Good day, everyone, and welcome to Manitowoc Company Second Quarter 2021 Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ion 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 second quarter 2021 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 Dave Antoniuk, 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 one and a follow-up and return to the queue to ensure everyone has an opportunity to ask their questions. Please turn to slide two. 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 statements, whether as a result of new information, future events or other circumstances. And with that, I will now turn the call over to Aaron.

Thank you, Ian, and good morning, everyone. Please move to slide three. To begin, I would like to congratulate our team on a great second quarter. We delivered a strong financial performance in spite of several big challenges which included supply chain disruptions, a cyber security incident and a continuing impact of the COVID-19 pandemic. I am extremely proud of how the team has performed. In addition to the better than expected financial results, we announced our first acquisition in over a decade. As we pivot to a growth-oriented company, I'm excited to see how Manitowoc's culture for excellence continues to mature. As COVID restrictions in the United States and Europe ease during the quarter, I was able to visit our production facilities in Shady Grove, France and Portugal. It was great to finally meet with our team members in person and observe all of the improvements that they've made - they've been able to accomplish over the past 18 months, as our implementation of the Manitowoc Way continues to accelerate. In Shady Grove, I was impressed by the dramatic operational changes in our manufacturing shared services value stream. Led by Tom McMurdy, this is our in-house fabrication supplier. Typically internal suppliers with multiple processes such as laser cutting, bending, welding and machining, struggle to manage their inventory levels and to meet delivery schedules. Using one piece flow SMED, TPM, and Standard Work, the team continues to drive improvements in safety, productivity, inventory turns and on-time delivery. Five years ago, this was a struggling supplier for the Shady Grove campus; today, they are one of our best. Moving to France. The team in Charlieu has implemented automated welding to fabricate pivots, which has resulted in an 85% reduction in our cycle times. They've also set the standard for how an…

Thanks, Aaron and good morning, everyone. Let's move to slide five. Our second quarter orders totaled $537 million, an increase of $299 million or 126%, compared to the same period last year. On a currency neutral basis, Q2 orders were up $278 million. Orders improved in all of our segments, driven by higher customer demand within each region, and was exacerbated by the prior year's order decline due to the significant impact from COVID. Sequentially, orders improved by $64 million due to improving market conditions in the Americas and steady markets in Europe and India [ph]. Seasonally, second quarter orders typically come in lower than the first quarter, which indicates strong momentum in all of our regions. Our June 30 backlog of $736 million increased 71% over the prior year and up 66% on a currency neutral basis. Backlog increased across all our segments and over 85% is scheduled to ship within the year. Compared to year-end, backlog was up 36% and on a currency neutral basis, up 37%. Notwithstanding the challenges in the quarter mentioned by Aaron, we achieved net sales in the second quarter $464 million, an increase of 135 million or 41% from a year ago. The year-over-year increase resulted from a combination of entering the quarter with a higher shippable backlog coupled with abnormally low sales in the prior year as a result of the COVID impact. Net sales were favorably impacted by 5% from changes in foreign currency exchange rates. All of our reportable segments reported increases in sales. Second quarter ES&A expenses increased by $14 million year-over-year. This amount included $4 million of cost related to the write-off of a note receivable from the 2014 divestiture of our Chinese joint venture and other acquisition-related costs. Excluding these items, the adjusted $10 million increase in…

Thank you, Dave. Please move to slide seven. In past calls, I said 2021 would be a year of transition. This remains our short-term business case, as we return to a new normal from COVID-19, work through supply chain challenges, and deal with ongoing inflationary pressure and skilled labor shortages. Nevertheless, we remain committed to our four strategic growth initiatives. Number one, grow our tower crane rental and aftermarket business in Europe. Number two, build out our China and Belton road tower crane business. Number three, accelerate our new product development in all terrains. And number four, expand our aftermarket activities in North America. Moving to slide eight. Last month's announcement regarding the acquisition of H&E's crane business is a perfect example of how we are executing our growth strategy. Through this acquisition, we will obtain a strong service network, which has 11 branches and approximately 225 team members, including the largest group of Grove, Manitowoc service technicians in the world. The acquisition provides us a platform to grow our service, parts, used sales, and of course, our new product sales through a variety of financing options such as long-term rent or purchase arrangements, which are often referred to as RPOs in the crane business. An RPO is when a customer rents a crane for one to two years before purchasing the outstanding balance. This is similar to how an individual would lease a car for five years and then execute the buyout option. On our last call, a few folks had questions about Manitowoc competing with our customers, as a result of this acquisition. This is absolutely not the case. Our goal is to help customers more effectively manage their fleet and assist with greater financing options to ultimately sell more machines and move more iron. While our long-term…

Thank you. [Operator Instructions] We take the first question from Stephen Volkmann at Jefferies.

