Crane Co (CR) 2008 Q1 法說會逐字稿

Good day, everyone and welcome to today's Crane's Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Director of Investor Relations, Mr. Richard Koch. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to Crane's First Quarter 2008 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. 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. 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 non-GAAP numbers which are reconciled for the comparable GAAP numbers, in a table at the end of our Press Release which is available on our website at www.craneco.com, in the Investor Relations section. Now, let me turn this call over to Eric.

Thank you, Dick. Last night, we reported first quarter net 2008 net income was $48.4 million or $0.79 per share, compared with net income of $43.6 million or $0.71 per share, in the first quarter of 2007, an increase of 11%. Let me now highlight several key items for the first quarter.

Fluid Handling had record first quarter sales and operating profits. Sales increased 10% in the quarter to a record $289 million, operating profit increased 44%. Operating margin reached 15.5%, exceeding our longer term goal of 15% margins for this segment.

Merchandising Systems operating profit increased $4.5 million, with strong improvements in both Vending and Payment Solutions. The stronger than anticipated performance in Fluid Handling and Merchandising Systems, more than offset the higher engineering spending in Aerospace and soft markets for Engineering Materials. Turning now to specific segment comments.

Aerospace Group sales of $101 million increased $11 million or 12% from $90 million in the prior year period. The first quarter 2007 sales, exclude $10 million of sales from aircraft electrical power, which was transferred from Aerospace to the the Electronics Group effective January 1, 2008.

OEM and aftermarket sales were higher than last year with OEM sales growing 8% and aftermarket sales growing 10%, on a comparable basis. The OEM aftermarket mix was 62%/38% essentially the same as last years first quarter. Operating earnings and Aerospace declined by $4.9 million, reflecting the $10 million increase in engineering expense due to the heavy investments in new programs and technology.

Absent the heavy investment in new programs for future growth, operating margins were consistent with our long term goal of 20%. Gross profit, which excludes engineering spending, increased $4.6 million over the prior years quarter. I point this out, so that you will understand that the balance of the business in Aerospace is performing well and in line with our long term expectations.

Our engineering spending in the first quarter of 2008 was $24 million, compared to fourth quarter of 2007 of $21 million and $14 million in the first quarter of 2007. This increase in engineering spend, all of which is expensed, is largely because of the 787 programs. Based on recent program reviews, which include the information about the delay of the 787, we now anticipate a higher level of 787 engineering expense through 2008, reflecting longer development time, continued software and hardware testing and modifications, and design changes related to the interface of subsystems with other suppliers. We expect to partially offset this engineering spending with claims settlements on certain developmental spending, expense controls, and better than planned growth in OEM and aftermarket sales.

Claims arise when changes of scope occur. That is when the customer changes the design, which impacts design costs or schedule and resources. The cost of the scope, change of scope is identified in the claim that is submitted to the customer by the supplier. We expect to receive certain claims settlements in both the second and third quarter which will help offset higher engineering spending. By their very nature, claims settlements are discrete items and could be hard to predict because they are the result of negotiation.

Electronics Group sales of $57 million, decreased $1 million or 2% due to the lower sales in power solutions. The Electronics Group operating profit was essentially even with the first quarter of 2007.

Engineered Materials. In the first quarter, Engineered Materials core sales decreased $13.7 million, reflecting lower volumes to the companies traditional recreational vehicle and transportation customers, partially offset by $8.7 million of sales related to the composite panel business we acquired from Owens Corning in August. We saw a 22% decline in sales to our traditional recreational vehicle customers, in line with the continued softness in the RV industry. We experienced a 34% decline in our sales to transportation related customers, consistent with reduced trailer build rates and a 4% decline to our building products customers. Operating profit declined 27% as a result of lower core business sales and higher raw material costs, which are largely related to crude oil and natural gas prices and costs associated with the integration of the acquisition.

