Crane Co (CR) 2005 Q2 法說會逐字稿

Good day, everyone. And welcome to the Crane Co. second quarter 2005 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations and Corporate Communications, Ms. Pamela Styles. Please go ahead, ma'am.

Thank you, Vicky. And good morning, everyone. Welcome to our Crane Co. second quarter 2005 earnings release conference call. As I've been introduced, I'm Pam Styles, Director of Investor Relations and Corporate Communications. On our call this morning we have Eric Fast, our President and CEO, and Bob Vipond, our VP and CFO. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just as a reminder, the comments we make on this call may include some forward-looking statements and we would refer to you the cautionary language at the bottom of our earnings press release and also in our annual report, 10-K and subsequent filings pertaining to the forward-looking statements. With that, let me turn the call over to Eric.

Thank you, Pam. I'm pleased with the Company's performance in the second quarter. Our core sales growth was up 8%, excluding foreign currency, compared to where we were in the first quarter of 2004, with less than 4% growth. We have continued a consistent trend of core growth for over a year, now. Demand remains strong with solid orders, particularly in Fluid Handling, plus 7% and our backlog increased 8% driven be the Electronics Group, Fluid Handling and Control Segment.

Unlike last year, price increases have offset the material price inflation in Fluid Handling and Engineered Materials. We are seeing some pressures in Special Alloys. stainless and titanium, now, that are affecting our Aerospace and Electronics and Fluid Handling Segments, but we are aggressively working to mitigate any impact.

We continue to drive productivity improvements through plant closures. One Co. integration activities and more active and disciplined [kaisan] activity throughout the Company. These activities will help position us as we move into 2006, with reduction in force, alone, providing approximately $10 million of annual benefits.

Reflecting our confidence in the Company, we announced a 25% dividend increase to $0.50 per share on an annual basis, up from $.040 per share. And we have tightened the bottom of our full-year earnings guidance upward by $0.05, to $2.15 to $2.25 per share. Third quarter guidance is $0.56 to $0.64 per share, versus $0.56 a year ago.

Important changes in our management team include Max Mitchell to President of the Fluid Handling Segment, bringing his strong OpEx and leadership skills; Curtis Robb to the newly created corporate position of Vice President of Strategic Planning and Corporate Development; and Dan Colbert, as President of Engineered Materials, to replace Rich Schueller who has taken early retirement. I would like to thank Rich for his 15 years of service as President of Kemlite and for working diligently with me over the past year to find his replacement.

At the end of June, our net debt to capital was a conservative 25%, and our $300 million revolving credit for acquisitions remained fully available. We have seen considerably more acquisition opportunities in the last several months, but sale prices remain at aggressive levels.

Turning now to specific segment comment;, margins in the Aerospace & Electronics Segment were clearly a disappointment. However, they were higher than the first quarter. And we expect further improvement in the third quarter.

Aerospace Group margins declined approximately 400 basis points versus prior year. Reflecting mix, after-market trends, and P.L. Porter's lighter margins. Excluding P.L. porter, Aerospace Group margins were 19%.

The OEM after-market mix shifted dramatically to 64/36% versus 59/41% last year. Reflecting both strong OEM demand, and lower after-market of approximately 8%. After-market sales were down 2% -- $2 million from last year, because of fuel orders for initial provisioning spares, but we expect the after-market demand to be stable for the rest of the year.

P.L. Porter experienced a 24% increase in sales, compared with the prior yea,r driven by demand for the new iMOTION software-controlled Power Actuation System. However, margins, while improved by 150 basis points from the first quarter, were still slightly below 10%. We expect to see continued but gradual margin improvement throughout the year for Porter.

The Aerospace Group group has aggressively focused on productivity improvements, completing the consolidation of the Porter Facility, affecting the reorganization of the management structure which eliminated 70 positions and beginning the consolidation of two facilities in the Seattle area. These actions will contribute to the expected second half margin improvement and will provide $5 to $7 million of operating profit benefit in 2006.

We continue to spend heavily on engineering and R&D for new products and program wins, with revenue streams largely beginning in the 2006 to 2008 period. In this regard, I would note our first-ever Air Bus Brake Control Award on the A400M military transport, and new contracts with both Cessna and Boeing 777 for a new wireless tire pressure system with shipments, again, beginning 2006, 2007.