Great. Good morning, everybody. Aaron, I wonder you mentioned supplier constraints, but it was hard to tell, did that actually limit your production in the quarter or is this more of a price cost issue?

I'd say it's a combination. In the second quarter, we did have some disruptions in terms of supply chain where we weren't able to ship a few cranes, but it wasn't a huge number. I think the bigger challenges are in the second half.

Okay. And so you are expecting to have actual supplier issues sort of weigh on shipments in the second half?

Yeah, I mean, today we've been very comfortable with what we've been able to manage. The difficulty is it's a game of whack-a-mole with the challenges on the semiconductor issues.

Understood. Okay. And then just on the price costs, I mean, it sounds like you don't really have a great sense of when this normalizes again. Are the price increases that you've put through or are putting through now, are those sufficient to sort of cover the known inflation that we have? And if so, is 2022 kind of a more normal price cost year?

Yeah, so I hope that 2022 is more normalized, but I think it's tough to say as prices or costs continue to rise. As of right now, I feel really good about where our pricing is, the difficulty we have in the second half is just the timing of the backlog.

Okay. And how much of that backlog shifts before year end? I know you said 85% in the next year?

By year end, Steve.

85% by year end, okay. Super. I will pass it on.

Thanks, Steve.

[Operator Instructions] We will take the next question from Mig Dobre at Baird.

Good morning, Mig.

Good morning. Thank you for taking the question. So, maybe a little more clarification on cost, you talked about the $30 million steel-related drag last quarter but it sounds like this figure is larger, maybe you can give us a sense for how much larger. And the 15 million discretionary component, the way I understood it at the time is, this is just normal kind of cost coming back into the business, things like salary increases and the like. So I'm looking at confirm this figure, and really any other incremental costs that you might have, things like freight and so on and so forth. So, maybe a little help on this to better understand the margins in the back half.

Okay. So let's start with the easy one, the 15 million, that's exactly how you describe it. That's basically costs we didn't have last year because of some of the benefits that were outlaid by the government and some of the other one-time benefits to manage through COVID. So, those are sort of back to normal levels. In terms of the $30 million, I would say the difference here is, we did okay in the second quarter, much better than we expected. We thought we'd see a bit of that impact in the second quarter. We did have some impact but it's really moved that all to the second half. So the last time we talked about that, I really thought that 30 million would head over the second, third and fourth quarter; today, I would say it's more heavily weighted to the third and fourth quarter. And then in terms of some additional costs, we have baked in some additional costs in SG&A for our new product development initiatives and they really don't start to kick in until the second half.

Okay. Well, then my follow up, I guess is when I'm sort of looking at the guidance, if I treat the $30 million as, let's just say, this is a factor of the current cost environment and you can offset it, the implied margin here is just shy of 8% on, call it, $1.8 billion of revenue. So going back to your strategy that was outlined by your predecessor, Aaron, that this is a business that sized to deliver double-digit EBITDA margin on $1.8 billion to $1.9 billion, how do we think about your progress relative to that goal? And what else is there for you to still do to kind of get the margins there? And kind of what's the path forward to actually getting us closer to that target? Thank you.

Yeah. So my real view, Mig, is how do we grow our EBITDA. Are we getting the 10 by 20, the old program was called, sure we can get the 10% but, I mean, my real objective is how do we grow the business up to $2.5 billion, quite frankly? And that means we've got to invest a little more money in SG&A, new product developments and sales and service, so it is really how do we drive our overall EBITDA while trying to get to that same number. To me, that's how we're going to drive the value of the business. So we continue on the same path but we probably need a little more volume to get to that 10% number. Dave, do you have anything to add?

Go ahead.

Go ahead, Mig.

Well, I'm trying to understand if the framework that you guys have used in the past has been altered by investments or something that you've done different in the business, or if you're still needing to generate efficiency, whether it's through consolidating facilities, or whatever else that you're going to need to do in order for us to get to this target, because it doesn't sound to me, like you're really endorsing that target the way you've done in the past. So just want to clarify this.

