Crane Co (CR) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the Crane Company Fourth Quarter 2006 Earnings Analyst Conference Call. Today's call is being recorded. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to Director of Investor Relations, Mr. Richard Koch. Please go ahead,sir.

Thank you, operator. Good morning, everyone. Welcome to Crane's Fourth Quarter 2006 Earnings Release Conference Call. I'm Dick Koch, Director of Investor Relations.

On our call this morning, we have Eric Fast, our President and CEO, and Bob Vipond, our Vice President and CFO. We will start off our call with a few prepared remarks after which we will respond to questions. Just as a requirement, the comments we make on this call may include some forward-looking statements. We would refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward-looking statements.

Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the table at the end of our press release, which is available on our Web site at www.CraneCo.com in the Investor Relations section. Now, let me turn the call over to Eric.

Thank you, Dick. Before discussing the quarter, let me highlight our record full-year 2006 results. Sales increased 9% to $2.3 billion, operating profit rose 16% to $248 million. Operating profit margin improved from 10.4% to 11%, and earnings per share increased 19% to $2.67 per share from $2.25 the prior year. Dividends were increased 20% to $0.60, following a 25% increase in 2005.

For 2006 earnings growth occurred notwithstanding unsatisfactory performance in the fourth quarter. That was also impacted by losses associated with two vending acquisitions that were completed in the second half of the year. We believe that these strategic acquisitions will show improvement in 2007 and provide solid future earnings growth. As you saw in our press release, our 2007 guidance remains at $2.80 to $2.95 per share.

Fourth quarter EPS was $0.61 versus $0.58, primarily reflecting the increase in miscellaneous income from appliance sales, and the lower tax rate from the R&D tax credit. As fourth quarter operating profit decreased 3%. Four of our five segments had operating income at approximately the same level as last year, with the exception of Merchandising Systems, which was $1 million lower. Operating margins increased 9.2 % from 10.9%. Turning now to specific segment comments, Aerospace and Electronics.

First in the Aerospace Group, OEM and aftermarket sales were higher than last year, excluding Resistoflex Aerospace, which was sold in May. The OEM aftermarket mix was 57% 43% respectively compared with last years fourth mix at 58% - 42%. Excluding Resistoflex Aerospace, OEM sales grew 15%, and the aftermarket was very strong, growing 21%, reflecting several one-time modernization and upgrade shipments and orders ahead of the January 1st price increase.

Our aftermarket plan for 2007 remains at 8% growth. Excluding Resistoflex's Aerospace bookings for the year were strong, up 23% overall with OEM and aftermarket both contributing to the increase, providing a solid base for future growth. Aerospace backlog at the end of the fourth quarter of 2006 is up 21% from 2005, so we are well positioned for 2007. A recent win further strengthens our long-term confidence in the business.

In November, we announced that Crane Aerospace had been selected by airbus to provide an improved landing gear control and interface unit for the Airbus 8320 family. This system communicates the position status and controls the movement of the aircraft landing gear and gear doors. The system is made up of two identical electronic boxes and associate proximity sensors and target. With close to 3,000 8320 family aircraft and service worldwide and with the aircraft halfway through its production life, we are extremely pleased to expand our involvement with this successful program. Revenues will begin by the end of 2008.

Aerospace was also recently awarded a contract by Boeing to develop our realtime onboard weight and balance system for the 777 Freighter Aircraft. This win represent it is first commercial win for the new weight and balance product line. It marks our second big win with air waves Technology. And our total we were awarded a contract by NAV Air to develop the system for the C130. The first 777 Freighter deliveries are scheduled for 2008.

Crane Aerospace also has had important wins with its wireless tire pressure system, the Smart Stem. We will have sales for this device starting in 2007 on the Boeing 777 and are developing our application for Boeing 787. We also have a contract with the business Jet OEM. As we said at our December conference, our engineering spending, all of which is expensed to support new products and platforms increased $7 million in '06 and is expected to increase another $9 million in 2007, a 21% increase. It is important to understand that approximately 75% or $39 million of our $52 million Aerospace 2007 engineering spend is for programs who's revenues doesn't start until 2009, a powerful source of future growth.

