Crane Co (CR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Crane's first quarter 2009 earnings results 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, Mr. Dick Koch. Please go ahead, sir.

Good morning. Thank you, operator. Welcome to Crane's first quarter 2009 earnings release conference call. I am Dick Koch, Director of Investor Relations.

On our call this morning we have Eric Fast, our President and CEO, and Tim MacCarrick, 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 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 some non-GAAP numbers which are reconciled to 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 the call over to Eric.

Thank you, Dick. I thought we had a solid performance in the first quarter. While sales declined much more sharply than we had planned, our overall earnings, while considerably lower, were in line with our internal projections. Overall core sales declined 16% in the quarter versus our 7% guidance for the full year.

Extremely difficult end markets in Engineered Materials and Merchandising Systems resulted in unprecedented sales declines in the quarter of 54% and 34%, respectively. Both of these businesses are leaders in the niche markets they serve and we believe are winning market share. Aerospace & Electronics and Fluid Handling sales were in line with our expectations.

Disciplined cost control throughout 2008 by our leadership team focusing on headcount, discretionary spending, the restructuring program announced in the fourth quarter, and aggressive actions with suppliers all contributed to a profitability in line with our expectations in spite of the core sales decline. Given the weak first-quarter sales and even weaker orders, our backlog was reduced 7% from year-end 2008.

Recent project deferrals in our Fluid Handling segment and rescheduling in the commercial aerospace business suggests continued difficult markets. As a result we expect our cost reduction activities to be substantially greater than the $75 million we previously announced and we view them as ongoing, continuous adjustments to end market demand.

In spite of the more difficult markets and excluding the impact of the Coachmen legal settlement announced last night, we have reaffirmed earnings guidance. Our free cash flow guidance remains unchanged. Our balance sheet remains strong and we have excellent liquidity. We ended the quarter with $210 million in cash, a $300 million four-year revolving credit facility, no near-term debt maturities, and $150 million expected in free cash flow in 2009.

Our strategy remains unchanged with our focus continuing to be to win in the marketplace and to take market share. We are executing on this strategy by maintaining our customer-facing activities, continuing our operational excellence programs, and accelerating the introduction of new products. At the same time we are aggressively reducing costs and managing cash flow.

We feel that the measure of the Company will be how we come out of this global downturn and believe strongly that the successful execution of this strategy will give us clear opportunity to leverage volume when it turns. Now let me turn the call over to Tim MacCarrick who will provide additional details on our first-quarter results.

Thank you, Eric. Turning now to specific segment comments which compare the first quarter of 2009 with 2008 and include restructuring charges and benefits. Aerospace group sales of $93.4 million decreased $8 million or 8% from $101.5 million in the prior year. Total OEM sales declined 10% and although aftermarket sales also decreased 5%. They were stronger than anticipated and contributed to a favorable OEM aftermarket mix of 60% to 40% compared to last year's first quarter of 62% to 38%.

We did see improvement in military OEM and spare sales and higher modernization and upgrade activity on certain products. Operating profit in Aerospace declined by $1.3 million at the impact of the lower OEM and aftermarket sales more than offset a $3.3 million decline in engineering expense associated with the 787 and A400M programs. In the first quarter of 2009 our Aerospace engineering spending was $21 million or 22% of sales compared to fourth quarter 2008 spending of $28 million or 27% of sales.

As previously communicated, we have reached key milestone for the 787 program including delivery of initial hardware and software for first flight and expect to complete a version for commercial application during the second quarter.

Our engineering expense reduction activities remain on track and are being intensified with clear and improved line of sight to productivity opportunities. We expect to see accelerating sequential and year-over-year declines in aerospace engineering expense throughout the balance of the year. At this time it is our expectation that we will exceed the previously communicated $25 million year-over-year reduction in engineering expense on a full-year 2009 basis.

As previously disclosed, Boeing has communicated certain changed aircraft requirements that affect the 787 brake control system. And we remain in discussions with our customer, GE Aviation Systems, regarding development of a new version of the brake control system including whether this additional development work will be funded by the customer. Although these discussions are continuing, our position remains that we are not required to undertake this additional development work without customer funding.