Well, I don't want to get there just by cutting costs, because while we could hit the number for a day, you won't be able to hit it forever. So, when you look at altering business, I mean, sure, we could have got back prototypes and cut back SG&A and cut back engineering but I don't think that's the best thing for the business long term and in order to drive the real value of the business. So, I guess, my view is we continue to work hard to manage our costs but I'd like to invest a little more in the future and make sure we don't take a step back in terms of our product development.

Okay, fair enough. Thank you.

Thanks, Mig.

The next question comes from Jerry Revich at Goldman Sachs.

Hi, this is Ashok Sivamohan on for Jerry Revich. I'm wondering if you can provide any details on what you're seeing for capacity utilization for cranes in the field by region?

Yeah, so we typically don't talk about it by region. But if I look, I think in the United States, it continues to pick up which is natural because it's the summertime and it always picks up in the summer, starting to get back to more normalized levels that is really good about where constructions going. In Europe, it's sort of the tail two halves utilization on tower cranes is really strong, which is driving the interest for new machines, while I think it's a little more muted on all terrains. But again, you sort of have this combination where I think some of the large players, big crane operators in Europe are just being conservative to get through the year and manage their balance sheet, that's why you don't see them jumping into the business. And then in terms of Asia-Pac, Korea has been super strong, utilization is good; China, where we've recently seen a step back, I'd say in the last two months. But in total, I feel pretty good about overall utilization.

Okay. And then just in terms of the orders, I'm wondering if you can provide any color on what the cadence was throughout the quarter, and sort of how that evolved?

Yeah, I'd say it was pretty consistent throughout the quarter. There wasn't one month that was surprisingly large or one month that was surprisingly weak.

Okay. Thank you.

Thank you.

The next question comes from Ann Duignan at JP Morgan.

Good morning, Ann.

Good morning. Maybe you could just expand a little bit on your comments on both your tower cranes strength and trying to slow down Europe, I guess how much of that is your own self-help versus fundamentals? And anything in particular you're seeing with the fundamentals in Europe that we should be aware of? And then China is slowing in the last two months, again, expand on that a little bit. Any color that you can provide will be greatly appreciated.

Yep. So in the tower crane business, I mean, it's just the self help. It has almost become problematic because we're taking build scheduled slots. So it is really the demand of the market and if you look at construction, for instance, in France, it had been down the last couple years, it's now starting to pick back up, so I think there's several good economic indicators that's really the strength of the business. In China, we were pulling lots of information from different points, but one of the points that I'd heard is that excavators are off 30%. Now, I've heard that through the grapevine, and my team seems to have confirmed it, and they felt that the tower crane has slowed down too, so you know there's always a delay between when you get the data versus when it's happening, but I've checked it across a couple different points and it seems that overall construction in China has slowed down. I wouldn't be surprised that the Chinese government also takes action to help prop it up too but we haven't seen that yet.

Okay. So your comments on China are more like anecdotal or what you're hearing from others, as opposed to what you're actually seeing with your equipment in the field in China? Is that -

Yeah, I mean, some of the issue we have is that we have such low share, so we're not effective, I'd say as much. The issue where we see it is more around making sure that we get paid upfront and managing our receivables and protecting our balance sheet. But we haven't seen that behavior change and we've been a little more conservative. So I think the rumors that we hear which I have good sources for some of the data points I have are real.

Rumors are always real, I guess, anyway. Just as a follow up on the double-digit margin target question, do you have a revenue in mind that you feel like you would have to achieve now in order to get to the double-digit margin? Or is it all totally dependent on altering business improving from here or just where's your head at around that currently?

Yeah, I mean, mix is always problematic for us. But we felt that $2 billion is decent targeted. This is as good as any. If we had normalized pricing and costing [Technical Difficulty].

Ms. would you like to another question.

I think we lost him.

I am sorry, I think we lost Ann.

Can you hear me?

Yep.

I can't - like I - we lost you actually.

Can you hear us?

We can hear you now.

Yes, I can hear you.

Okay, so I - what - my answer to your question, Ann, was, I think that $2 billion is as good of any number to target for the 10%. Mix is always a challenge and we have to assume that we're back to this normalized costing pricing situation.

Okay, I appreciate the comments. I'll get back in line. Thanks.

Thanks, Ann.

The next question comes from Jamie Cook at Credit Suisse.

