Earnings Call Transcript - MTW Q1 2024

Operator, Operator

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

Ion Warner, Senior Vice President of Marketing and Investor Relations

Good morning, everyone, and welcome to the Manitowoc conference call to review the company's first quarter 2024 financial performance and business updates, 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 & 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. 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'll now turn the call over to Aaron.

Aaron Ravenscroft, President and Chief Executive Officer

Thank you, Ion, and good morning, everyone. Please turn to Slide 3. Today, I'd like to start with my update on market conditions. Our orders for the first quarter were up 6% year-over-year. Total backlog ended the period at a strong $971 million. In the U.S., crane activity around the country remains strong. Utilization and rental rates continue to hold up, and although the short term is a bit mired by the election cycle, the overall outlook remains positive. With this perspective, I recently spent a day with the owner of a large crane rental house who's been in the business for more than 50 years, and he told me that he's seeing more work coming than he's ever seen. Of course, we all see the announcements around new semiconductor projects, but this fellow indicated that data storage centers, rail, and power generation were driving his regional market. It will be interesting to see how this plays into decision-making over the next couple of quarters, but I view the medium and long-term outlook in the U.S. favorably. Turning to Europe, the power crane market remains very challenging. Our machine orders for tower cranes decreased 34% during the first quarter of 2024. Our data suggests that the tower crane market is operating at 2009 levels. In spite of this difficult environment for machine orders, our aftermarket sales have held up relatively steady. The CECE or Committee for European Construction Equipment recently published their annual economic report. The report suggests that the overall European construction market will stabilize in 2024 and start to recover in 2025, driven by government investment in renewable energies and industrial infrastructure. In addition, there's a huge housing shortage, and we have already seen some of the large crane rental houses start to sell off their older assets outside of the region. Finally, I would add that the comparables should start to get easier in the third quarter, which is normally the basis for a recovery. There's no doubt that mortgage rates have been far more inelastic in Europe than they've been in the United States. The current mortgage rate in France is around 4%. I believe that even a modest reduction in these rates would provide some relief and a basis for recovery in the residential end market. As it relates to mobile cranes, demand in Europe is stable. We have surely seen a wide variation of behaviors from customers across Europe, but on the whole, activity is positive. Italy and Poland have been particularly good for us, and we saw some green shoots in France during April. Utilization remains good at the crane rental houses, and folks are actively managing their fleets. Heading into the next couple of quarters, we have a pretty strong order book, which is always a good sign. Moving to the Middle East, our orders for the first quarter increased more than 10% year-over-year. Quoting activity remains at an all-time high, driven by investments in Saudi Vision 2030 and Qatar's North Field expansion project for natural gas. Although the timing of big orders isn't always easy to forecast in this region, the strong demand is broad-based in nature, and we expect this to continue for the foreseeable future. Not surprisingly, however, Chinese competition in the Middle East has started to heat up, and we're starting to see pricing pressure. Lastly, Asia Pacific remains dominated by the storm clouds over China's construction market. Although we've seen some bright spots in Hong Kong and Singapore, in South Korea, the tower crane market has slowed, but it's been offset by good demand in the mobile crane market. Finally, Australia continues to progress steadily. Please move to Slide 4. Just to briefly touch on The Manitowoc Way, I visited our French facilities a couple of weeks ago, and they've never looked better. In spite of the volume reductions, the team remains extremely motivated, and I'm very proud of how they continue to manage the things that they can control in a very difficult environment. On this slide, I've shown three great achievements at our Charlieu factory. The Manitowoc Way always strives to eliminate forklifts from our plans to improve safety. Given the size of our parts, there isn't always a good alternative. As you can see in the picture on the left, however, the team is now using some very basic equipment to move large masses from the shop floor, which eliminates the hazards created by forklifts. The center picture shows a drum that the team developed in three months. This will be the heart and soul of the large 64-meter ton luffing crane that the team is developing to serve major Saudi projects and future European nuclear projects. Lastly, the picture on the right is a remanufactured mass for a large top-slewing crane. A key differentiating factor for Potain cranes is that we use a pin system to erect and assemble masses, which is significantly faster than the typical bolt system that our competitors use. These pinholes wear out over time. Since the team started on this initiative roughly 12 months ago, they've been able to reduce our costs for remanufactured masses by 56%. This is quickly becoming a viable aftermarket product offering that we've dreamed about for more than 25 years. With that, I'll pass it over to Brian for a financial update.