Electronics group sales of $58.7 million increased $1.5 million or 3%, primarily driven by relatively stable demand on key military programs. This sales growth together with ongoing management actions including stringent spending controls, stronger program management, and improved manufacturing performance resulted in a $2.6 million improvement in operating profit compared to the first quarter of 2008. These actions have also enabled improvements in key operating and customer metrics within the electronics business including lead time and on-time delivery.

In the first quarter Engineered Materials sales of $38.2 million decreased $45 million or 54%, reflecting substantially lower demand across all areas of the business. First quarter 2009 sales declined 76% in the recreational vehicles business, 42% in transportation related, and 30% in our building products segment, all representing increased rates of sales decline on a quarter-over-quarter and year-over-year basis.

Although we experienced a Q1 decline in sales of 54% our continued efforts to responsibly manage the cost base of this business through ongoing headcount reductions, price versus material discipline, and lower manufacturing and general costs, Engineered Materials posted an operating profit of $1.5 million in the first quarter of 2009. Now this represents a decline of $11.7 million versus Q1 of 2008, but an improvement in profit performance compared to the fourth quarter of 2008.

To date we have reduced headcount levels by 45% compared to year-end 2007 and by 18% since December of 2008. The restructuring actions within Engineered Materials including the reduction of our manufacturing footprint from eight to five plants remain on track to deliver meaningful savings in the second half and are expected to deliver pretax savings of approximately $7 million in 2009.

We recently shut down operations in our Zenicon thermoplastics facility in Joliet, Illinois, and at the end of March we ceased manufacturing operations at our Grand Junction, Tennessee, facility. As previously announced, we will complete the consolidation of our two facilities in Goshen, Indiana, later this year.

Finally, related to the separately announced legal settlement within the Engineered Materials business, we agreed to a mediation with Coachmen in an effort to resolve this lawsuit and we are satisfied that the settlement outcome is in the best interest of the business.

Overall Merchandising Systems segment sales declined 37% versus the first quarter of 2008 reflecting continued difficult end market conditions, resulting operating profit declined $11 million or 79%, and margins eroded eight points to 4.2%. Demand declined for both our vending and payment systems products during the second half of 2008 and we experienced further declines in the first quarter of 2009. Te fundamental drivers of this end market softness for vending are continuing as commercial office space vacancies rise, factory employment levels decline, and vending route operators experience margin pressure.

In addition to the slowdown in the vending channel, payment systems felt the impact of the global slowdown in gaming, retail, and transportation end markets.

In response to these ongoing market conditions we have reduced employment levels by 21% compared to the end of 2007. The recently announced consolidation of our St. Louis, Missouri, production operations into our Williston, South Carolina, facility is underway, on track, and will be complete by year-end. We expect this plant consolidation and other restructuring related actions within Merchandising Systems to save approximately $9 million pretax in 2009.

Despite the disappointing current market environment we are containing our efforts to stimulate near-term sales and position this business for improved profits when markets return. New product introductions such as [Corenza], merchant, and our glass-front beverage machines have been very favorably received by the marketplace. We are taking market share and we continue to maintain solid operational and customer metrics across the business.

Fluid Handling, which represents 45% of Crane's total revenue, experienced a $22 million or 8% reduction in sales and an $8 million or 18% decrease in operating profit. Although the Q1 core sales decline at 5% was consistent with our expectations, we incurred $40 million or 14% of unfavorable foreign currency translation which had a significant impact on our sales performance. These declines were partially offset by $33 million or 11% of sales generated from Delta Fluid Products and Krombach. These late 2008 acquisitions which broadened our product offerings and enhanced our manufacturing capabilities are performing well and are integrating smoothly into the Fluid Handling group.

Fluid Handling margins declined 170 basis points to 13.8% compared to the record first quarter of 2008, primarily reflecting unfavorable foreign exchange and lower sales. However, despite the quarterly sequential sales decline of $12 million, margins were essentially flat compared to Q4 2008 reflecting our continued and growing cost productivity efforts within the Fluid Handling business.

Fluid Handling backlog was $276 million at quarter end, a decline of $27 million compared to December 2008 levels. New order demand continues to be under pressure as certain customers push out project timelines and demand slows across the chemical, oil and gas, pharmaceutical, and building products and services industries. Accordingly, we do expect further sales deterioration and consequently are intensifying cost reduction efforts across the Fluid Handling businesses.

