Crane Co (CR) 2007 Q2 法說會逐字稿

Good day, everyone and welcome to the Crane Co Second Quarter 2007 Earnings Analyst conference call. Today's call is being recorded.

At this time I would like to turn the call over to the Director Investor Relations, Mr. Richard E. Koch. Please go ahead, sir.

Thank you operator. Good morning, everyone. Welcome to the Crane's Second Quarter 2007 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 a reminder, the comments we may make on this call may include some forward-looking statements we would refer to you the cautionary language at the bottom of our, 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. Last night we reported second quarter 2007 earnings of $0.75 per share. These results included a charge of $0.09 per share for the anticipated settlement of the previously disclosed false claims proceedings by the U.S. Government that has been substantially negotiated but not yet executed. Excluding the settlement second quarter 2007 earnings per share were $0.84, exceeding the high end of our guidance of $0.74 to $0.82, which obviously did not include the $0.09 per share government settlement costs.

Second quarter 2006 earnings were $0.71 per share, which included a $0.04 per share gain on the sale of two businesses. On an adjusted and comparable basis, our second quarter earnings per share are up 25%. The non-GAAP table in the press release provides details to help you understand the results of our continuing operations.

Let me give you more context on the one-time 7.6 million pre-tax provision we have taken for expected settlement costs with the U.S. Government. We inadvertently failed to provide prior notice to the Navy and update the Navy's qualified product listing to reflect the 2003 change in manufacturing location for certain valves from California to Texas. We have cooperated fully with the government's investigation. The failure to notify the Navy was unintentional and there was no misconduct by Crane co personnel. This legal matter has been previously described in our SEC filings.

Turning now to specific segment comments, Aerospace and Electronics operating profit for the Aerospace and Electronics segment declined 1.6 million, attributable to the performance of the Aerospace group. In the Aerospace Group, the positive earnings impact of strong OEM and after-market demand was offset by a 6.9 million increase in engineering expense. Demand for our Aerospace products continued to be strong in the quarter, and is expected to remain strong for at least several more years, and our goal remains for operating profit margin to be 20%. In the Aerospace group, OEM and after-market sales were higher than last year. OEM sales grew 23%, and after-market sales grew 14%, excluding Resistoflex Aerospace which was divested in May of '06.

The OEM after-market mix was 63% and 37%, compared with last year's second quarter mix of 61/39. Our engineering spending, all of which is expensed, is the key investment in aerospace's future, as we described on our first quarter earnings call, in 2007, we are spending heavily on three major Landing Solutions Programs, the Boeing 787, the Joint Strike Fighter, and the Airbus A400M. First production hardware delivery for the 787 will be in the third quarter of 2007, the Joint Strike Fighter will be in the fourth quarter of this year, and the A400M will be in the third quarter of '09. Our engineering spending in the second quarter of '07 was 17 million, compared to 15 million in the first quarter. And is expected to be in that range for the balance of the year. I do expect the spending to decline noticeably in 2008.

The Electronics group operating profit was approximately the same as the second quarter of '06 on 6% higher sales. The second quarter saw a continuation of the good order in flow that we experienced in the first quarter that resulted in the backlog being 8% higher than a year ago. Engineering materials. In May, we announced that Jeff Craney had been named president of Crane Composites group. Jeff joins us following a broad career of more than 25 years with Owens Corning. In the second quarter, Engineering Materials (inaudible) an operating profit grew 7% and 36% respectively over 2006. Overall sales increased 5.4 million, with the increase due to the Noble Composites acquisition.

We have continued to see weakness in our key end markets that have resulted in sales declines of 19% in Recreational Vehicles, excluding Noble, 18% in Transportation, and 9% in Building Products. These trends were similar to the first quarter of 2007 and are likely to continue into the third quarter. Good earnings from Noble, disciplined cost control and improved yields in the plants resulted in a 20.4% operating profit margin compared with 16% last year. The need for customer support payments has been reduced. Which translated into lower product support costs in the second quarter of 2007, a trend which we expect to continue in the second half of the year. Our more distortion resistant G3 Fiberglass Reinforced Plastic Panel for the RV industry is performing well in the marketplace, and is gaining customer acceptance. Noble composites which was acquired last fall had sales of nearly 15 million in the second quarter and operated near capacity. In May, we broke ground for the expansion of Noble which will double its capacity. The expansion should be complete in the second quarter of 2008.

