Good day, everyone, and welcome to the Manitowoc Second Quarter 2022 Earnings Call. For your information, today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Ian Warner, Vice President, Marketing and Investor Relations. Please go ahead, sir.
Good morning, everyone, and welcome to the Manitowoc conference call to review the company's Q3 2022 financial performance and business update as outlined in last evening's press release. Participating on the call today are Aaron Ravenscroft, President and Chief Executive Officer and Brian Regan, Executive Vice President and Chief Financial Officer. Today's webcast includes a slide presentation, which can be found in the Investor Relations section of our website under Events and Presentations. We will reserve time for questions and answers after our prepared remarks. I would like to request that you limit your questions to 1 and a follow-up Please turn to Slide 2.
Please note our Safe Harbor statement and 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 1 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.
Thank you, Ion, and good morning, everyone. Please turn to slide 3. Our Q3 operating environment was similar to that of the last few quarters. Significant part shortages, labor constraints, logistics disruptions and inflation. I greatly appreciate the persistence and determination of the Manitowoc team We're managing through these difficult times while executing our 4 breakthrough initiatives to grow our aftermarket business.
Growing our aftermarket reduces our cyclicality, provides recurring revenue streams and improves our margins over the long term. During the Q3, our sales were $455,000,000 and our adjusted EBITDA was 24,000,000 As I inferred on our last earnings call, we ended the 2nd quarter with a fair number of machines that were nearly complete. I had high hopes that our naturally lower In spite of this, We fell short of our internal revenue forecast by $45,000,000 adjusted for FX. On the demand front, 3rd quarter orders were $472,000,000 Our orders have tracked to roughly $150,000,000 each month for the last 8 months. That level of consistency is unusual in our business.
Our backlog ended the quarter at a robust $943,000,000 During the Q3, demand trends remain unchanged from the previous quarter. Across North America, customers are busy with a steady backlog of projects. Dealer inventories remain healthy and planned government Infrastructure and chip manufacturing provide good reasons to be optimistic. Not to mention, oil prices are well above $65 per barrel, which was historically been a good barometer for crane demand in the oil patch. Of course, these tailwinds are juxtaposed against inflation, rising interest rates, Ongoing parts and labor shortages and longer lead times for cranes, which has finally growth.
In Europe, Russia's transgressions have given rise to dark clouds over the region. Inflation has risen to record highs, yet the European Central Bank has been slow to adjust interest rates. The tower crane business has begun to slow And the mobile crane business, which was very subdued during the immediate fallout of the COVID pandemic, has experienced a sluggish recovery in spite of healthy crane utilization in the region. Among all of our markets, the Middle East offers the greatest opportunity for growth. Saudi Arabia's Vision 2,030 initiative is coming to fruition.
The government has committed more than $1,000,000,000,000 to a diverse slate of ambitious projects and the momentum is building. In addition, Qatar and Kuwait are showing promising signs of growth. After years of muted activity, it appears the Middle East is coming alive again. As in recent quarters, Asia Pacific remains mixed. Although China is a relatively small market for Manitowoc, it continues to deteriorate.
Our Chinese competitors are once again offering pricing and payment terms that defy logic. These Chinese players are at an enormous capacity over the last 5 years. As the domestic Chinese market continues to slow, We expect these competitors to aggressively pursue more export business in the Belt and Road region. In South Korea, The local market remains robust, but the strong U. S.
Dollar has become a significant obstacle for us in the short term. Likewise, in Australia, crane activity is holding up, But supply chain issues have led to a cash crunch causing anxiety through the construction industry. Finally, in Singapore, we are starting to see some green shoots in the tower cream market. Please turn to Slide 4. Changing gears, we continue to make progress on our Cranes Plus 50 strategy to grow our aftermarket.
For the quarter, our non new machine sales increased 27% year over year and we are on track to achieve our full year 2022 goal. This growth is primarily driven by acquisitions, but the team continues to increase our field service population and expand our territory. Last month, we purchased certain assets from Saunton Equipment Company, adding Colorado, Wyoming and Nebraska to our footprint. Although this investment was relatively small, I'm excited about the expansion of our direct to customer territory. It's a great addition to our portfolio with a promising mix of non new machine sales and synergies for our MGX and Aspen businesses.