In the Electronics Group, we continue to feel good about our strategic position in this business. Orders are up substantially for the first half of this year. Since last year, at plus 10%, and particularly strong at Power, which is up 34%. Backlog is also up 20% versus last year, and even with the first quarter.

You are familiar with the operating challenges we have shared with you, now, for over six months. During the second quarter, we continued implementing aggressive corrective actions with key finance hires, including a new CFO for the group, and several key site leader changes. Importantly, we did see sequential improvement in margins, and expect this trend to continue throughout the second half of the year. As I said last quarter, there continues to be operating inefficiencies in the Group, caused by a number of programs that we continue to work through that have low or no margins. But there should be steady improvement as we make these shipments and get this behind us. We continue to expect to see sequential margin improvement in both our Aerospace and Electronics Groups in the second half of this year.

At Engineered Materials, we had an excellent quarter in Engineered Materials with margins of 23%, as price increases, OpEx improvements, and material utilization and stable residence styrene material costs all benefited margins.

The RV industry clearly over-ordered in the first quarter and made adjustments, along with the normal reduced demand due to the model year change in the second quarter. The latest industry forecast is currently calling for a 3.5% decline in RV builds for the full year, which is what we have planned for. Transportation OEM deliveries grew approximately 10.5% for both refrigerated and dry bands in the second quarter. The latest [ACT] forecast is calling for trailer increases of 9.6% in '05 and 6.6% in 2006. We believe the forecasted decline in RV industry demand and increased costs for new product development will be offset by more stable raw material pricing, which will result in achieving our goal of 20% margins for this business.

In Merchandising Systems, in spite of continuing uncertain markets, we remain confident about our business model and our ability to gain market share. Our Vending Business experienced 8% revenue growth with 60 fewer people, and 15 people dedicated full-time to OpEx. Increased sales and strong margin improvement in the European coin [mech] business contributed to segment margin improvement to 8.9%, from 7.3%. New and updated products in the Food Refreshment Center and Coffee Machine Categories are having a positive impact on sales. At the introduction -- in the introduction of our Coin-Bill Recycler in the U.S., while at the very early stages, shows excellent promise.

Fluid handling. Fluid handling saw a strong sales increase of 13%, 10% excluding foreign currency, and 130 basis point margin improvement in the quarter to 8.1%. We now have two quarters in a row with over 100 basis point margin improvement versus the prior year. Improved margin conditions and good stable front-end sales and marketing organizations are driving revenues. Orders were up 7% for the segment and 8% for our $600 million Valve Group in the quarter. Backlog was up 17% for the segment and 19% for the Valve Group.

Unlike last year, customer price increases are covering higher raw material costs across the segment. We remain vigilant in this regard, and would note that the recent 2% re-valuation of the Chinese currency is expected to have less than a $1 million impact on an annual basis.

Promotions and new hires have substantially strengthened the Fluid Handling management team, particularly in finance and operations. Over 50% of the site locations have new operations leadership. We did continue to see short-term disruptions at Pumps resulting from product quality issue, and the China joint venture, and the Salem, Ohio plant consolidation.

I want to remind everyone that as is our practice, we do not intend to comment on our estimate on the Company's asbestos liability, beyond what we have said in our form 8-K. I encourage you to read the disclosures carefully, as we are making it every effort to make it complete and informative.

Before I turn the call over to Bob, let me extend our thanks to Pam, who as many of you know, will be moving on at the end of this month. During her three years with our Company, Pam established a strong Investors Relations Program at Crane, heightened the visibility of our Company with the investment community and developed a large and active institutional analyst and investor base of relationships for Crane. We wish her well in her new pursuit. Bob?

Thank you, Eric. I wanted to comment on a few other items which did impact our second quarter results. First of all, the decrease in our effective tax rate for the quarter to 30.2%, was the result of an agreement with the tax authorities. As you know, under the accounting rules, such adjustments must be entirely taken in the quarter in which such an agreement occurs. We expect the effective tax rate to return to 32% for subsequent quarters this year. This change in the second quarter did favorably impact our earnings by a penny and a half ($0.01.5)

Secondly, our miscellaneous income and expense was $1.7 million better than last year. Primarily, it's due to net hire proceeds of about $600,000 on a number of small active cells throughout our business in the gains versus losses that we had in some of them last year. Secondly, we also had an increased income from our Ferguson joint venture and from our China JVs of about $350,000. And overall, some lower expenses in a number of areas in here, that contributed another $250,000.