Merchandising Systems. With the acquisitions completed in 2006, sales rose above the 100 million mark for the first time, increasing 88%, and operating profits increased 164%, to 11.9 million. Our operating margin of 11.8% was ahead of both the second quarter of '06 and first quarter of '07 results. We are continue to be pleased with the performance of our Payment Systems business which experienced strong demand in its traditional gaming and amusement markets, and very effectively leveraged the increased volume to operating profit. We are also focusing on Payment Systems for the Vending Channel and as we noted in our first quarter conference call we signed a long term contract to provide coin validation with a major European vending operator.

In the U.S. we have begun rolling out our new Payment System called [carenza] using 100% Crane bill and coin technology which is being sold as a package with our vending machine. In the traditional snack and food vending machine business, including the AP acquisition last September, operating profits improved over the first quarter reflecting the completion of the AP plant consolidation and greater productivity in the St. Louis plant. With a modest strengthening in orders, and continued focus -- excuse me, with the recent modest strengthening in orders, and continued focus on costs, profitability is expected to continue to improve in the second half in this segment of the vending business. In can and bottle vending machines, Dixie-Narco sales and operating results continue to below our expectation of break even operating profit for 2007, due to lower industry wide demand for can and bottle vending machines and slower than planned adoption of Dixie's glass front machines with major customers. We expected Dixie's sales will decline from first half levels because industry practices that customers normally order can and bottle vending machines in the first half of the year so they are in place for the peak cold beverage demand in the summer.

This lower seasonal demand will mean that operating losses of at Dixie will increase in the second half of '07. We have and will continue to take actions to right-size the business consistent with sales. We are capitalizing on manufacturing, engineering, procurement synergies between our operations in St. Louis, Missouri and Wilson, South Carolina, to reduce costs and improve quality. We are continuing our efforts to satisfy the needs of major customers for can and bottle vending machine. I believe the actions we are taking in '07 will position us for significant improvement in 2008. While performance at Dixie has been below our expectations, the other acquisitions we made in '06 are making solid contributions to the earnings growth for the Merchandising Systems segment as a whole. As we look at the overall performance for the six months sales are up 86%, operating profit up 13 million, up 162%, and operating margin is 10.9%, exceeding our expectations.

Fluid Handling which represents 43% of Crane's total sales had sales increasing 12.6%, operating profit growing 11.6%, with a profit margin of 11.9%. Our core sales in Fluid Handling which excludes foreign currency effects increased 8%, reflecting solid and broad-based demand from the chemical and pharmaceutical industries, energy which includes electric power, oil and gas, and nonresidential construction. We are seeing larger project orders from both NU's customers and engineering procurement contractors acting on their behalf. The competition for these orders is strong and pricing is an important element of success in the bidding process.

We are being disciplined on pricing particularly in light of the raw material escalation issues, that the entire industry is facing and in fact have selectively raised prices. New orders for Fluid Handling continue their solid pace, and the backlog at the end of June was 30% above year-ago levels. We continue to evolve our energy and [chem-pharma] market focus that we told you about at our December investor conference, which is bringing us closer to our customer's needs. Much work remains to be done in this market-focused initiative. Crane Pumps and Systems operating profit margin increased from the first quarter of 2007 and from the second quarter last year, which results favorably impacted by higher productivity from operational excellence initiatives and lower head count. Now, let me turn the call over to Bob Vipond, our CFO.

Thank you, Eric. Regarding our guidance for the second half of the year, our earnings guidance is $0.72 to $0.80 for the third quarter of '07, compared to reported earnings per share of $0.74 in the third quarter of '06. The third quarter of '06 did include a $4.9 million pre-tax benefit or $0.05 per share from a reimbursement from the Department of Defense for environmental cleanup costs related to years before '06. We have increased our earnings guidance for the full year 2007 from a range of 280 to 295 per share, to a range of 290 to 305 per share. This guidance is for normal business operations and excludes items such as the $0.09 per share provision for the anticipated settlement with the U.S. government. Including that provision, the company's earnings guidance for the full year 2007 is 2.81 to 2.96 per share.

The company's tax rate was 31.5% for the quarter, compared to 32.5% for the second quarter of last year. The primary reasons for the decrease were the inclusion of the federal R&D tax credit, in the second quarter of 2007, and it was reinstated in December, so it wasn't a comparable amount in the second quarter of '06. And greater utilization of foreign loss carry-overs in 2007. We continue to expect our annual tax rate will be about 32% for all of 2007.