With the integration of the recent acquisitions completed, we have We've begun to accelerate our implementation of the Manitowoc Way at these new businesses. To that end, last month, we completed 2 kaizens at Aspen equipment location in Bloomington, Minnesota. 1 of the kaizens was focused on 5S, while the 2nd kaizen was aimed at increasing productivity in one of the locations Truck body upfitting cells. The team created an action plan that is expected to eliminate approximately 80% of the waste in this upfitting cell and improve its capacity by 30%. Although we are in the initial stages of implementing LEED at Aspen, I'm proud of the team's receptiveness to the Manitowoc Way and I look forward to further success.
Please turn to Slide 5. Before I hand the call over to Brian, I would like to comment on last month's Bauma Show in Germany. As most of you know, Bauma is the largest construction equipment trade show in the world. It's a phenomenal opportunity to showcase our new products and solutions, to celebrate milestones with our customers and to drive the commercial side of our business. And it takes a tremendous amount of work to pull it off.
I want to extend a heartfelt thank you to the many Manitowoc team members who made the show a big success. Customers at the show were very With the 12 new cranes we introduced including a 4 axle, 100 tonne all terrain hybrid concept crane and our 1st muffing tower crane model equipped with CCS, Our crane control system. We also received good feedback on our recent dealer acquisitions in the U. S. These acquisitions will allow us To get closer to several of the large European based multinational crane operators and importantly, our customers noted that our product quality has improved significantly, which is a far cry from my first Bama 6.5 years ago.
Overall, feedback from our customers and global partners reinforce that we are on the right track with our strategy. With that, I will turn the call over to Brian to take us through the financials.
Thanks, Aaron, and good morning, everyone. Please move to Slide 6. Our 3rd quarter orders totaled $472,000,000 a decrease of 13% from a year ago. The year over year decline was driven by lower demand in our Urash segment, primarily due to softening macroeconomic conditions in the region as mentioned by Aaron. This was partially offset by higher orders in our Americas segment.
Additionally, foreign currency impacted orders unfavorably by approximately $24,000,000 Our September 30 backlog was relatively flat sequentially at $943,000,000 and unfavorably impacted by approximately $25,000,000 from changes in foreign currency exchange rates. Backlog remained elevated with supply chain constraints continuing to impact our ability to complete and ship cranes. Net sales in the Q3 of $455,000,000 Increased 12% from a year ago. The year over year increase was driven by the stronger shippable backlog entering the quarter, primarily in the Americas in Europe regions and incremental sales from acquisitions, which drove higher non new machine sales. However, Sales continue to be negatively impacted by supply chain constraints, resulting in shipments shifting to the right.
We estimate this impact to be approximately $45,000,000 Adjusted for foreign currency. Net sales were also unfavorably impacted by $32,000,000 from changes in foreign currency exchange rates. SG and A expenses increased by approximately $6,000,000 year over year, primarily related to our acquisitions and partially offset by favorable foreign currency exchange rates. Our adjusted EBITDA for the 3rd quarter was $24,000,000 an increase of 20% year over year. As a percentage of sales, the adjusted EBITDA margin was 5.3%, an increase of approximately 40 basis points over the prior year, primarily due to the higher sales volume.
Foreign currency did not have a material impact on adjusted EBITDA during the quarter. 3rd quarter depreciation and amortization of $15,000,000 increased $5,000,000 compared to the prior year, which was driven by the acquisitions. Moving to income taxes. We had a benefit in the quarter of $300,000 This was driven by the jurisdictional mix of the income. As a reminder, we have tax valuation allowances established for certain countries and therefore losses in those countries are not available to offset Income tax expense in profitable jurisdictions.
Our GAAP diluted income per share in the quarter was 0 point 0 $7 On an adjusted basis, diluted income per share was $0.10 an increase of $0.04 from the prior year. Our net operating working capital year over year increased $112,000,000 $156,000,000 on a currency neutral basis, primarily due to the acquisitions, increased volume, supply chain disruptions and inflation. Year over year, approximately $75,000,000 of the increase was attributable to the acquisitions. On a sequential basis, Net operating working capital was up $18,000,000 primarily due to higher inventory as a result of missed shipments in the quarter And lower accounts payable as a result of adjustments to our build schedules. Sequentially, foreign currency exchange rates favorably impacted net working capital $18,000,000 Moving to cash flow.