In our Controls segment sales decreased $8.8 million and operating margins fell to 1.5% driven by lower demand for oil and gas, transportation, and military end use applications that primarily impacted our Barksdale and Azonix business units.

Now reflecting back on our top-line performance across the business, our quarter sales declined 16% in the first quarter compared to our investor guidance of a 7% full-year decline. Our first quarter, and in fact our first half, comparisons will be made against record levels of performance in Q1 and Q2 of 2008. This comparative growth effect will be mitigated somewhat in the second half given our relative performance in Q3 and Q4 of 2008.

Having said that, it is likely that our core sales for the full year may decline more than originally anticipated and accordingly we are taking actions to intensifying our cost productivity actions.

We have implemented a comprehensive, systematic, and culturally-embedded process to reduce areas of general cost in every part of the Company. Our employees are actively supporting this effort on an ongoing basis and we have seen excellent results. We expect that this pervasive effort will continue to yield significant benefits thereby allowing us to exceed our prior productivity expectations for general cost savings. As I mentioned earlier, we also expect even greater reductions in aerospace engineering spending throughout 2009. And, finally, our restructuring program announced in Q4 2008 to reduce headcount, facilities, and infrastructure costs across the Company remains on track to deliver savings of $37 million in 2009. Accordingly, we now anticipate that these cost-focused initiatives will result in pretax year-over-year savings substantially exceeding our previous 2009 estimate of $75 million.

We have disciplined processes in place to verify the traction of all of our cost savings programs and to extend and accelerate them in response to ongoing marketplace demand as required.

Turning now to certain key financial items of interest. The first-quarter tax rate was 30.6% compared to 32.3% in the first quarter of 2008 and we continue to estimate that the full-year tax rate will be 30%. Our balance sheet remains strong and we ended the quarter with $210 million in cash. We have no significant near-term debt maturing as half of our long-term debt of $398 million is due in 2013 and the other half is due in 2036.

Capital expenditures in the first quarter were $10 million and included some carryover spending on projects initiated in 2008. We have set 2009 capital budgets to limit spending to approximately $35 million compared with the $45 million spent in 2008. Now back to you, Dick.

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

(Operator Instructions) Shannon O'Callaghan, Barclays.

Can you give us a little more flavor on your new expectation for core sales? You are saying worse than the down 7% you expected but you mentioned 1Q down 16%. It sounds like the orders were down more than that. Do you expect that kind of trend to continue? Do you expect it to get worse from 1Q, better from 1Q, and what drives that?

This is Eric, Shannon. We are not going to give out a specific on it because I think only God knows. But our view is that the -- our thinking is -- our current thinking is that the rate of decline will slow as we go through the year. That is what we currently have pretty much in our forecast and we are adjusting our cost base to accommodate that.

Okay. You mentioned a few markets there in Fluid Handling. Where are you seeing the biggest drop off?

We are globally seeing delays in significant major projects, and we are seeing a reduction in our daily MRO low flow both in Europe and here in the US.

Any particular end markets that are weaker than others?

Pretty much across the board.

Okay.

Pretty much across the board. Refineries; if you think about it, spreads are thin in refineries, chemical plants, power plants. It's pretty much across the board because of the downturn in demand and the credit availability.

Okay. Then on Aerospace we have got I guess two things going in opposite directions a little bit. On the one hand it sounds like you have got this modification hanging out there which may require you to do more work. On the other hand you are apparently ahead of plan on the existing set of brakes because you are reducing the R&D. So can you flesh that out a little bit? Any more color on what is driving this required modification? Is the version you have done really completely up to customer requirements? Are there still issues with that? Where do you stand?

The version that we are currently working on meets all the originally specified requirements. We are going to meet first flights, TIA; we are in solid shape there. The difference is on the new request for a new brake control which has new requirements.

Our position remains the same that we are not prepared to do it without customer funding. There has not really been a change in this since our last quarterly call or our February update.

Okay. In terms of this additional cost actions you are taking, how is that going to be accounted for? Are you going to run that expense through the P&L? You are still saying that your guidance includes the same $0.15 per share of restructuring, so are there going to be additional backed out charges or how are you going to do that?