Let me call your attention to the non-GAAP financial table which accompanied our press release, which dealt with several items from the income statement and balance sheet and our free cash flow. Cash provided from operating activities, 34 million compared to 50 million in 2006. This was primarily driven by increased working capital requirements to support our higher sales. And higher net asbestos payments in 2007. In the second quarter of 2006, we actually had a slight asbestos related cash inflow from our insurers and this year we of course had outflows. Capital spending was 15 million in the second quarter of 2007, compared to 9 million in 2006, as a result of our investment in the Noble Composite Expansion.

For 2007, we continued to expect free cash flow will be in the range of 165 to 190 million, compared to the 154 million we generated in 2006. 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 had said in our form 8-K. I encourage you to read (inaudible) carefully as we have made 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 will go to the first question from Deane Dray at Goldman Sachs.

Thank you. Good morning. The first question on the Engineering Materials business, can you comment to the extent you can on the product support costs? That was something that you carried for several quarters and it sounded like that was less of a head wind this quarter. Just in terms of the business issues, is this now all behind you now or is this going to carry on a bit?

I think, Deane, the -- I think we did absolutely the right thing. We stood behind our product. We called product support costs because it was not clearly cover under our warranty and I think our customers have appreciated that. And it was the right thing long term to do strategically. And we had anticipated a decline in the product support costs this year. And that decline has occurred. As we work through the -- some of the distortion issues, and you know, I think by the end of this year, it should be behind us or largely behind us, and frankly is tracking as it was. The only -- the residue of this is there are still two outstanding lawsuits that have not yet been resolved.

So, Eric, if you look at the Engine Materials business, it was a terrific quarter and that you add some pressure on the top line, but you came through in profitability and I was just trying to gauge how much of that was the reduction of the product support costs, the handling, raw material cost, getting pricing, just can you calibrate for us?

I just think for competitive reasons we are not prepared to get into that, Deane, but I would say that importantly, material costs savings and the yields in our plant was an important contributing factor. Just general cost control, was an important contributing factor, and the product support costs. So it is all three of those issues, I would say if you look at our traditional business, even though sales were down pretty dramatically, our profitability was slightly better.

And when you say down, those are the businesses in RV and transport, correct?

Excluding the Noble acquisition, those RV transportation, building materials, were all down, but in the agreggate, the profitability excluding Noble was slightly up.

Terrific. And then --

We did a good job there, Deane.

That is evident. On the fluid side, at 11.9% profit margin is right up at a level that I want to say over a year and a half ago people thought would be difficult to hit and you're hitting that regularly now. How much of a contribution did you get in price in the quarter? You mentioned it is tough to get price but can you quantify for us what price contributed in the quarter?

There's some price in there. I would rather not. I would say a couple of things. Let me deal with the margin issue. First off, I'm always happy when Fluid Handling is at around 12% margin but I actually -- if you look at first quarter, we did a better job of leveraging the volume in the first quarter than we did in the second quarter, and I actually was a little disappointed and I thought we could have leveraged the volume a little bit better in the second quarter than what we did. And I continue to see a lot of opportunities for us to improve margins and do better in Fluid Handling. I would also say that, demand stays strong here. I have been, just this past quarter, I've been -- I spent a fair amount of time in Europe, and I spent a week in the Middle East and we're continuing to see pretty strong global demand in Fluid Handling. I just don't see a reason why we shouldn't continue to experience that for the foreseeable future.

Just as a follow-up, on the Fluid Handling side, did price offset raw material costs?

Yeah, it did, Deane. This is Bob.

Good And then Bob, just last question, just to follow up on the announcement last quarter, where you all made the decision that you would no longer provide quarterly guidance, and just give us a sense, just confirm if that is the plan, and any feedback from investors and analysts about that going forward?

We've got I think universal compliments from people that we announced it a year in advance that we were not going to do quarterly guidance, and then people were very complimentary about the fact that we're not only going to give annual guidance, but we're going to do it in February, and we're going to continue to give sales and OP guidance for the major businesses. So people were complimentary on both.

Add us to the list of the compliments.

Thank you.

Thank you.

We will go to our next question from Shannon O'Callaghan at Lehman Brothers.