We announced price increases to our customers to reflect these higher costs and will benefit from that for the remainder of the year. The physical expansion of Noble Composites and the integration of Owens Corning composites acquisition, are proceeding as planned. We currently are conducting trials and will be ramping up production of the second manufacturing line of Noble, over the next several months. While direct labor headcount is constantly adjusted with volume, given soft market conditions we have also reduced indirect headcount in the core business by 10%.

Merchandising Systems. In, we had a record first quarter for Merchandising Systems. Sales increased 17% with improvements in virtually all business lines lead by the successful introduction of the glass front BevMax III, and we saw higher demand for coin and bill validation and our coin dispensing products. Operating profit increased $4.5 million or 47%, reflecting very effective leverage of the higher sales and the absence of integration expenses for the Dixie-Narco and automatic products acquisitions incurred in the first quarter of 2007. Improved performance from the acquisitions we made in 2006, contributed significantly to the the operating profit increase.

We continue to see sales growth from our Currenza payment system for the Vending Channel and the new glass front BevMax III, both of which can enhance profitability for the root operator. Orders from the major bottlers to the BevMax III machine are expected to remain seasonally strong to the second quarter and then are expected to taper off in the second half as is normal in the industry.

Fluid Handling, which represents about 42% of Crane's total sales, turned in a record first quarter with sales increasing 10%, operating profit growing 44%, with a profit margin of 15.5%. The operating profit increase was broad based across all major units in the segment reflecting continued global demand, improved productivity and good pricing discipline.

We have continued to see broad based demand from the chemical and pharmaceutical industries and energy which includes power and oil and gas. Crane Supplies, which services Canada continues to see consistent demand. As expected in our Crane Pumps and Systems business, we had sales decreases for our residential Pumps and Systems. We remain committed to the concept of profitable growth with a strong discipline on pricing. Raw material escalation issues continue to affect the entire industry and we continue to raise prices selectively.

As previously disclosed we'll be closing our foundries in Ipswich, England and Brantford, Ontario and we'll move that foundry work to China. Our foundry and restructuring efforts are on schedule. These are important steps to increase our low cost country sourcing and improve margins in 2009.

As pleased as we are with our record first quarter with operating margins at 15.5%, we do not expect margins for the balance of the year to be quite as robust, because spending for continued growth initiatives such as costs associated with the closure of the two foundry's and our China expansion, the increase in the nuclear valve capacity, new protect development efforts and upgrading our information technology infrastructure. We have received orders from the military which will benefit our Pumps and Systems business later in the year and will help to offset lower residential demand.

I just returned from two weeks in the Middle East and Asia along with the leaders of our Fluid Handling business. Our findings from this visit reinforce the theme of our Annual Report, the better we get the more opportunity we see. We continue to invest resources, improved execution in each region, and see continued gains from our reorganization focused on end markets and Energy and ChemPharma.

All indications are that global demand will continue to be strong for sometime and we remain guardedly optimistic as project business outside North America remains strong. Capital spending was $9 million in the first quarter of 2008 compared to $7 million in the first quarter of 2007, reflecting increased new Product Development, the completion of the Noble Composites expansion, and our new Fluid Handling facility in China. We bought back 958,000 shares of stock for $40 million in the first quarter, which will mitigate dilution for the year. At the present time, we do not have plans for further re-purchases in 2008.

First quarter reported GAAP tax rate was 32.3%, compared to 32.5% in the first quarter of 2007. As previously disclosed, we anticipate the 2008 annual tax rate will approximate 31%, with some variability quarter to quarter. We are reaffirming our earnings guidance for the full year 2008 of $3.45 to $3.60. We continue to have a strong balance sheet and end of quarter with $295 million in cash, as we continue to opportunistically look for acquisitions. Now back to you, Dick.

Thank you, Eric. This marks the end of our prepared comments. Operator? We are now ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS]. We'll go first to Deane Dray with Goldman Sachs.

Thank you, good morning.

Good morning.

I'd like to drill down a bit on the Fluid Handling business and to get a better sense of where that upside came this quarter and Eric, you talked about global demand. So first question is, how does that demand break out the quarter between major geographies, so a sense that North America, Europe, Asia?