Hi, good morning. I guess just two questions. One, can you talk about what percent of your backlog reflects the price increases that you guys put through and just sort of the markets, how they're reacting to the price increases? And then I guess, Aaron, for you, you sound slightly positive about the market, whereas you're usually very balanced or downbeat, I guess is what I would say. So can you just sort of talk directionally, as you're talking to your customers about 2022, how they're thinking about the market? Are you optimistic that we could see another year of growth? Thanks.

So first, on the pricing, the difficulty that I have in answering that question is just the way that we implemented pricing. So, for instance, in the tower crane business, we've actually done three price increases, because you always want to be measured and make sure you're not too far ahead of the inflation when you do the price increases. So it's tough for us to answer that question, you know what, because some of the orders earlier don't have the price increases that we needed to cover the entire impact of steel increases, particularly in Europe. With respect to my positivity, yeah, I feel pretty good, especially with the H&E acquisition coming down the pike in the fourth quarter, I think we've got some good things moving in the right direction. Really looking forward to Bauma at back half of next year. And I think when I talk to customers, they're in a pretty positive mode, too.

And is the market accepting the price increases? Is the competition following?

Yeah, I'd say yes and yes.

Okay, great. Thank you.

Thank you.

The next question comes from Stephen Volkmann at Jefferies.

Hi, Steve.

Hey guys. Thanks for taking the follow up. Just to a quick one, how was the parts and service business in the quarter?

Yeah, so, Steve, I would say that on a year-to-date basis, we're up 10% year-over-year.

Okay, good. I think you were actually only about 1% in the first quarter, right, if I have that. So, that's a good acceleration.

Yeah, we had a good quarter.

Okay, great. And then I guess I had a couple of big picture questions, Aaron, since we're already on to round two here. The first one is, is there any chance, this whole price cost thing has been sort of whipsawing us all around, I think, for, it feels like, for 20 years or something. I'm dating myself. But as the industry consolidates there are lots of industries that don't have this problem, right, where you have escalators and de-escalators maybe or some way of kind of balancing this better. Any chance that this gets better over time, because people are really seeing such impact right now?

Well, I think that's a tough question. My gut says, it doesn't get better for us. I mean, I think one of the challenges that we have in the crane business is our volumes aren't tremendous when you look at some of the suppliers we have, whether it be for engines or transmissions or steel. So, it's hard to believe that it gets much better, I guess. Dave, what are your thinking?

Okay.

Yeah, I would agree. Yeah.

Okay. And then maybe another very big picture question. But I know you guys and Aaron, you've been very focused on lean manufacturing and all the various pieces of that, and obviously, inventory, in that kind of view of the world is evil, right. And so we do our best to minimize inventory, and do one piece flow and all that. But in this kind of environment, having a little inventory whether it's parts or whatever actually means you can fill more orders. And I just wonder if it's possible that the pendulum has swung a little too far in terms of managing this stuff, sort of hour by hour. And in fact, in a really low interest rate environment like this, a little inventory could be a real competitive advantage and perhaps we can sort of tap back to the middle a little bit.

I love the question, Steve, because that's exactly where my head is for the fourth quarter. I mean, typically, we dive off at the end as we try to manage our factories, to an inventory number. My goal and what I'd like to believe is that we changed that a little bit this year because I think that the beginning of next year will be strong. And a lot of times we put ourselves at a disadvantage, particularly in January and February, because of how far we've pulled on our inventory in the fourth quarter. So I'd like to increase it a bit. I'd like to say that we're normally under 400 and this year maybe we add a five in front of it. But I'm spot on with exactly what you said. I think having some more finished goods, and having some more units in the pipeline as we get into the beginning of the year would be very beneficial for us and with respect to our competitive position.

Awesome, thank you.

Thanks, Steve.

The next question comes from Larry DeMaria at William Blair.

Thanks. Good morning, everybody.

Good morning, Larry.

Wanted to follow up on crane inventory in the channel, it seems obviously tight like everything. Do you expect that there could be a build next year as supply change normalize in maybe some of the higher volume categories? It is the first question.

I'd say our dealer inventory right now is in good shape. And it's too early to tell about what is coming out next year, I think.

Okay, so it's not super tight. Okay. And then, secondly, obviously, to the last question, too, but you clearly indicated a strong market, like you said, with orders. Obviously, price cost is not super beneficial, especially in the second half. But I guess kind of struggled to understand, if it's so strong, why we can't put in surcharges or escalators and have the balance of power maybe shift towards you guys a little bit more. And, you're making high quality, highly engineered products, is the competition that's strong that you can't go back and put in - or going forward put in escalators or think about putting in surcharges?