Good morning. You know, I guess a question on the Aero R&D. So Eric, I think what you said is, you know, expect this rate to continue. I'm assuming that is the 17 in the second quarter which would be about 66 then for the year now?

Yes.

So you updated us last quarter and this is a little bit higher. Last quarter you had said things came as a bit of a surprise to you. What is leading to the further increase? Could you calibrate us little bit there?

Well, we've got first flight is in the third quarter here and so there's -- we've got three or four new pieces of technology and great controls and finding an engineers is hard and expensive and that's the run rate that we need to do to get the job done. And frankly Shannon, the first priority here is to have great control for the first flight, and I frankly think we're going to have technology here that is far superior to anybody else in the world when we get done with it. But there is some short term pain to go through it.

And then when you're talking about, substantially down in '08, I mean can you give us any sense of what you're talking about, and has that number, given that '07 is sort of turning out higher than you think, is the number in '08 going to be a little higher than you initially thought, or is the drop just bigger?

Let me do it this way. The engineering spend in Aerospace will be highest at the beginning of the year and will ramp down each quarter as you go through 2008. We're running at 14%, 15% of sales here. In my own view, it should be maybe as much as 3% below that. So if you take 3% on 400 million of volume, that is 12 million bucks, that ought to count directionally that -- that is an opportunity to come out of engineering spend, not -- I say that. That's the way I think. Frankly, that's going to be an attitude I go into with next year's plan with but I don't have next year's plan obviously done with. But I know Greg Warfield is the same way. (sic - Greg Ward)

Okay. In terms of the Engineering Materials markets, you mentioned the third quarter is still going to be soft. When do you expect things to sort of -- the declines to at least moderate or things to improve in the end markets there?

Your guess is as good as mine. [ Laughter ] Look at it. What we're doing is we're doing an exceptional job operating, under these conditions, and I'm pleased with the performance. I think our goal here is strategically long term and certainly in RV's anyway to see if, with our new products, we can -- that position will allow us to take some market share to improve volumes but we will just have to see.

Okay. And just last one, I guess, in terms of some of the recent acquisition, it sounds like Noble is doing a lot better than maybe you thought, and Dixie a little worse. Can you just comment on how those deals are performing relative to what you were initially hoping for?

I would say first off, overall in the aggregate, clearly far better than we had planned when we bought them. I would say the payment systems, the businesses, the two payment systems businesses have been absolutely terrific, and particularly cash flow far better than we expected. Noble has clearly performed better than I expected or that we planned and Dixie has not. I would say that with respect to Dixie, in terms of the strategic importance, and the synergies that we're going to get, and the opportunities that we have in the future, if you ask me today, I actually feel better about it. I'm not happy with the results but I feel better about how important it is going to be to us.

Okay. Thanks a lot, guys.

And next we will move to Scott Graham an Bear Stearns.

Hey, good morning.

Good morning, Scott.

Several questions for you. A couple of housekeepings first. The other three $3 million of FX, you talked about what was in food handling, where was the other $3 million floating around, Bob?

Well, some of it, Scott, will be -- probably the next biggest piece is in merchandising. Remember, cash goes in Canada. That is a big piece. And we do have a European base in merchandising as well. That would be the next biggest piece. Because in Aerospace and Electronics, and Engineers Materials, the FX piece is very modest.

Okay. And what were valve sales in the quarter?

We didn't disclose it this time. Part of the philosophy here is to start talking about Fluid Handling in the aggregate and what the trends are in Fluid Handling. So we didn't actually break it out. But there wasn't any reason not to. But I don't have that number.

All right. Just a couple of -- of other questions. The backlog, Fluid Handling and Aerospace, obviously still looks pretty good. Do you have an idea, a sense, Eric, what the margins, the gross margins are, the backlogs, relative to the corporate average right now, high, low, inconsistent?

I'm not losing any sleep over the backlog margins.

Okay.

I think that -- I said consistently that we're trying to be disciplined in Fluid Handling, and Aerospace is, most of that stuff is on long term contracts.

Okay. Two other questions for you. You seem to try to color the merchandising sales quarter as sort of neutral, yet when you strip out the acquisition, the organic, the merchandising was quite good overall, not withstanding payment, you know, versus vending. Are we past the bottom in that business?