Well, the way I would answer, well first off we have a big European business. We have probably 15% of our sales are in the Middle East and Asia, a big European business, a big Canadian business, so the demand has been pretty broad based. Dick can give you the specific break down later, Deane.

Okay and then how about on how much of that was price? You talk about price discipline and recovery raw materials. How much did price contribute this quarter in Fluid Handling ?

Here is the way we look at this. We see, we're very pleased with the Fluid Handling performance in the first quarter on a year-over-year basis, and it really represents a continuation of the positive trend that you saw last year. So I would describe the performance there as tremendous throughput efficiencies versus a year ago on the $288-89 million in sales.

We do, our analysis price, our price increases did cover material so we got a modest benefit there. Our total salaries, wages, infringes, as a percent of total sales were a full two percentage points better on the $288 million in sales than they were a year ago. That's almost $5 million in savings.

We clearly leverage the core volume that we got, and we benefited some from the FX translation. So this was kind of consistent broad based across all the units and overall performance of the business versus just any one issue that I would point to.

So that's my next question was, when I look at that leverage that you have in Fluid Handling, 53% incremental margins would suggest that you got to ask whether there's anything special going on, no one-time items that would have boosted that because to get that kind of leverage is extraordinary versus anything you've done previously.

Well, Deane, you didn't listen to me. It's not about the incremental $25 million in sales. It's about the throughput efficiencies that we got on $289 million in sales. Our labor costs as a percent of sales are down 2%. That's over, that's almost $5.5 million. We got price in relation to material overall. We've got some benefit from foreign exchange.

We clearly did a good job of leveraging the core volume that we got excluding price, so we - I, it's not about the $25 million in incremental sales. It's about, on a broad base basis the better performance across the Fluid Handling business and that's the way we look at it and that's the way that I think everyone should look at it.

Good, that's helpful but your comments about the balance of the year, not quite as robust, what were the factors that will contain that margin?

Again, we're not harvesting this business. We're investing in our Fluid Handling businesses with the foundry restructuring, a whole new 100% owned WOFE in China, we're expanding our Nuclear Valve capability, we've got more new Product Development going on in Fluid Handling than we've had for some time and this is all about investment, we're expanding, I just spent two weeks with the senior team in Asia and the Middle East. We're clearly expanding our Sales and Marketing efforts across the Middle East, India, and China, so this is all about investment.

Terrific.

And we're going to continue to do that.

Okay and then just quickly over in Aero, is this the first time that you've kind of laid out an expectation regarding claim settlement? And can you give any sort of specifics around what you think that second and third quarter offset might be, any way you can quantify those claims and will that get contentious or is it pretty automatic in how you'll get it?

First off, I think claims for out of scope work in the Aerospace Group is kind of a normal part of the business. They're heavily negotiated, and there's a lot of debate around them but I think it's a normal part of the business. I'm not going to give more clarity in terms of that guidance.

There are a number of moving pieces and initiatives including the changes in scope that are occurring, so I'm really not comfortable providing a specific number either on the engineering spend or on the claims, at this point. I would reiterate that my prepared remarks that impacted the higher expected engineering, is expected to be partially offset by some of these claims and settlements as well as higher OEM and aftermarket sales.

Thank you.

Thank you.

We'll go next to Ron Epstein with Merrill Lynch.

Hi guys, it's actually Stephanie Wang, how are you doing?

Hi, Stephanie.

Hi. I just had a question about, I know you mentioned you're expecting kind of a higher level of sustained R & D related to the 787, so should we expect kind of a similar run rate to what you guys reported in the first quarter through the rest of the quarters?

You know, Stephanie, I'm just not going to give guidance there. This is as I said, there's a lot of moving pieces and initiatives here in terms of how and where we schedule certain functions to go on brake Controls, claim recoveries. There's just a lot of moving pieces and we're comfortable that we have sufficient courses of action that we're taking to be able to meet our overall guidance but I'm not going to , I don't think I can give you specifics on either the engineering spend or claims at this

Okay, but I guess we should expect, I know you said I think $73 million in '08 so I guess we would expect something higher than that though?