Our free cash flow, before asbestos, was strong in the quarter at $45 million, versus $31 million in the prior year second quarter. And we reaffirmed our free cash flow target before asbestos of $150 million for the full-year 2005. Lastly, as we mentioned last quarter, we planned to adopt FASB 123 on options expensing when it becomes effective for us January 1, 2006. The Company has disposed its options expense amounts in the footnotes to the annual report for several years and they have ranged from $0.07 to $0.09 per share on an annual basis. Now, let me turn it back over to Pam.

Thank you, Bob. This marks the end of our prepared comments. Before we open up the call for your questions, remember that we take questions in the order received. As a courtesy to your colleagues, we ask that you each of you limit your questions to just one or two at a time in order to give others a chance to ask questions, as well. You are always welcome to get back in the queue again to ask additional questions. With that Vicky, you may now open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] And we will take our first question from Ronald Epstein with Merrill Lynch. Mr. Epstein, your line is open. Do you have a question?

Move ahead, Vicky. He can come back on later.

All right. We will move on to Ned Armstrong with FBR.

Yes, good morning.

Good morning, Ned.

Can you talk a little bit about the Electronic Groups and the steps that you're taking to improve the margins there?

Well, I would -- first off, margins did improve in the second quarter versus what we experienced in the first quarter.

Secondly, we -- there are -- I don't see any new issues in the Electronics Group. The programs that we've -- the loss/low margin programs that we're working through, are the same ones that we had in the first quarter. We didn't find any new ones. And it is a matter of moving those through the system and out the door.

And then thirdly, we are very focused in making sure that on the new orders that we're taking, that we've got a new product introduction process that is very much standard work, that we've got engineering change order process, very much standard work, that orders aren't released to the floor until they're complete. So we're very focused on making sure that the new orders that we're taking will flow through our plant in the way we expect it.

And do you think that those margins will be at acceptable levels at year-end? Or will it take more work into '06 to get those to acceptable levels?

Well, I it think we said ha we expect margins for the Segment to start to approach more normal levels. And we are expecting a positive recovery in the Electronics in the third and the fourth quarter, no question about it. I did say last quarter, Ned, and I'm going to quote myself, I went back and actually re-read this; we still feel it will take well into the second half to stabilize our production and throughput processes for this Business. So there is a lot of work still going on. But we are expecting our activities to start to read through the results, here, in the second half.

Okay. So by year-end, looking forward, you would anticipate that you would be able to generate margins at acceptable -- what you consider to be acceptable levels?

I would expect by the end of the year that we are going to be largely through the current operating program challenges that we have.

Great. Thank you.

And we will now return to Ron Epstein with Merrill Lynch.

Yes, good morning, guys.

Hey, Ron.

I never hit the button before. It kind of caught me off guard. Just a couple of questions. The Equitas settlement, you can give us some more color on that, what that means?

Just I'm going to stick to our position that I'm not going to comment on anything as it relates to asbestos, Ron, because I feel it is important to read the disclosure in its entirety. And we, as I said, we worked very hard to try to make the -- our disclosure more helpful and informative, and I just encourage you to go back and read it.

Sure.

Read it carefully.

Okay. And then going back to Aerospace, what are you guys seeing now in the after-market, in terms of demand, traffic growth -- what are you guys looking for?

Well, we've -- our after-market was, in the Aerospace Group, was off $2 million in the second quarter because -- primarily because of there was some initial provisioning in the prior year quarter. We expect it to be about equal, approximately equal to what it was last year.

What you're seeing is, there is about -- if you just look at Air Bus and Boeing planes, today, versus six, nine months ago, there is about 200 more planes flying, but they are all Air Bus planes. So as fast as Boeing can make a plane, they're parking the old ones, and that impacts our after-market. So our outlook for the second half of this year is kind-of a steady after-market equal to last year, at the moment.

Okay. And just one last question, and then I will let someone else go. You mentioned something about the supply chain. You said how, in the specialty alloys you guys were seeing some constraints in titanium, I think you mentioned. You can give us some more color on what you're seeing? Is this Aerospace-grade stuff or is this across other business units?

It is mostly Aerospace-grade stuff, we've got some situations where we've got some sole suppliers that have been qualified on planks in the titanium area that have raised prices pretty dramatically. You see the same in stainless. And some of it slips over into the high-end industrial valve business where you get a lot of the special alloys.

Okay. Great. Thank you very much.