Well, the growth in sales in the second quarter, in the core business, excluding like for like acquisitions, if you take out the acquisition impact, the growth really was almost all from payment systems. But when you look at vending, it was -- I would call it flat. And we've got a recent -- I would call very modest uptick in orders here at the end of the quarter. And are expecting a little bit better volume in the plants, and particularly in that St. Louis plant, with AP and the old traditional MV in the third quarter. I'm not ready to call it as a turn yet.

Last question is, regarding the Fluid Handling remarks, which while the previous question did talk about, how it is comfortably at this higher level, I guess I was thinking that given all of the current activity that I know, Max Mitchell applies to that business that maybe there would have been better conversion. Would were there one or two things that maybe were one time in nature or what happened in that business that stopped that margin from going higher.

You and I think alike here. The sales were up 30 million and OP is up 3 million and I would like to think we're leveraging at least 20% generally. So it could have been as much as 3 million higher. When we look at it, there is some legal expenses, associated with a lawsuit that we settled and there is some ERP, we are putting in a new ERP system at [Zoemox], there's some -- a half million dollars that was in China, and there is just bits and pieces all around kind of that got in the way there. Nothing -- not one big thing.

Very good. Thank you.

Next we will move to Ned Armstrong at FBR and Company.

Yes, thank you. Good morning. My questions really had to do more with the sales and marketing side of things. You had mentioned, Eric, in talking about the merchandising systems, how sales at Dixie-Narco were off and it is going to be difficult to recover because you're past the peak season for demand. Can you talk a little bit about why those sales were off? Was it because of operational hindrances? Or lack of marketing focus? If you could elaborate a little bit on that, it would be helpful.

I would say first off that sales are off because based on everything that we can tell, I don't have the exact number on this, but clearly industry conditions in can and bottle have been soft in the first half of the year and are going to be soft in the second half. The second reason is because there has been, as I said, slow acceptance by some of the major bottlers of our glass front machine, as I mentioned in the first quarter, there are, in some cases, on trial, and other cases being tested, and that continued in the second quarter, and where they're continuing to be tested and I expect that to continue somewhat into the third, but that slow ramp-up in the glass front sales and acceptance has clearly been a factor impacting sales.

So from your perspective, it is much more market conditions rather than execution? Is that a fair assessment?

I would be tougher on ourselves than that. I think it is -- I don't have the exact percentages but I think it is both.

It is some of both.

Yes, sir.

Okay. And then with respect to Fluid Handling, I thought I heard you mention that some of your market focus isn't quite where it needs to be yet, with regard to chemical pharma, et cetera. Can you elaborate a little bit more on what you mean there, and why it is not up to your expectations at this point?

I wouldn't say it is not up to our expectations. It is just -- we're consolidating three different valve businesses, and the energy business, we're doing another three into the Kent Pharma business, the management team for energy is all in place, and structured, and operating on that basis. We do not yet have a president for Kent Pharma, so you know, Max is having to step in that role directly on an interim basis, so it is just a little bit slower to get that entire organizational structure together and move forward. And really, that is what I was alluding to.

So staffing and structure is really the reason there?

Yes.

Okay. Good. Thank you very much.

(OPERATOR INSTRUCTIONS) We will go next to Matt Summerville at Key Bank.

Actually, I just had one question. Most of mine were answered. Can you talk about where you stand in terms of raw material cost trends and engineering materialing as well as selling prices? And then I guess on the building products side, why do you feel your business is so slow? I thought you had a little bit of leverage to nonres there?

Styrene prices were kind of firming up. Styrene was firming up a little bit against us in the second quarter. We're kind of hoping, thinking that that is going to stable, be more stable here in the third, but as I said, we have had very good material utilization there in terms of our plant yields which has really paid big dividends. And what was the second question?

Building Products--

Relating to the Building Products business down 9%, I thought you had somewhat were supposed to be kind of meaningful new product launches there. I thought you had some leverage to nonresidential construction and I'm just trying to understand why the business --

I think some of that is price competition, and maybe a little bit a share in building products. Some of it is clearly slower. Decorator product sales, than what we would like. And I know Jeff Craney is our new President, is spending a fair amount of time thinking about that and of course coming from Owens Corning, he has a building products background, and I see him, fully engaged on this.

Okay. That's really all I had. Thanks.

Thank you.

And at this time, we have no further questions. I will turn the conference back to management for any closing remarks.

This is Dick Koch. Thank you very much for joining us and we look forward to talking to you on the next quarterly conference call. Thank you for your continued interest in Crane.