a quarter in which a bunch of that activity could have occurred so that people can actually lock in prices before you really start making your adjustments as the year progresses?

Aaron H. Ravenscroft, President and Chief Executive Officer

If you're shipping from Germany, especially with all-terrain cranes, I believe customers were initially expecting a 10% tariff, but it has now increased to 15%. As a result, many are hesitating to place orders. When shipping items from such a distance, there is more hesitation and apprehension because you cannot guarantee a locked-in price at the time of the deal.

Brian P. Regan, Executive Vice President and Chief Financial Officer

Yes. And for the vast majority of our orders, they're going to include the price adjustment because we knew during the quarter that there was going to be some level of tariff.

Mircea Dobre, Analyst

Okay. So now we have 15% tariffs. What does that do for demand? Your commentary seems more cautious than it was three months ago. Are these tariffs reflected in the $35 million estimate you provided, which is much lower than before? First, how are you offsetting the tariffs? Second, now that customers are aware of the 15% tariff, does this mean demand will be reduced for a long time? Or do you think this is just a short-term adjustment and eventually, customers will adapt, allowing us to return to normal in '26?

Aaron H. Ravenscroft, President and Chief Executive Officer

Yes. I think there are two key factors at play. One relates to dealer inventory, and the other pertains to what crane rental companies are planning to purchase. Our dealers have essentially paused their buying. Eventually, they will run out of inventory and will have to make some choices. From my perspective, this likely needs about six months to clarify. Looking back at July, the volume was roughly consistent with the last three months. This shows that people are making necessary purchases, and if they can afford to wait, which most crane rental companies can due to the nature of cranes, they are being more cautious. Additionally, from a pricing standpoint, there is potential room for companies to absorb the tariffs, although we do not know how this will unfold over time.

Mircea Dobre, Analyst

But how are you offsetting these tariffs, the $35 million? You say you're going to mitigate it at 90%. How are you doing that?

Aaron H. Ravenscroft, President and Chief Executive Officer

Price increases.

Mircea Dobre, Analyst

You're doing that with price increases. Just mathematically, if I'm looking at your Americas revenue and I'm looking at the, call it, $30 million of incremental tariff headwind, that does not appear to be very significant. We're only talking about like 2.5%. So I recognize that I'm basically spreading it across the entire business while only certain products are impacted here. But my question to you would be, does it make sense to spread the tariff impact across all your products and try to sort of minimize the drag on demand? Or are you being sort of very targeted in saying, "Hey, this model is coming from Europe. We're going to put the full boat tariff pricing on this one," as opposed to something that's manufactured domestically?

Aaron H. Ravenscroft, President and Chief Executive Officer

We're very targeted. You have to remember, we have to go through piles of HTS codes for every component that goes onto the local unit. So, and we have to go unit by unit.

Brian P. Regan, Executive Vice President and Chief Financial Officer

And remember, there are different tariffs involved. We mentioned in Q1 the reciprocal tariffs on the whole goods we produce in Europe and sell to customers in the U.S. That's one aspect. Additionally, there are tariffs like the steel tariffs included in our products. We are addressing this, and the percentage of impact varies. For reciprocal tariffs, it will be 15% on those products. For the other items, the effect is less directly related to tariffs and more about price increases.

Mircea Dobre, Analyst

Okay. Yes, I guess lastly for me, and I don't know if this is a question; maybe it's a comment, and you can comment back. When I'm looking at your updated tariff view, it's less bad than it was three months ago, yet your commentary is more cautious. There's a divergence here that I think is at least to me personally, a little bit surprising. So I guess I'll leave it at that.

Aaron H. Ravenscroft, President and Chief Executive Officer

I mentioned during the last call that I am concerned about price elasticity in the crane business. Currently, we are observing that people are becoming hesitant due to the 15% tariffs on reciprocal products. Additionally, the 232 and 301 tariffs are affecting our locally produced items. From my perspective, we are in the midst of the situation and are analyzing how people are reacting. In the previous call, it was more speculative since we lacked sufficient data to accurately predict their response.

Brian P. Regan, Executive Vice President and Chief Financial Officer

And when we gave the information last quarter, we said, hey, this is our expectation based on current demand. We don't know what it's going to do to demand. And we've seen impact on demand during Q2, which is going to impact our full year.

Operator, Operator

And our next question will come from Cliff Ransom with Ransom Research.

Clifford F. Ransom, Analyst

Thank you again for the opportunity to work with your folks in Italy. It was very instructive. Look, after 50 years around the damned lift business, the recovery from cycles and going into downstrokes is very difficult. Let me ask a 35,000-foot question. If you look back, say, 3 to 5 years at Manitowoc and the institution of the Manitowoc Way, what about lean thinking has enhanced your ability to respond to rapidly changing exterior events? What do you think has happened to your culture?

Aaron H. Ravenscroft, President and Chief Executive Officer

Yes. I think a big part of what we've done, if you look back historically, we were very, very vertically integrated. And so we didn't have the flexibility to go up or go down, quite frankly, very easily or fast. So we've done a lot of work on our supply chain in order to have more access to more parts to continue to move, so if we go up 10% or 20%, we can react way faster than we could have, say, 5 years ago or 10 years ago.

Clifford F. Ransom, Analyst

I was really thinking more about what happens internally. Maybe I'm asking a mindset question, which is too hard to answer. One of the things about Lean thinking is that the review process is very disciplined. You tend to discover trends faster than companies that don't use that methodology. Am I barking up the wrong tree here? Or is that something real?

Aaron H. Ravenscroft, President and Chief Executive Officer

No, I think it's 100% real. And what we talk about a lot of times is the feedback from our customers is almost instant. We're in a lot of industry because we talk to the owners of the people that own the crane rental houses or the CEOs because everyone is so involved in their big purchases. So in terms of how we build our build schedules and start tack times and how they run the lines, I think getting that input, we get it pretty instantly. I mean, even this morning, I was getting feedback from customers. So I think that makes a big difference in terms of how we look out the next six months and how we see the dynamics play out.

Clifford F. Ransom, Analyst

Got it. And you talked about making adjustments in the second half of the year to, let's call it, protect cash flow. What specific things will you be doing?

Aaron H. Ravenscroft, President and Chief Executive Officer

Yes. So we took down our build schedules at a couple of different locations. So at Shady Grove and Wilhelmshaven specifically. And it's just dependent on the product line relative. So what we do is we track our backlog, we track the orders, we track the trends and how much dealer inventory is out there, trying to guess where we think demand will be six months from now. So based on where current rates are, we need to start to adjust our build schedules now to make sure that our supply chain doesn't get overwhelmed or overheated as we get into the back end of the year.

Clifford F. Ransom, Analyst

And I got cut off the call twice, but I got reconnected. When you talk about getting your net leverage down, did you, at some point, give us an estimate of free cash flow for the year?

Brian P. Regan, Executive Vice President and Chief Financial Officer

Yes. Our free cash flow for the year is expected to be on the low end of our original range. So we're thinking in that $10 million to $15 million for the full year.

Clifford F. Ransom, Analyst

Okay. And what was your best expectation in the year for free cash flow? Investor Relations section of our website at manitowoc.com. Thank you, everyone, for joining us today and for your continued interest.

Brian P. Regan, Executive Vice President and Chief Financial Officer

When we gave our plan, I think it was $45 million.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Ion M. Warner, Vice President, Marketing and Investor Relations

Thank you. Please note that a replay of our second-quarter 2025 earnings call will be available later this morning by accessing the Investor Relations section of our website. We look forward to speaking with you again next quarter.