Our next question is from Scott Graham with Bear Stearns.

Good morning.

Good morning.

A couple of questions. Could you talk about pricing versus raw materials in both the Fluid Handling and Engineered Materials Businesses? Are you covering, right now, in both businesses?

Well, the -- we would say the answer to that is, yes, for both. The volume increase that you're seeing in Engineered Materials is, basically, price. The Fluid Handling -- the numbers we're looking at for the quarter, Fluid Handling clearly covered the material increases during the quarter.

Okay. On Aerospace, the margin [even-Ex] quarter was down on a year-over-year basis, Eric. And I'm wondering, is all of that the after-market mix, as well as the step-up in R&D? Or was there something else at work there?

It was the after-market. It was step-up in R&D for the new programs. It was some inefficient -- some scrap, it was some warranty, this were some bits and pieces all through there that were in addition to that.

Okay. I think another good sign here was that you had a decline, sequentially, in inventory -- last year it was up, the year before, it was up, this year it was down; and I am wondering, where you think inventories can come down to by the end of the year, that would be a nice source of cash for you?

We've maintained our cash -- our free cash flow guidance, as you know is 150, and I think we feel good about where we are in receivables. We feel pretty good about where we are in payables. The challenge here, for Crane is, is I feel there is a lot of opportunity in inventory and that -- those opportunities, frankly, are in Fluid Handling, and in Electronics. And we are going to be very focused on those in the second half. I haven't given a forecast for -- for the end of the year, I'm not going to do it. But you can be -- we are very focused on it in those two segments, here. I might add that we're doing an excellent job in Merchandising Systems, Kemlite; so it is really electronics and Fluid Handling.

Thank you.

Next is David Smith of Smith Barney.

Good morning, guys.

Good morning, David.

You can just go into a little bit more color, I'm going to let you off the hook on Aerospace; but as far as the RV market in the quarter, was it up or down as compared to last year?

RV shipments for us in the quarter were down about 13%.

And then you think you feel pretty good about the 3% for the year?

It is an uncertain time for us because of the model change and have you to see what is selling through in the lots. So it is very hard to tell, clearly they overbought from us in the first quarter. I think our shipments were up 19%, something like that in the first quarter. So they way overbought and now they're adjusting. And we're going through a model change, the industry stayed pretty constant on being down 3 or 4%. That's what we planned, and as I said, our current best thinking -- this is a book and ship business -- is that we can handle that kind of 3 to 4% decline in the industry. And we don't see it any different, at this point.

Profitability on the RV stuff that much different from the transported industrial?

It is better. It is better. I wouldn't describe it as materially better, but it has been higher margin, but there is price pressure there like there is across the whole Company.

Okay. So the margin growth in the Segment in the quarter really seems to have come from the price increases and the productivity?

It is really nice productivity improvements in our material usage through our OpEx program. It was a pretty big number, frankly. Again, the price, as you noticed, in my comments -- I mean, our goal here is 20% margins. We did 23% this quarter. I don't see us sustaining the 23%. Our goal is to try to sustain 20%. And that remains our goal for this year.

And just quickly, maybe if you would give us a comment on the [Pumice Pak] Business and what the operational -- just really, is it a broader issue or is it something that is just a one quarter kind of blip?

I think it is -- well, the impact is in the first quarter and the second quarter. I view it as short-term issues. We see it is due to the planned consolidation and some quality problems, and out of our joint venture in China, but we see it as short-term. We are looking for -- I was going to say strong improvement in the third quarter, but with clearly a strong recovery of those results in the third quarter, so it is not like we're going to wait for next year.

Okay. Thanks, Eric.

Next is Deane Dray with Goldman Sachs.

This is [Kevin McVeigh] for Deane Dray. A couple of questions. I wonder if you could help us understand, a little bit, the price versus volume on 8% organic growth Company-wide?

I think -- I don't think we've usually given that out. But when we do the numbers on this, volume is 5%, price is 3% and 2% was FX.

That's very helpful. Thank you. And then --

I guess we will start doing this now every quarter.

That would be helpful.

Well, we can do it. We are a lot more analytical about it than we used to be.

Good. And the, secondly, I wanted to understand the dividend a little bit. If I have my numbers right, I think it is the first increase since 1998.

That's correct.

Just wondering, what can we expect, going forward? Will it be more consistent, or kinda these one-time boosts -- just for modeling purposes.