Yes.

Okay. And then kind of given what's going Boeing on in North America --

With the industry trend also.

Industry. Okay.

On this plane.

And then given kind of what's going on with the North American airlines with some M & A and a lot of them cutting capacity, are you expecting a similar sort of, I know you reported 10% growth in the after market. What are you looking for, for kind of the rest of the year as we go forward?

We think, I haven't given a specific estimate on aftermarket but we continue to expect it to be strong. We've got some important initiatives in our repair and overhaul to shorten lead times to continue to build that business.

We've got some aggressive stretched targets in our modernization and upgrade, and based on the current signs of we expect our aftermarket to continue to be actually a little bit stronger than we planned. We went back and looked at some analysis the last time after 9/11 when they started to park planes and there is quite a considerable lag between the parked planes and our aftermarket so at least for 2008 we should be okay.

Okay. Thanks and then how is your CFO search going actually?

We're in the very final stages.

Okay. Well thank you very much.

Thank you.

We'll go next to Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Good morning, Shannon.

So on an Engineered Materials, you mentioned cutting through price to get back some of the margin after a tougher first quarter. Are you seeing more difficulty doing that given how tough the RV and transportation end markets have been or any read on how much of that you think can stick? Is it getting any tougher than it was a year ago?

Our price increases across all of the markets have been implemented and accepted, and we expect them to, we look for the price increases to cover our rising material costs for the remainder of the year.

Okay, so the first quarter Is kind of a little bit of an anomaly and we should get back to something more normal for that segment?

Our first quarter had almost no price increase in it. We are looking for prices to cover material costs and those prices have been accepted for the remainder of the year.

Okay. And then Fluid Handling, we went through kind of the margin dynamics there. In the core sales growth, as strong as things seem to be actually 4% is a little less than I thought, the leverage is better than I thought but the volume is a little lighter, but any commentary in terms of the pieces there, what parts of it are up sort of strong double digits and what the drags are?

I said pretty consistently, that we're focused on disciplined profitable growth and we're being very disciplined on pricing. You can almost take on as much work as you want here, if you not disciplined and when you're disciplined about pricing , you're going to hold back that growth a little bit.

I would also, and we certainly demonstrated that we could, that we're running the business in extremely profitable way. I would point out that, you could knit this a little bit that there's one less shipping day this year than last year because of where Easter fell, that our small residential pump business was off, but we could mitigate that with our military orders in that business, so I'm not, I don't really see it as a key issue. And I've said consistently, we think much, don't need much volume to continue to drive this kind of performance and operating profit improvement in the

Okay. And just last one on sort of uses of cash here, you said no plans for further share repurchase. I assume maybe that means the acquisition pipeline is looking pretty good too. What's the outlook there and any particular target areas?

I think we've been very consistent here that when I just go back to the February conference recently that generally, our preference is to look for acquisitions and that we want the share repurchases assuming we think the stock is a good investment, we want to make sure we mitigate any at a minimum the dilution there.

I wouldn't say that on the acquisitions we're spending a lot of time on it. I wouldn't say that it's a full backlog by any means. We are just starting to see pricing crack here a little bit, but it's not systemic across industries and we expect pricing to continue to come down here given the kind of economic environment.

Okay. Thanks a lot.

Yes.

We'll go next to Matt Summerville with KeyBanc.

Good morning. Two questions. First,can you just provide a little more commentary around the top and bottom line outlook for the electronics portion of Aerospace?

I would say stable. For both. Our guidance at the beginning of the year was 2% revenue increase with some, a little bit of margin improvement and we're looking to work hard to track that.

Okay. On the Engineered Materials side you hit on raw material costs and selling prices, but more on the markets that you're serving. Are you getting a sense that any of your three major markets are approaching a bottom yet?

I would characterize, RV's have been difficult year second quarter in a row. Can't really tell how much of the first quarter was somewhat of an inventory adjustment, but I don't really look for it to get any better.