We had a use of $6,000,000 of cash from operating activities in the quarter, primarily due to the continued working capital challenges previously discussed. Capital spending was $15,000,000 of which $8,000,000 was the rental fleet. As a result, our free cash flow in the quarter was a use of $21,000,000 We ended the quarter with a cash balance of $43,000,000 which was flat sequentially. Total outstanding borrowings under our ABL Increased during the quarter by $24,000,000 to $104,000,000 and total liquidity remained strong at $245,000,000 Our net leverage ratio remained under 3x as of September 30, 2022. As we enter the 4th quarter, Our elevated shippable backlog and inventory levels support achieving the low end of our revenue and adjusted EBITDA guidance for the full year.
As it relates to free cash flow, we have line of sight to achieving breakeven. However, we remain vulnerable to part shortages and vessel availability. With that, I will now turn the call back to Aaron.
Thank you, Brian. When I assess the current environment, it's a tale of contradictions. On one hand, high oil prices, significant infrastructure spending, good crane utilization and a large backlog are usually signs of a strong crane cycle. On the other hand, we face an unprecedented supply chain and logistics crisis, the highest inflation in 40 years, An exceptionally strong dollar, rising interest rates and an unpredictable geopolitical situation on the back door of the EU. While this plays out, the Manitowoc team remains focused on generating cash and executing our 4 breakthrough initiatives.
As I learned 20 years ago from Fred Pozis, the former CEO of American Standard, when it's light, it's hard to see the dark and when it's dark, it's hard to see the light. At the moment, there is no shortage of darkness. That being said, crane fleets continue to age and at the moment are clocking plenty of hours. Every major crane house that I speak with recognizes the need to refresh their fleets. The longer the pending crane replacement cycle is delayed, the stronger the next cycle will be.
While we wait for better times, we will drive internal continuous improvement with the Mammoth Walkway, while executing our Cranes Plus 50 strategy. As part of this journey, we will continue to strengthen our product offerings and build out our aftermarket footprint, fueling our long term growth and driving shareholder value. With that, operator, please open the lines for questions.
Your first question comes from the line of Jamie Cook with Credit Suisse, your line is now open.
Good morning, Jamie. Hi, Jamie.
Hi. This is Chigusa Kotoku on for Jamie. Thanks for taking my question. So my first question is on the 4th quarter. I think the sales and the margins are implied up sequentially.
And I was just curious if you could comment a little bit about what gives you confidence that you could clear the red tags. If you could comment on supply chain and price cost, it would be great.
Yes. So I mean looking at it sequentially, the Q3 is always our weakest quarter because of all the shutdowns. That being said, of course, we do have fewer days because of the holidays. But I think there's a couple of things that we look at. First off, internally, we reduced our forecast similarly to the misses we've had in the last couple of quarters.
So We have pulled that back in terms of our internal forecasts. The other thing I'd add is to remember that when you look at the historicals, we've added $120,000,000 in annual revenue from the acquisition, so that will help get us to the big number that's out there. And then the last piece is just around what we've been fighting with The majority of the year, I was just in the Willem Saben, for example, and we had 45 finished cranes sitting in the yard where we're trying to get them on vessels and Get customers to come take their machines. So there's that's a combination of battling the part shortages as well as getting units on the vessels that are going to make the difference. But we've got the backlog, we've got the inventory associates.
At this stage, most of those machines are nearly complete. I mean, typically for us, there's about a month lag. I mean, we finished the machines and then there's a lot of work that has to be done in terms of final configurations and load testing and those sorts of things, but the manufacturing is pretty well closed by the time we end November. So I think all those things considered, we can get a little luck in terms of the supply chain and we normally do in the Q4 More so than some of the previous quarters, we feel that it's doable. I agree it's going to be a tough stretch.
But as I say, we've got everything in place to do it.
Okay. That's helpful. Thanks. My second question is on 2023, the top line. So I was just wondering if It's fair to assume that 2023 is most likely going to be down given the demand trends.
But like as to your point, like Given the fleet age and the oil prices and the government stimulus is yet to manifest, there's a lot of tailwinds in 2023 as well. So, I just wanted to get your thoughts on how to think about how you think about 2023 top line?
Yes. I mean, we haven't given any guidance in terms of 2023. All I would say is that we Really have good backlog and we've been tracking it about 150 a month in terms of orders and a little bit stronger than that in October. So I don't think that it will necessarily be down, but again, we haven't rolled out any guidance at this stage formally. But again, I think There's some positives out there too, assuming we don't have some deep down recession that comes.