Brian Regan, Executive Vice President and Chief Financial Officer

Thanks, Aaron, and good morning, everyone. Please move to Slide 5. From an overall perspective, the first quarter results were in line with our expectations. During the period, we had orders of $554 million, an increase of 6% from a year ago, bringing our March 31 backlog to $971 million. The higher order intake was primarily driven by the European mobile business. Net sales in the quarter were $495 million, a decrease of 3% from a year ago. The year-over-year decrease was primarily driven by continued softness in our European tower crane business. This impact was partially offset by the Americas and the European mobile crane business. Our non-new machine sales were $145 million, relatively flat year-over-year. MGX, our in-house distribution business, continues to grow its aftermarket. However, used sales in our traditional OE business were down modestly. SG&A expenses were $76 million or 15% as a percentage of sales and relatively flat year-over-year. Our adjusted EBITDA for the first quarter was $31 million, a decrease of 31% year-over-year. The adjusted EBITDA margin was 6.3%, a decrease of 260 basis points over the prior year due to unfavorable product mix. The European tower crane market continues to be a headwind with a year-over-year impact on adjusted EBITDA of approximately $20 million. This was partially offset by incremental shipments from the rest of the business. As we have stated in previous calls, tower cranes sold into Europe represent our highest margin product. Unfortunately, our European factories also have the least flexible overhead structures, resulting in weak absorption of fixed costs as volumes decline. Our GAAP diluted income per share in the quarter was $0.12. On an adjusted basis, diluted income per share was $0.14, a decrease of $0.32 from the prior year. Please turn to Slide 6. Net working capital ended the quarter at $509 million. Although our accounts receivable ended higher than we anticipated due to the timing of the Easter holiday, the main driver for our increase in working capital is inventory. While we have our normal seasonality with line starts relative to our build schedule, the single largest growth in inventory, whether it be year-over-year or versus year-end within our internal distribution channel, our build schedule for these businesses was more heavily weighted in the first half, giving us more flexibility to ship products in the second half. We expect to work our inventory down significantly by the end of the year. Moving to cash flows, we used $31 million of cash for operating activities during the quarter. Capital expenditures were $12 million, of which $6 million was for our rental fleet. We ended the quarter with a cash balance of $32 million. Total outstanding borrowings under the ABL increased $14 million during the quarter, leaving $74 million outstanding. Our net leverage ratio was 2.4x, well under the targeted 3x, and total liquidity was $233 million.