The Electronics Group had a difficult earnings comparison against a strong fourth quarter of 2005. Electronics have been quite stable from a profitability point of view for the last three quarters of 2006 with operating margins in the 10% range. We've received new orders in our custom power business during the fourth quarter of 2006, resulting in growth in the Electronics Group backlog of 12% during the quarter and the overall Group backlog at the end of the year was slightly ahead of 2005.

In 2006, the management team has been strengthened. We have a full year under Dave Bender's leadership, two internal promotions from other units for the Vice President of Human Resources and the Director of Operational Excellence position, and a recent external hire for the V.P. Operations role. As we indicated at our investor's day in December, we are expecting modest sales growth of 3% for the full-year 2007, and operating profits to increase 15% as our focus continues to be on executing on existing programs and reducing costs.

In Engineered Materials, overall revenues were equal to the 2005 fourth quarter and operating profit at1 $11.7 million was just slightly below $12.1 million in 2005, excluding the Noble acquisition, our sales for the quarter were considerably lower in recreational vehicles, continuing a market-driven trend that began in the third quarter. Transportation sales were 6% behind last year's fourth quarter and building products, incoming mass merchandising, saw a 5% increase.

Our acquisition of Noble Composites on September 29th provides us with a high gloss exterior finish product for RB side walls which we were unable to make on our continuous process. Sales of $9.2 million in the fourth quarter and operated profitably and on plan. Profits from Noble and the impact of pricing increase in our base business roughly offset the impacts of lower volume in the remainder of our business in continuing product support costs.

Looking forward to 2007, we expect flat revenues from the existing business, with all the increase coming from the Noble acquisition. We continue to expect the RV market to be down, led by [totals] with flat results in transportation and a modest increase in building material. In this environment, we continue to forecast a 10% increase in operating profit from $50 to $55 million as we have lowered our planned salaried head count by 30 positions and forced disciplined utilization of direct labor and expect reduced customer support payments in the RV Industry reflecting the success of our new G3 product.

Merchandising Systems, in the fourth quarter, the strong overall earnings performance of our payment solutions business more than offset $5 million in losses from our Vending solutions business. The CashCode and Telequip acquisitions have driven the higher earnings and payment solutions, along with improved profitability at NRI. We continue to be pleased with the performance of our payment solutions acquisition, which have exceeded our plan and have excellent opportunities for growth.

Since the acquisition of Dixie-Narco on October 23rd, we have aggressively implemented our integration plan. Our integrated engineering efforts between Automated Products, National Vendors, and Dixie-Narco have focused on making quality a top priority and we believe that Dixie's glass front Bed Max 2 not only have features and benefits superior to the competition, but that its ability to constantly vend different bottle sizes is unmatched.

We have strength in field service by integrating national vendors in 8P65 service and sales reps with Dixie's 15, providing the bottlers service resources unmatched in the industry. We are committed to being the supplier of choice to bottlers and full service operators. At the same time, we are relentlessly attacking costs at Dixie.

Short-term, we reduced indirect head count by 15%, top graded the entire direct labor force, and-sized it to current demand levels, and reduce inventory by $6 million in two months, 17% reduction, allowing us to eliminate three warehouses. The business did better than anticipated and generated $3.9 million in positive cash flow in the quarter.

We are aggressively leveraging consolidated spend in key commodities, and for the longer-term have begun an extensive value engineering program to reduce costs and number of parts. We continue to forecast this business to break even in 2007. When we acquired Automatic Products, we did not buy their manufacturing facility in St. Paul. We have made good progress on relocating the manufacturing to our St. Louis facility and started production of this product line began in November.

During the fourth quarter, we occurred one-time costs associated with ramping up productions in St. Louis, such as highering and training 100 new employees. During the first quarter, we will be eliminating our inventory of higher-cost AP machines, which were manufactured by the previous owner to ensure we would have adequate inventory during the transition of manufacturing. We expect the one-time integration cost to be finished in the fourth quarter, and for this operation and National Vendors to be profitable in 2007.