I would say that transportation, which has been down sharply through '07 and in the first quarter, if you look at the industry statistics on build rates for reefers and drive ends, year-over-year in February it was actually up slightly, February versus February, so we're looking for transportation to be more stable. Building materials, I think was down 4% in the first quarter. We see it in that range, maybe a touch weaker as we go through the year.

Okay, great.

And the key here is that we've got a strong management team in place. We implemented our price increases as largely as we planned. Those are in place. Our expansion in Noble is behind us. We feel like we're fully engaged and prepared going into the second quarter and the rest of the year here, in spite of difficult volume environment.

Hey, Eric, with respect to the price increase, I apologize if you already mentioned it, when did that take effect?

It's really announced in the first quarter, really starts to take effect in the second quarter.

Okay, great. Thanks a lot.

Just a tiny little bit was in the first quarter.

Thank you.

Yes

We'll go next to Scott Graham with Bear Stearns.

Good morning, Eric. Good morning, Dick.

Good morning.

Just a couple of questions. first on the Fluid Handling business. I know this question was asked earlier, but when you're talking about the 4% core sales versus what was double digit for a couple of quarters last year, is there anything in here from a project timing standpoint that may have impacted the quarter as well?

No. This is about, one of the things I learned when I first came here in 2001 is, Shell Evans, I used to talk about growing sales and Shell Evans told me it's not about growing sales. It's about growing profitable sales and believe me, I've learned that lesson early from Shell and we're disciplined about it. And this is, our margins and our improved profitability speak for themselves. We do not want to load up our plants with unprofitable business.

Okay. You seem to be pretty excited about the Vending Machine results, obviously the margins have been there and the payment system stuff has been there for awhile under Brad's very steady hand there. What are you seeing in the order book, if that's the right way to ask it. On the Vending machine sales side that suggests that I think that I think what is that this business may have finally turned the corner.

Well first off, Scott, let me thank you for asking about merchandising. We spent all last year talking about it and now that I'm getting good results, I can't even get questions about it.

Why ask anything good.

So I owe you a dollar I think. So the backlog is up a little bit but it's a book and ship business so it's hard to tell, but we just strategically the acquisitions have so strengthened our position in North American Vending. Strategically, we've got, we believe that the BevMax III, the new glass front, is the premier industry leader with features, benefits, and certainly in terms of quality, we think that what we're hearing back from our customers is that their experience is solid, robust, and they're coming back for reorders. So I like our strategic position in North America is clearly the leader and the acquisitions have put us there.

We have this really high technology, high margin Payment Systems business that we're investing into grow. We're bringing the recycler into the Vending Channel and I might add that we have a handful of new products that we're bringing in Vending. I feel solid about it, certainly based on the current order rate and how things look.

We have a management team thats gone from 100% focused on assimilating these acquisitions to a management team that's fully engaged in driving growth and being on the offense. It's just fun to see.

Eric, thank you. Thats all I had.

Thanks, Scott.

(OPERATOR INSTRUCTIONS) We'll go next to Jim Pong with Gabelli.

Just on the 787 engineering spend, do you expect that to begin to trend down in 2009?

Yes.

And then could you just talk about the revenue expectations you might get from the 787 as we go into '09, '10, and '11?

Again, we don't really as a matter of policy, Jim, disclose ship set content on these planes. If you look at 2009, I think the new schedule from Boeing is 25 planes in the third or fourth quarter. We start to see revenues six months for that before that, but for 25 planes it's relatively insignificant.

The key issue for us is the amount of the development spend that we're spending which is clearly over and above what we expected and really, that is what we have to manage and drive and finish this project and get it behind us and as you see that engineering spend come down which we expect a dramatic decline in '09, you will see a strong increase in Aerospace earnings.

Okay, great. Thank you. That's all I have.

Thank you.

Thank you. That concludes our question and answer session. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Thank you very much for joining us today and your continued interest in Crane. Bye-bye.

Thank you, everyone. That concludes today's conference. You may now disconnect.