Aaron Ravenscroft, President and Chief Executive Officer

Thank you, Brian. Please move to Slide 7. Next week, Manitowoc is holding a Crane Days event at our Shady Grove factory, where we expect to host more than 1,000 visitors. This is always a great opportunity to showcase our new technology, our latest aftermarket initiatives, and, of course, our new cranes. We'll display 34 machines at the event, of which 5 will be new unveilings. Over the last couple of quarters, we've been very focused on integrating our dealer acquisitions and growing our aftermarket, and I think this is an appropriate time to remind everyone just how much we've done in terms of innovation without much fanfare. Since 2021, we've launched 29 new or refreshed crane models, and here's a few highlights. Firstly, we developed GROVE CONNECT and POTAIN CONNECT telematics solutions with a suite of remote diagnostic and troubleshooting capabilities. To date, over 2,500 cranes have been equipped with this capability. Next, we launched two new truck-mounted cranes and a new boom truck that specifically serve the U.S. taxi market. Aligned with our breakthrough initiatives to drive new product development for all train cranes, we've launched 9 new or refreshed models, and we continue to push forward to commercialize models with our hybrid technology. With respect to our breakthrough initiatives to grow sales in the Belt and Road region, our team in China has launched 8 new tower crane models in record time. Most recently, we launched the MCR 325 and MCR 625, which are key luffing cranes to serve the Belt and Road region. Lastly, for European tower cranes, we launched 7 new models. Most notably, we started to incorporate CCS, our crane control system, into our Potain luffing cranes, which provides better load charts and simplified operations. In addition, we've begun to introduce our Evy crane. This is our next generation of self-erecting cranes, which meet the new European safety standards and come with added features, like POTAIN CONNECT, providing extensive fleet management functionalities in remote or local troubleshooting capabilities with a smartphone. In closing, as we expected, the slowdown in the European tower crane business is dampening our profitability in the short term, and we will continue to battle this situation for the balance of the year. Fortunately, although it's difficult to see in our results, the early gains from our CRANES+50 initiatives to grow our aftermarket are helping us manage through this cycle. On one hand, our aftermarket business in the European tower crane market is proving to be far more resilient in spite of the depressed market for new machines. On the other hand, our dealer acquisitions from a few years ago continue to grow and exceed our expectations. We didn't expect to break the impact of the crane cycle in 3 years where our CRANES+50 strategy is bearing fruit. Overall, orders remain very strong, and we see good signs of pent-up demand around the globe. We're already seeing projects move in Saudi Arabia, and we are slowly but surely starting to see signs that the U.S. infrastructure and semiconductor builds are moving. Concurrently, many of the large crane rental houses around the world have been very focused on reducing the age of their fleets for the first time in my 8-year tenure. In the meantime, we remain focused on controlling the things that we can control, which include: number one, leaning into The Manitowoc Way to reduce our inventory and generate cash; number two, executing our CRANES+50 strategy to get closer to our customers and increase our aftermarket; and number three, doing what we've always done, engineering, manufacturing, and selling the best cranes in the industry, which we will showcase at Crane Days next week. Before we hand it over to the operator, I would like to thank the Manitowoc team. Over the last couple of years, it seems like we've drifted from one crisis to the next, whether it be COVID, inflation, unexpected geopolitical calamity, or a bridge accident that shuts down our main port of entry into the U.S., the team always steps up and tackles the problems head-on. I would just like to express my heartfelt gratitude to our employees for their endless commitment and dedication to the company. Thank you. With that, operator, please open the lines for questions.

Operator, Operator

And your first question comes from Jerry Revich with Goldman Sachs.

Clay Williams, Analyst

This is Clay on for Jerry. Just quickly, with supply chain performance, it seems to be normalizing. Moving forward, could decremental margins be relatively muted given improved productivity offsets the lower volumes in the cycle?

Brian Regan, Executive Vice President and Chief Financial Officer

Yes, I think definitely seeing a tailwind related to supply chain. But the bigger impact, as we talked about in the prepared remarks, is the tower crane business. And we'll see that from a comp perspective in the second quarter as well. It starts to normalize in the second half. So I think that's the bigger kind of issue that we're working through right now.

Clay Williams, Analyst

And then as a follow-up, just can you update us on the strategic priorities over the next 12 to 18 months, particularly just around capital deployment?

Brian Regan, Executive Vice President and Chief Financial Officer

Yes. I think, again, as we've talked about in the prepared remarks, inventory management over the next 9 months is going to be really important. We did see the normal seasonality kind of spike in Q1. But trying to get through some of that inventory, particularly in the distribution business over the next 9 months is really the priority.

Aaron Ravenscroft, President and Chief Executive Officer

And our CapEx remains $60 million.

Operator, Operator

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

Mircea Dobre, Analyst

Can you maybe recalibrate our expectations relative to your prior guidance? And maybe help us as to how we need to think about Q2 relative to Q1 as well.