I think Tim did a nice job on this. We do expect our engineering -- our previous guidance was $25 million. We expected the savings to be more there.

Secondly, on our discretionary spending, this disciplined process and the way the Company has reacted we are going to get a lot more savings than what we had previously planned. And then, thirdly, on the restructuring we reaffirmed that it would be approximately the $15 million that we have -- that we gave in our previous guidance. Some of that will change from what we originally thought, but we think largely it's going to stay in that ballpark.

Going forward the nature of the -- the additional restructuring is severance. At the present time there is no additional facilities being contemplated -- that could change -- but it's really the additional cost of severance.

Okay. All right, thanks.

Ronald Epstein, Banc of America Securities.

Good morning. Eric, can you talk about in a very general sense what you are seeing out in the market in terms of M&A, maybe the pipeline? Are there willing sellers, that kind of thing?

We are seeing dogs and cats -- that is not very professional. Just bits and pieces; we are starting to see some dislocations of some of the weaker companies. We are kind of coming to a period here where people had old price expectations and they are starting to be reset.

As we look at our radar screen at the moment we don't have anything large on the screen. Continues to be relatively modest opportunities. The challenge, Ron, is to be disciplined in terms of what your earnings expectations are for '09 and '10 and make sure that they are realistic.

Sure, sure, sure. And then maybe just circling back to the 787 brake software, when you look at in the end how much it costs and then what the original plan was, can you say how much over it costs? How many multiples of the original plan it was?

You know, we haven't really disclosed that but you can go back and look at the spending and it clearly far exceeds anything that we originally contemplated. It is all in the P&L; there is none in the balance sheet. And I can say that universally along the supply chain community for this airplane we are not alone in unfortunately exceeding our original target.

Yes, I guess that is kind of the point I was driving at. What was the underlying root cause? Was it just kind of you had changing expectations from your customer or was it just a very hard engineering task?

I think there is a combination of factors that include new technology on our part which wasn't as developed as it should have been and it has taken us a lot more money to develop that technology. I think it's the new way that the airplane went together in terms of very loose requirements at the additional initial stage, which required constant changes. And then even as recently as over the last six months a lot of changes that have come because as they start to put the plane together we are required to make changes in our original design, both hardware and software.

It's not a pretty picture but it's all in the P&L. It's really -- as we deliver this first set of brake controls, it's going to be largely behind us here after the second quarter.

Okay, great. Thank you, Eric.

(Operator Instructions) Matt Summerville, KeyBanc.

Couple of questions. First, on Engineered Materials and Merchandising Systems -- I missed a couple minutes of your prepared remarks, Eric, so if you hit this I apologize -- but are your cost structures in both of those businesses to the point now where more in line with current demand? Just in terms of demand have you started to see any sort of bottoming out in either one of those segments or any of the pieces of those segments?

Well, I am not about to call what we see in terms of future demand. Clearly, in both these businesses it's substantially worse than what the industry thought and what we planned.

My comment on Engineered Materials is I think the team has done a terrific job here. When you can have sales down 54% and you make money that is saying something. If you notice our sales are actually down from the fourth quarter when we lost a little money. Even though they are down in the first quarter, we made some money.

So clearly the headcount reductions that started in the second quarter of last year -- we are down 466 people since the end of '07. That is a reduction in discretionary spending and discipline on price versus material. I think the team has done a solid job there.

And as I said in my remarks, we feel like it's hard to see because the orders are so small but we feel as -- we are taking market share in a very tough market.

I really think the same comments apply to Merchandising Systems. We did not anticipate a 37% decline in sales. If you go back and look at our previous guidance for the year, nothing like that. So much sharper than what we expected.

Hard to call demand here. The second quarter is usually a better quarter because of the bottlers (inaudible) but we will have to wait and see whether that happens. Again, we had 26% deleverage. And I would say that in both Engineered Materials and Merchandising Systems a lot of the savings from the restructuring activities will now start to come in the latter part of this year.