Yeah, the businesses that competitive I would say. It will never replace our backlog. There wouldn't be accepted by our customers. I think the biggest issue is -

How about going forward? Going forward, can we see escalator contracts?

We do - we've tried some different things to try to contain it but usually that's on orders that have longer - when someone might come in and place an order that goes two years and in that situation, we'd be able to do some things to protect ourselves. But in the normal course of business, the difficulty you have is you're going to buy a $5 million crane, you want to know it costs 5 million, not 6 million.

Okay. All right. All right. Thank you.

Thanks, Larry.

The next question comes from Steven Fisher at UBS.

Hi. Good morning, guys.

Good morning, Steve.

Just one follow up here. Good morning. Not sure if I missed this earlier but oil and gas has historically been an important factor for demand and also for mix. I guess I'm curious what you're seeing there and what your expectations are over the next year or so? What's happening on quoting in market and what does that tell you about where this market could go, if you haven't covered it already?

Yeah, I was down into oil patch two weeks ago and the feedback is that oil just slowly keeps creeping up. And in for the longest time, people have been - so if the publicly traded companies get punished every time, it sounds like they add rigs into the market. So people have been restrictive. But the general tone from the folks I've talked to, and I talked to another person just yesterday in that business, and they feel that it's going to continue to creep up, and at some point, then, of course, you've got this dislocation and you end up with demand, it's interesting, because it's a normal oil cycle. So as much pressure there is against oil and gas in the newspapers, I actually think that prices will continue to creep up and that will be good for our demand. And that's what I'm hearing from our customers and our contacts?

Are you actually seeing quoting on either on the production side or maybe on the larger process industry side, as a derivative of high oil prices?

I talked to a couple of our dealers down there and they saw that there were some good quoting. But that doesn't mean it's kicked off yet. And it's a good sign that folks are looking at it and doing the math but they're still really tentative to pull the trigger yet, so.

Got it. Okay. Very helpful. Thank you.

Thanks.

[Operator Instructions] We would take the next question from Mig Dobre at Baird.

Hey, thanks for the follow up. Just to kind of clarify the guidance a little more, as you're looking at the backlog and your scheduled deliveries for the back half, how should we think about revenue sequentially third versus fourth quarter? I mean, do we still see that normal seasonality where the fourth quarter is stronger than the third or, I don't know, is it different this year?

Yeah, I mean, some of it is driven by the holidays with the August shutdowns. So, I think it'll follow the same.

Okay, so fourth quarter stronger than the third. And then from a margin perspective, can you give us a sense, third versus the fourth quarter, like what's embedded in your guidance?

Yeah, so, Mig, I'd say that - to add to what Aaron said, because of the supply chain issues and everything, it's a moving target to some extent. We're not going to comment on the quarterly margins, which is why I only gave that. I'd say, generally speaking, we are going to be a bit higher in Q4. We anticipate being a bit higher in q4, just because of the way we do things, but I wouldn't say it's going to be a significant difference between the two. And I think that from a margin impact we're going to see kind of the flow through of costs impacting Q3 and Q4, and that could be equally throughout the year, because of the amount of backlog we have going through for the remainder of the year.

Yeah, I mean, that's what I was wondering if somehow the cost headwind actually gets tougher in the fourth quarter relative to the third, just thinking as to how the materials might be flowing through the P&L.

A bit, right. I would say a bit.

Because - then my last question is, as I'm thinking about 2022, is there any reason for me to think that things get better in the first quarter of '22? Are we lapping of these issues, or is pricing coming through, or should we think that 2022 is going to start pretty slow, similar base as the fourth quarter?

Yeah, so only I'd say that is - I think we had pretty good visibility when we were talking about this February time frame and it's sort of played out and it never - it hasn't plateaued yet. So I think it's too early to tell. We don't have any good indicators to even consider of 2022 yet.

Okay, thank you.

Thanks, Mig.

It appears there are no further questions at this time. Mr. Warner, I'd like to turn the call back to you for any additional or closing remarks.

Before we concludes today's call, please note that the replay of our second quarter 2021 conference call will be available later this morning by accessing the investor relations section of our website at www.manitowoc.com. Thank you everyone for joining us today and for your continuing The Manitowoc Company. We look forward to hearing from - speaking with you next quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.