Brian Regan, Executive Vice President and Chief Financial Officer

Yes. As we said, Q1 was in line with expectations. We didn't update our guidance intentionally because we think our guidance is still the right range at this point in time. The sensitivity around the tower crane is we don't have much of a backlog, and we're really living hand to mouth right now makes that wide range still appropriate.

Mircea Dobre, Analyst

Okay. So you're reiterating guidance, but it sounds like the tower crane headwind is still there. So as we're thinking about Q2, specifically, I mean, normally, we have a seasonal ramp in revenue, margin is also a little bit better. Is that still to be expected? Or is this more of a back half story at this point?

Brian Regan, Executive Vice President and Chief Financial Officer

Yes. I believe the impact in Q2 regarding towers will be somewhat similar to what we experienced in Q1, perhaps slightly less, but overall comparable. The second half should return to normal.

Mircea Dobre, Analyst

Great. Regarding the discussion on tower cranes, I understand that the data in the industry can be somewhat unclear. However, one of your Japanese competitors released some information indicating that the tower crane market has been exceptionally strong in 2023, possibly seeing the best demand since 2008. I’m interested in your view on this. Do you think we might be experiencing an investment cycle in tower cranes that suggests this downturn could extend beyond just a year, potentially lasting multiple years? Or do you see something entirely different happening for your business?

Aaron Ravenscroft, President and Chief Executive Officer

Yes. I don't know of any Japanese tower crane companies, so I'm not sure who you're referring to. With respect to the European market, it's broad-based. Everyone we speak to is saying the same thing. If you dig into that CECE report, there's some more data in terms of the downturn last year. Given that we're at 2009 levels, we'd like to believe we're at the bottom and feel that we're at the bottom. But there is a bit of normal seasonality on the tower crane business, too. I mean folks like to take their cranes in the beginning of the first quarter to really sell them or rent them in March and April. So we're already sort of through that cycle. And of course, everything is slow in the third quarter in Europe. So I think from a seasonality standpoint, we're really looking to the fourth quarter before we get a good view. And that's normally when we have our winter campaign, and we start to see orders for folks for the next fall.

Operator, Operator

And your next question comes from the line of Stephen Volkmann with Jefferies.

Stephen Volkmann, Analyst

I'm going to stay on tower cranes, if it's okay. It sounds like, I think you've said a couple of times, that the comps sort of get easier in the second half. Could towers be flat in the second half? Is that the right way to think about it? Or we just don't know.

Aaron Ravenscroft, President and Chief Executive Officer

Well, we're sort of hand to mouth since we don't have much backlog, but that's generally sort of how we view the second half of the year.

Brian Regan, Executive Vice President and Chief Financial Officer

Yes. The reason for the wider range is that a significant order could impact it. We're optimistic, but that's our current situation.

Stephen Volkmann, Analyst

And if towers are flat, maybe my words, not yours, but that should sort of reduce a bunch of kind of year-over-year margin headwind because of the margin mix issue.

Aaron Ravenscroft, President and Chief Executive Officer

That's correct.

Stephen Volkmann, Analyst

Okay. Great. And then Crane Days, Aaron, is that like a catalyst for orders, do you think? Or is this just sort of getting the word out?

Aaron Ravenscroft, President and Chief Executive Officer

Yes. I mean anytime we have that many customers, we're hopeful to get some orders. As you can see, we've got plenty of inventory. So we're eager to start pushing machines next week. Normally, there are always some things that have been in the works, and folks bring those orders to the event. But the real intent is to just get out and be communing with our customers.

Operator, Operator

And your final question comes from the line of Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

So I also have a follow-up question on tower cranes. That's been weak for a few quarters now. What KPIs are you watching to give any signs of inflection there? Basically, the reason for my question is, is there any catalyst you're looking forward to which would drive stabilization in trends in the back half? What needs to happen in that market?