We remain very excited about our payment systems capability in the vending market. European vending customers are realizing real benefits from NRI's coin validation technology, which has superior reliability. With the [inaudible] new payment system provided by CashCode and NR I, which was introduced in the U.S. this month, we have a powerful coin and bill solution for North America Vending. Reflecting the acquisition merchandising segment sales are expected to reach $425 million this year, up from $258 million in 2006. All of these acquisitions fit our strategy of highly engineered products serving the niche market, leveraging and strengthening of our existing businesses. Potential synergies are better than we initially expected.

Fluid handling, for the full-year 2006, fluid handling were $1 billion up 7% over 2005. Operating profit was $107 million, up 41%. Operating margin was 10.7% compared with 8.1% in 2005. Market demand was favorable in 2006 and we believe that will continue in 2007 based on the late cycle nature of these businesses. In the fourth quarter of 2006, our segment sales were $255 million. Our core sales, which exclude foreign currency affects in fluid handling increased 8%, reflecting good and stable demand from the chemical process industry, power, and nonresidential construction.

Operating profit was $23 million, slightly ahead of the fourth quarter of 2005. The group's overall profit performance was undercut by the weak results of our pump's business. We believe that pumps will show improvement in the first quarter as we resolve the disruptions caused by several suppliers. Importantly, fluid handling orders remain strong and the backlog at December 31st is 29% above year-ago levels, excluding Westad that was sold last year.

At the end of December, our backlog was up 17% year-over-year, on the same basis, so we are entering 2007 with good momentum. Within fluid handing, the Valve Group had sales in the quarter of $188 million, excluding Westad, sales were up $30 million or 19%. Operating profit increased 24% over the fourth quarter of 2005, and margins increased from 9.1% from 9.7% in '06. The improved results were broad-based across most units and product line. Excluding Westad, orders were up 32% in the fourth quarter over the prior year.

In Crane pumps and systems, our results reflected reduced demand as detailed in the press release, and disruptions and quality issues with several key suppliers resulted in outsourcing and over time costs. While demand is expected to remain soft in the residential submersible pump portion of the business, we expect margins to return to more normal levels in the first quarter. Controls.

Briefly, our controls business continues to grow. Excellent markets in oil and gas, transportation, strengthened management teams and a real focus on customer metrics and new products are driving the improved results. As we noted before, we are now including wireless monitoring and Crane environmental in this segment. We have included the real line quarterly results for Controls, Aerospace and Electronics and Fluid handling along with the normal table in our press release.

Turning to our first quarter guidance, we expect our earnings per share to be in the range of $0.62 to $0.68 versus $0.61 in the first quarter of 2006. Our core backlog, excluding acquisitions and divestitures was up 90 million or 16% at year-end confirming our positive outlook for all of 2007. Now let me turn the call over to Bob Vipond, our CFO.

Thank you, Eric. Our corporate expense increased $1.5 million from the fourth quarter of '05, primarily due to the requirement to expense options and other employee-related expenses in '06.

In the fourth quarter of '06, we had miscellaneous net income of $2.3 million compared to $0.1 million in 2005, largely resulting from the sale of a building and land in Australia, which was no longer needed due to the consolidation of two plants into one. Our interest income was higher in the fourth quarter of '06 because of the interest on the $31.5 million insurance settlement with Equitas that had been held in escrow since mid-2005, which more than offset the affects of the lower average cash balances in the quarter.

Our tax rate for the fourth quarter was 26.7%, which reflected the full-year benefit of the Federal Research and Development Credit, which congress passed in mid-December and which was passed retroactive to January 1. This resulted in the full-year impact of this credit being recorded in the fourth quarter.

For 2007, we estimated our tax rate will be approximately 32%. At the bottom of our income statement, we provide several pieces of supplemental data that I would like the comment on. Our depreciation and amortization increased from $48 million in 2005 to $54 million in 2006 because of our acquisitions.