In the Engineered Materials we closed the Grand Junction plant at the very end of the quarter and the Goshen consolidation is not going to take place until third or fourth quarter. Then in Merchandising Systems the big St. Louis Williston plant consolidation will not take place till very late in the year so there is almost -- Tim made the comment, there is almost $9 million of savings we expect from those activities in Merchandising Systems. I think we only used about, we only got about $1.5 million or $2 million of them in the first quarter.

I think just to add to that on the restructuring actions, as I indicated, everything is on track and proceeding accordingly. As Eric mentioned, we will complete the St. Louis move to Williston, South Carolina, until later in the year but all of these activities are well in hand and moving forward.

Okay. And then, Eric, can you just provide a little bit of color in Fluid Handling how order rates looked month to month and if you have seen any discernible change thus far in April?

I am not going to comment on April. I would say that March was slightly better but I wouldn't see that as -- we didn't feel that that constituted a new trend.

Okay, great. Thanks, Eric.

[Rand Gessing], Neuberger Berman.

Good morning. On Fluid Handling can you just sort of give us that update as it relates to sort of the drivers of holding margin? I know we talked in February about the importance of pricing, but I just wanted to get a sense for you about how you feel about the markets as they are sliding a bit and how we will you hold price -- ask you how we will hold margins to some degree?

I would make a couple comments. I would reiterate first what Tim said that volume was down $12 million from the fourth quarter and we held margins, so at 13.5%, 13.8% is a pretty solid. Going forward, Rand, we do expect conditions to worsen in our Fluid Handling business. And as a result of that a lot of our additional cost take out activities are coming in the Fluid Handling business and all of that is well underway.

I think you also felt that price was going to be a weapon for us this year. Just any update as --?

I feel that we continue to be very disciplined on price and at the same time we have aggressively gone after our material costs, so we have maintained a positive variance there certainly through the first quarter. Again, not chasing projects that won't pay us. I expect it to get harder and harder, right?

Right.

It's going to get harder and harder.

Okay.

But we have done a good job and I don't see why we can't continue.

Okay. And obviously you are getting the savings that you felt from the foundry closure and all that.

Yes, yes, yes. Branford is closed, Ipswich is closed; it's on track.

Okay. The electronics piece of Aerospace, it seems like it's sort of coming out of the hole. Is that -- better performance there?

I wouldn't describe it coming out of the hole, Rand.

But we are finally getting some --

We are getting -- you are right. You are right. We have been stable at electronics, right? Running about a 10% margin and really what you are seeing in the first quarter is a little bit of volume, some nice throughput efficiencies. Again, on-time delivery here has gone from 75% to in the low 90%s.

Our pass through backlog has gone from $15 million down to $2 million or $3 million. And there is a real nice solid cost control environment that they have created. I was just out there last week. I mean, the margins were in the mid-teens in the quarter and the challenge for electronics is to see if they can hold that kind of performance for the rest of the year.

Yes, okay.

But it's a good start.

Yes. All right, guys, thanks.

Shannon O'Callaghan, Barclays.

Good morning, guys. Just thinking through what declines moderate from here; I mean, Fluid Handling we are going to see the declines get worse I think is what you are saying. So is it mainly in Engineered Materials and Merchandising as the declines moderate or when you think of the moderation from the 1Q rate what drives that?

Well, a couple things. First, I think you get better comparisons in the second half than you do in the first half, right?

Yes, yes.

Secondly, we expect Aerospace -- the recent cancellations and delays in orders -- I expect Aerospace to start to decline. So you have got Aerospace, Fluid Handling going down. It's hard to see Engineered Materials and Merchandising really getting much worse here. These are short-cycle, book and ship businesses that are early on in this cycle. RV orders are down 72% and our sales were -- how much lower can you go?

Yes. Any direct impact -- I mean obviously impact -- but I mean do you think the customer bankruptcies in the quarter make it any, another leg down or no?

Well, they haven't helped.

Yes.

But, you know, it is what it is.

Okay. And just on the brake modification, just one more question. In these discussions that are going on do you have any kind of timeline on those when you might get clarity one way or the other?

Hard to say.

Okay.

It's hard to say.

Okay. Thanks, guys.

Our position remains firm.

We have clarity on our position.

Okay, thanks.

And as we have no more questions in the queue we will go back to Mr. Koch.

Thank you very much for joining us this morning and for your continued interest in Crane. Good bye.