Aaron Ravenscroft, President and Chief Executive Officer

Yes. So I think to get us going again, we need to see interest rates come down a little bit. So that's probably the first thing that I've been tracking. Secondly, you can look at the residential permits in Germany and France. I think there's good data out there, so we're tracking that as well. But as always, in the crane business, it's always built off of confidence. So I think until you start to see those metrics move, it can be tough for folks to really get a lot of confidence to start spending CapEx again.

Tami Zakaria, Analyst

Understood. Just to clarify, regarding residential permits in Germany and France, if there is an uptick in permits tomorrow, do your orders typically follow at a delay, or can you expect to see an increase in orders within the same quarter?

Aaron Ravenscroft, President and Chief Executive Officer

Yes, there is a delay. There is always some timing involved. If we think back to a couple of years ago when it started to decline, we didn't respond immediately. So there is certainly a delay.

Tami Zakaria, Analyst

Got it. If I can ask one more question. Saudi Arabia, I think recent reports suggested that they scaled back some of the mega projects. Can you comment on what you're seeing in the Middle East and whether your long-term outlook for the region has changed based on some of these reports?

Aaron Ravenscroft, President and Chief Executive Officer

Yes, our outlook hasn't changed. I know that they have altered the scope regarding the project timeline. However, I don’t think there is a consensus that the entire scope will be realized, and it certainly wouldn't be completed by 2030. Based on previous discussions, it seems more likely to occur around 2040 or 2045. This is a long-term investment, so there are no surprises for us. That said, all other projects that are not dependent on that are continuing to progress. Therefore, our outlook for the Middle East remains very strong, as reflected in our extensive pipeline.

Operator, Operator

And we will take our next question from Clifford Ransom with Ransom Research.

Cliff Ransom, Analyst

I regret to mention this because I've received quite a bit of criticism about my age. This marks my 52nd year in the business of lifting companies. As we all know, this is a cyclical industry. I appreciate the efforts you've made to mitigate that cyclicality, particularly concerning the balance sheet and new products. However, I'd like to know what recent initiatives you have implemented. I noticed significant changes in France during my visit last month. What actions are being taken throughout the rest of the company, particularly at the highest levels? It's important to promote The Manitowoc Way.

Aaron Ravenscroft, President and Chief Executive Officer

Yes. So I'd say that our real focus these days has been around our aftermarket business and trying to figure out how we can apply our lean tools to an aftermarket business, which has been great. Of course, having distribution, we start to learn more and more about our traditional business and what we can do better to be a better partner to our internal distributors as well as our existing distributors. So I'd say that our main focus is really just dragging it out off the manufacturing floor and into the service locations and to some of our other administrative offices and, of course, around environmental and some of the things we can do to reduce our costs relative to our gas usage.

Cliff Ransom, Analyst

Have you adapted anything in the culture of The Manitowoc Way to make that transition from the factory floor to what we call the corporate land world? Are there any particular success stories or learnings that you've made from things that didn't work well?

Brian Regan, Executive Vice President and Chief Financial Officer

Yes. When I look at the distribution business and the finance organization, they conducted value stream mapping sessions to really look at what impacts and what time they can take out of their process to provide more value to the business and be more of a partner to the business, and that's really on the compliance side. So they spent a few days together to look at their processes and try to identify ways to take out time from that process and really better utilize the system, the finance and back-office system that they use. So I think we had some good successes, but more to go with that.

Aaron Ravenscroft, President and Chief Executive Officer

Yes. I think in terms of challenges, anytime you're trying to standardize fixing cranes, I mean, that's a tough deal. So I think there's a lot of different good ideas floating around the company. In fact, I'm pretty optimistic that AI will give us some tools that will help us become more productive and just more effective at doing that.

Operator, Operator

And there are no further questions at this time. So Mr. Warner, I will turn the call back over to you for any additional or closing remarks.

Ion Warner, Senior Vice President of Marketing and Investor Relations

Okay. Thank you. Before we conclude today's call, please note that a replay of our first 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 continued interest in The Manitowoc Company. We look forward to speaking with you again next quarter.

Operator, Operator

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.