For 2007, depreciation and amortization is expected to be approximately $66 million, reflecting the full-year impact of the '06 acquisition.

In November 2006, we issued $200 million of 30-year notes at an attractive coupon rate of 6.55%, constituting approximately half of our long-term debt, this provides stability to our capital structure. Our free cash flow for the full-year 2006 of $154 million was lower than our guidance of 170 to 185 for several reasons, including higher receivables in Aerospace and Engineered Materials due to the timing of shipments and collections and higher raw material inventory at Aerospace to support early 2007 sales.

For 2007, we are expecting free cash flow to increase to the range of $175 to $190 million. For the full-year 2006, net asbestos payments of $40.6 million were lower than our guidance of $45 million, primarily due to the timing of cash receipts from our insurance carriers. for 2007, we expect our net asbestos payments to be approximately $50 million, excluding the benefit of the Equitas insurance reimbursement up $31.5 million I previously mentioned.

Capital expenditures for '06 were $27.2 million, slightly below our guidance of $30 million. For 2007, we are expecting capital spending to increase to $45 million as we invest in the internal growth and productivity projects.

Finally, I want to remind everyone that as is our practice, we do not intend to comment on our estimate of 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 make every effort to make them complete and informative. Now back to you Dick.

Thank you, Bob. This marks the end of our prepared comments. Operator, we are now ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Deane Dray from Goldman Sachs. Please go ahead, sir.

Thank you, good morning.

Good morning.

Maybe this is a question for Bob. Could you walk us through what change regarding your assumptions when you lowered guidance in December, because clearly the EPS result came in much closer to your original guidance. So it did sound like Palm residential side of the business was weaker, but then it was not as bad on the integration of Dixie-Narco. If you could reconcile what the previous guidance was?

Deane, I'll give you the shorthand version. If you go back and scrub the numbers, revenues were -- consolidated revenues were actually $3 million less, and operating profits was $3 million more. Of the $3 million, I'm going to say, the, $2.5 of that was better results in Merchandising Systems. And if you go back, there's a little bit better results in our margin in Fluid handling. And secondly, we benefited from the Equitas interest, which gave us more interest income in the quarter. I would say those are the differences between the guidance.

Is the merchandising $2 million, is that as a result of the integration that you didn't have to incur the cost on the plant shutdown, or stay -- is that on the core business?

It's not on the core business. In Dixie's case, we had some orders which allowed us to start up a line over the last kind of eight to ten days of the year, which we got some benefit out of, and we had fewer expenses on the AP integration.

Okay. Okay, just to shift gears over to the Engineered Materials business, give us an update on where we are on the quality issue? You didn't touch on that on your prepared remarks, but you did go through it extensively in December.

I don't think there is any change. We are standing behind our product. We've introduced the new G3 product, which is -- we have yet to have any distortion of. We expect to continue to provide product support costs in 2007, although at a reduced rate from 2006.

Do you have a sense what that cost you in the quarter in terms of the extra work and related specifically to that?

We have, but we haven't disclosed it, Deane.

I understand. Thank you.

And we'll move to our next question from Scott Graham of Bear Stearns. Please go ahead, sir.

Yes, good morning. I have a couple of questions as well. First, Eric, could you talk a little bit about the margin that is you're seeing in the Fluid Handling and Aerospace backlog compared to the core business?

I think I said this in December, but we're -- in Fluid Handling, I'm very confident that we've been disciplined about making sure that backlog is priced right. So I'm comfortable there. I'm just as comfortable on the margins in Aerospace. The pressure there comes near-term on all the engineering expense that's required to develop the product. But I'm very comfortable on the pricing in the backlog.

Very good. On the Electronics business, we've seen a stabilization, as you pointed out, in the margin now for the last three quarters. Is it now a matter of just getting the sales to run through to leverage up the margin, or how much more cost cutting can the new management team do to help 2007 earnings? Because the earnings in this business, as you know, are kind of in a rut. Just wanted to know if it's more of a sales-oriented improvement in '07 that you're expecting, or is there more cost cutting to come?