I think it, again, reflects the confidence that the board and the management team have in the performance of the Company and it was meant to signal that. We don't have any rigid guidelines on the dividend. But we are -- we do have free cash flow of $150 million in a conservative balance sheet. So we viewed it as an opportunity to return some capital to shareholders and send a strong signal. We don't have rigid guidelines on it.

Okay. And then, just if I could, one more real quickly -- any expectations in terms of core revenue growth in the second half of the year?

We haven't made that comment.

Okay. Thank you.

And Wendy Chaplain with Wachovia Securities is next.

Hi, it is Wendy Caplan. The dividend question -- I understand your answer, but does it speak at all to your earlier comment, Eric, that more -- there are a lot of acquisition opportunities, but the sales prices remain high? What are you seeing out there in terms of sales prices? And do you capitulate and just pay it, or how are you thinking about it?

I think -- I would not tie the dividend announcement to acquisition opportunities. I would strictly tie it to the earnings improvement and momentum that I think we feel in our Company, that would be my first comment.

And we've really been -- we were out of the acquisition game last year, because of the potential asbestos settlement, really haven't done anything since January of '04. We are seeing more opportunities in the last 90 days than I've really seen in the last year and a half. They remain at pretty lofty prices, which may be why we're seeing all of these opportunities; but there are more opportunities that would, at least, potentially, have the potential to strengthen our existing businesses and we are looking more closely at them. That being said, at least at this point, today, as I'm speaking, I don't see anything that we're close to yet.

Okay. And finally, since my colleagues asked more than one, a quick question on the warranty provisions that you mentioned on Aerospace -- but before you answer it, if I could just say, publicly, good-bye to Pam. And thanks for all your help over the years.

Thank you, Wendy. I appreciate it.

The warranty in Aerospace is business as usual. It is one pump thrust washer part. And we -- I consider it business as usual, Wendy.

Thanks, Eric.

And at this time, there is one name remaining on the roster. [OPERATOR INSTRUCTIONS] And Ron Epstein with Merrill Lynch has a follow-up question.

Yes, just following up on Wendy's question about the acquisitions. Eric, would you be willing to look at any businesses that are kind of, maybe, off the reservation? Or are you specifically looking at businesses that would kind of bolster your current core -- ?

We're really quite disciplined in looking at businesses that would strengthen our core.

Okay.

And there seems to be plenty of opportunities to do that.

Are you -- one last question along the same lines. Would that be defense, or commercial, or both?

Not going to -- haven't really -- we like all the businesses that we're in, Ron.

Okay. Great. Thank you.

You're welcome.

And Wendy Caplan also has a follow-up question.

Thanks. Just my usual question on Fluid Handling. Can you address whether you believe that, given that we're sort of done with some of the restructuring that's hurt margin, that volumes are good -- whether we can reach double digit margin coming out of '05? Or whether that is an '06 issue?

I have -- we gave earnings guidance in last December that we expected Fluid Handling margins to grow from 6.1% to 7.7%. And that guidance remains unchanged as it relates to the margins. And we never, ever suggested that it would be in double digits this year. And you are seeing strong margin improvement on a sequential basis, and are you seeing it over last year. But I haven't yet changed the guidance.

Thanks, Eric.

Thank you, Wendy.

[OPERATOR INSTRUCTIONS] And we also have a follow-up question from Scott Graham with Bear Stearns.

Just two quick ones. Were there any costs incurred this quarter to streamline the operations, Eric?

Look it, we're going to have costs every quarter to streamline the operations. We just -- we finished up the porter plant consolidation in July, here. Started the Seattle consolidation. We are going to continue to work away at our footprint, because of our lean activities. I mean, this is -- we're going to be in 50,000 square feet less space in the Aerospace Group after we close these two plants, than we were in 2002, and have $60 million more in revenue. So this is a process that is going to go on, here. And there is going to be more that we are going to do -- that we're going to plan to do, and execute to do, and get the margin improvements in Fluid Handling.

Okay. With those comments, you answered my second question. Thank you.

Okay.

There are no further questions. So I will turn the call back to Pam Styles for any additional or closing remarks.

Vicky, thank you very much. And, everyone, we're out of time for the call. And on a brief personal note, I really have enjoyed working with each of you. And I do look forward to working again, together, in the future. Thank you all for your time, interest and investment in Crane Co. Good-bye, now.

Thank you very much. And that does conclude our conference for today.