Okay. Thank you.
Your next question comes from the line of Seth Weber with Wells Fargo Securities. Your line is now open.
Good morning, Seth. Hey,
guys. Good morning. I wanted to ask about the backlog and price cost. Do you feel like that you've largely worked through Lower price backlog at this point or do you think that's a 4th quarter event kind of with big pusher in the 4th quarter? And then just how you're handling Pricing for orders that you're taking for 2023?
Thanks.
Yes. So we haven't worked through it yet. Then the Q3 is probably an impact of $10,000,000 to $12,000,000 which is better than what we sort of indicated on the last quarter. But realistically, it's probably not until the second half of twenty twenty three before we really get through all of that out of our backlog. And that being said, it's still Assuming that there's not more inflation than right now, I'd say where our biggest concerns are around wage increases, medical increases.
I mean, there's a lot of Downstream increases that are starting to come through even though commodity prices have tempered. So, I would say second half of twenty twenty three.
Okay. And when you're writing contract when you're taking orders for next year though, do you have From pricing or is it some sort of provisional pricing or Yes.
So we don't use surcharges, but we do have provisional pricing and we've limited The lead time in terms of which would take an order, so we firm it up as we get within 3 basically 6 months, I It's
6 months, Seth. And when you look at our pricing, like Aaron said, It is provisional pricing. So anything that's in our backlog is fixed price.
Yes. So it doesn't move from the provisional to backlog until it actually gets Locked in. So I mean the biggest expense advantage there is just given our dealers the visibility that they got units on the order board Without nailing down the price just yet.
Got it. Okay, that's helpful. Thank you. And then just on the aftermarket business, is there any Swag for how we should think about how you guys are thinking about that, the growth in that business over time, is that In your mind, sort of a mid single digit grower on the aftermarket side just going forward?
Yes. I mean that's Yes.
That's just it as we've got the acquisitions there that swing the numbers pretty heavily in the hands so far this year. And so I mean it is heavily acquisition driven, but we've been Slowly investing and getting more service techs. We've added a little bit more population. So I think that's probably a fair number that you're looking at there. But it's something that we're constantly talking about looking forward in terms of how do we keep the number growing to get to our end all beyond goal.
Because you can see that a lot of our investment has been in that area with the rental fleet. So the expectation is that that's going to drive Revenue and incremental growth in that area.
Got it.
Okay. Thank you very much, guys. I appreciate it.
Thanks, Seth.
Your next question comes from the line of Stanley Elliott with Stifel, your line is now open.
Good morning, Stanley. Good morning, everybody. Thank you guys for taking the question. I apologize, I got on a little bit late. But it sounded like October was better from an order standpoint.
Curious to hear a little bit more about some of the success you guys had at Bauma with the 12 cranes and maybe how do we think about orders coming out of the show from that?
Yes. So first thing I'd say, it's our 1st bomber in the fall and it lines up with Our winter campaign and some of the other normal trends we have, so it's a bit different than normal. I mean, normally, we project that we're going to be in that sort of $50,000,000 to $75,000,000 range. It's always hard to say what comes out of Baumann because all the other activities that are happening either before or after. When we look at October, I mean, we've been tracking at $150,000,000 of orders each month for the last 8 or 9 months.
In October, we were just over $200,000,000 So I think that's a good sign that we've seen some of that come through. And I think that for the Q4, our orders should be north of $500,000,000 So I think that's all pretty good sign of it was a good bomber. Dialogue was excellent. A lot of good activity, a lot of discussion. I mean, there's a lot of uncertainty, especially with the price increases and the higher interest rates.
Some of the things are going on Europe, but I mean if you look at really the conversations that were being had, folks are optimistic. So we just we need to get through some of these geopolitical issues or at least find some No, more certainty, I think it will be real positive for us.
And On the North American market, you talked about kind of stable private public investment. You've also done a lot to change the distribution, how you're going to market. How much of the improvement there do you think is that strategy to be closer to the customer Versus people trying to add fleet, just curious kind of what some of the dynamics are here in North America? Yes. I mean, I don't want
to say that the dynamics have changed much even with the acquisitions relative to sort of order trends. I mean, it's still the struggle of Lead times, dealers getting on the build schedule and then managing at relative to the price increases. So I wouldn't say that there's Then too much of an effect in terms of just general order dynamics? Brian, what do you think?