We view 2007 as continuing to strengthen and rebuild both the team and the processes. So we've got backlog is about equal to what it was last year, and we've only got a very modest assumption on sales growth. We're looking for 1% improvement in productivity. We're looking for 1% improvement in materials. So it's a strengthening improvement of the core processes while we [inaudible] and get the zero margin programs out of Electronics.

Okay. Thanks a lot.

And at this time, we have no further questions remaining in the queue. [OPERATOR INSTRUCTIONS] and we have one follow-up question from Deane Dray of Goldman Sachs. Please go ahead.

Sure. If I could get some further color on the first quarter guidance, what are your embedded assumptions regarding organic growth, we'll say, for the first quarter and the year?

We haven't -- we're not going to do that on a quarterly basis, Deane.

How about for the year, Eric?

We gave that in the conference. I think it was -- here, I'll give it to you. 8% acquisitions, 4% volume, 2% selling price, a total of 14%.

Good. What was the contribution from price in this quarter?

We haven't broken that out for the whole fiscal. I don't have that right now, Deane.

Okay. But your assumption for the year for '07 is 2 percentage points for price?

for '07.

Right. But you don't have it for the fourth quarter?

I don't have the percent.

Just a second.

9.4 million on 75 million sales increase. 12% -- no 1.-- I'm sorry 1%.

A little bit short of 2%.

Okay, thanks. And then, how about on the residential pump side, do you feel as though that has bottomed, or what's your expectation?

A lot of our business is not tied to the residential, but for the submersible pump, found pumps, decorative pumps, I think that's going to stay soft.

And does that go through distribution, Eric?

Yes.

Okay. Thank you.

And we'll take our final question from Scott Graham of Bear Stearns. Please go ahead, sir.

I want to talk a little bit more about first quarter guidance, if we could. Is the interest income from the Equitas settlement going to continue?

No, Scott. It was a one-time thing related to a coverage inflation agreement.

Okay, Bob, that frames my point here. If we're not going to have that, we're going to have a higher tax rate, and we're not going to have the gain -- another gain from the sale of a business. If we X out some of those sort of one-timers in the fourth quarter, earnings per share were, lets call it flattish kind of thing. Yet you guys at the midpoint are forecasting somewhere in the mid- to upper single digit earnings per share growth in the first quarter. You have these items kind of not repeating in the first quarter on a year-over-year basis. What are the swing factors that we're going to see first quarter versus fourth quarter, let's say beyond the pumps issue in Fluid Handling that are going to get us to that mid-60s EPS level? What businesses?

I would say first off, it's a little hard to look [inaudible] because you've got a very weak quarter for Engineered Materials, Scott.

Right. But I'm talking on a year-over-year basis, when we're talking about the growth --

First quarter --

-- in the earnings.

I think your point is first quarter '06.

That's correct.

And as Eric articulated, both in Aerospace and Fluid Handling, we're entering the year with record backlogs. We're expecting considerable strength in those two segments compared to the prior year. And we also, as you know, in Merchandising had a considerable amount of activity related to Dixie and AP in terms of integration costs. The pressure on that should subside somewhat as well as we go through. Engineered Materials [inaudible] the industry there is still a concern to us. That changes significantly from the fourth quarter, we're really not expecting a big percentage increases there.

Okay. All right.

But you're right in the Equitas thing, as you're thinking of that, that was a one-time. That's why our interest income is up so much from last year, but that's a one-time item. And the tax rate, you properly pointed out, we have the whole year's impact of that R&D credit. Next year, it will be in each quarter. But it's at 32% rate as the guidance we gave and we're still giving for the year for the income tax rate.

Okay. That's helpful. Thanks.

And it appears there are no further questions at this time. Mr. Koch, I would like to turn the conference back over to you for any additional and closing remarks.

Thank you, operator. Thank you for joining us today and thank you for your interest and investment in Crane Co.

That does conclude today's Crane Co. Fourth Quarter 2006 Earning Call. We do thank you for your participation and you may disconnect your line at this time.