Well, I think We do have about $90,000,000 in net working capital on our balance sheet related to the acquisitions at the end of September. There is a delay just based on the nature of the distribution business versus us selling to our dealers. So there's a little bit of that, that plays into Timing of sales, but I don't think it changes anything other than that.
Great, guys. Thanks for the color and best of luck.
Thank you, Stanley.
Your next question comes from the line of Tami Zakaria with JPMorgan.
Good morning, Tammy. Tammy.
Hi, good morning. Thank you so much. I may have missed it. I apologize if I'm asking the same question But I think last quarter you said you expected about $60,000,000 of Manufacturing costs headwind for the year, has that view changed as we exited the 3rd quarter?
No, I mean the view hasn't changed. The view of that hasn't changed. Mean it was lower in the Q3, but we also had lower shipments in the Q3 in lower seats. So, but I'd say that number is probably a reasonable number for the full year.
I think the $60,000,000 was the inflation impact, not just the manufacturing.
Yes.
Got it. Okay. And then just going back to the 3rd quarter top line. In the second quarter, I think you said Shipments missed by about $40,000,000 and then in the Q1, it was $35,000,000 Did you quantify how much of 3Q shipments shifted to 4th quarter. And what gives you the confidence that you can Still achieve the low end of the EBITDA guide for the year.
And then does that assume like you sort of catch up on all those Miss shipments in the Q4 and we get some sort of normalization, how should we basically think about like the achieving the low end of the EBITDA guide?
Yes. So I mean we missed we pushed and that's against internal forecasts, dollars 45,000,000 from the 3rd to the 4th. In Terms of our forecast mean we had an even bigger number expected in the Q4. I mean if we face the same challenges that everybody else Doesn't all your other calls. I mean, if everyone just we can get a couple of parts to go our way and vessels go our way, we can hit it.
We've got the inventory. When I say inventory, I mean, No, empty chassis, I mean, nearly completed machines. They're waiting for vessels. So This is the ongoing challenge we've had. Now I would say if you look back at our Q4 of last year, we had a similar situation where we were pretty conservative at the analyst meeting and then we actually beat the numbers that we had projected down to.
Things normally go our way as everyone is trying to get all their shipments out in the Q4. So I think we're in a position as long as vessels keep going, whether it's decent on the North Sea and parts come in even I would say At the current level, which hasn't been great. So I think that's a long way of saying we got a lot of machines that are nearly completed, whether it be WIP or finished goods.
And we have adjusted our internal forecast down and that's reflected in the guide to the low end of the guidance.
Your next question comes from Jerry Revich with Goldman Sachs.
Good morning, Jerry. Hi, Jerry.
Hi, this is Clay on for Jerry today. Our question was on pricing From other machinery makers, we're seeing pricing accelerating into the low double digit rate exiting the year. Is this similar to what you guys are seeing for your product lines?
Yes. I mean, if you look back over the last 12, 18 months, our prices are up 20% to 25%. We have not announced all of the price increases for early next year. So we're still in the process of really trying to nail down how much more we think we got to go. As you can appreciate with where the dollar is, particularly in the United States, we're trying to be we want to be as accurate as possible to not overstate the number.
Thanks. And as a follow-up, can you give us more color on how utilization rates have trended in the quarter based on what you're hearing from your customers? Thanks.
Yes. I mean, Bauma, the discussion with all the customers are extremely positive, I'd say, on all the major continents, Particularly on the mobile side of the business, I mean, a lot of this infrastructure that's out there is big projects and folks are ready to tackle these big projects. But I mean, all the major house We talked to particularly on the mobile side, activity was good. I would say on the tower side, we've seen a little more nervousness. And you can see that Whether it be that the Grand Prix is projects are starting to come off in France or just residential construction in France.
So the tower, I'd say is a little more nervous. But mobile crane wise, Activity and utilization is really, really positive.
Thanks. I'll pass it on.
There are no further questions at this time. Mr. Ion Werner, I will turn the call back over to you.
Thank you. Before we conclude today's call, please note that a replay of our Q3 2022 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 continued interest in the Manitowoc Company. We look forward to speaking with you again next quarter.