Crane Co (CR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Crane Co. second quarter 2009 earnings results conference call. Today's conference is being recorded.

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

Thank you, Operator. Good morning, everyone. Welcome to Crane's second quarter 2009 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 Tim MacCarrick our Vice President & CFO. We will start off our call with a few prepared remarks after which we will respond to questions.

Just as a reminder comments we make on this call may include some forward-looking statements. We will 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 am pleased with how the Company is executing in a very difficult market. While end market demand has been significantly weaker than expected, execution of our strategy to win market share and discipline cost control are helping to mitigate the downturn. As you saw in our press release, sales were down 21% in the quarter and earnings per share were $0.47 compared to $0.97 in the second quarter of 2008. Compared to the second quarter of 2008, overall core sales declined 21%, versus 16% in the first quarter and our February guidance of 7% for the full year. Extremely difficult end markets continue to impact Engineered Materials and Merchandising Systems resulting in sales declines in the quarter of 43% and 37%, respectively. In these two businesses we did experience a slight sequential improvement in sales versus the first quarter, and we see signs of volumes potentially stabilizing. Although these businesses continue to operate at severely depressed volumes, we are executing well to maintain profitability and our winning market share via our leadership position in these niche markets.

In the Electronics business we saw increased sales and higher margins based on improved execution and programmed delivery. Aerospace group sales declined 19% compared to the second quarter last year and based on new order trends further sales declines are expected. Excluding the impact of the Delta and Krombach acquisitions, fluid handling sales were 24% below the second quarter of 2008 including a 15% decline in core sales versus 5% in the first quarter. Order trends are expected to continue to decline in the second half of the year in fluid handling. Driven by depressed sales leveling and even weaker orders in the second quarter our total Company backlog declined 11% from year end 2008. Continued project deferrals and softening in MRO sales in our fluid handling segment and rescheduling in the commercial Aerospace business indicate difficult markets in our late long cycle businesses will continue through 2009 and into 2010. Our new guidance for 2009 sales is $2.2 billion, 8% below our February guidance of $2.4 billion.

Based on the significantly greater than expected sales decline, and notwithstanding over $125 million of cost reductions, we now expect to realize in 2009 we are reducing our earnings per share guidance from $2.01 to $2.31 which includes a charge for previously announced legal settlement to $1.75 to $2.05. This new guidance estimate includes charges for potential restructuring and integration activities of $0.10 per share. In addition, free cash flow guidance was reduced to $135 million compared to the $146 million achieved in 2008 reflecting the decline in expected 2009 earnings. Our balance sheet remains strong and we have excellent liquidity ending the quarter with $233 million in cash. We continue to execute our strategy to focus on winning in the marketplace and taking market share by maintaining our customer facing activities and 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. The true measure of the Company will be how we come out of this global downturn. We believe we are well positioned for the future and will have clear opportunities to expand margins as volumes return.

Now let me turn the call over to Tim MacCarrick who will provide additional details on our second quarter results.

Thank you, Eric.

I will turn now to specific segment comments which compare the second quarter of 2009 with 2008 and include restructuring charges and benefits. Aerospace group sales of $88 million decreased $20 million, or 19% from $108 million in the prior year largely due to lower commercial OEM business which declined 28%. Aftermarket sales decreased only 1% which contributed to a favorable OEM aftermarket mix of 58% to 42%, compared to last year's second quarter of 65% to 35%. Consistent with the first quarter we continue to experience higher military OEM and spare sales and increased modernization and upgrade activity on certain products. Operating profit in Aerospace declined by $2.9 million as the impact of lower OEM sales more than offset a $7 million decline in engineering expense associated with the 787 and A400M programs. In addition, the second quarter of 2008 benefited from a $5.6 billion engineering cost recovery. In the second quarter of 2009 our Aerospace engineering spending was $19 million compared to first quarter 2009 spending of $21 million and second quarter 2008 spending of $26 million.

This sequential decline in Aerospace engineering spending was consistent with our expectations and prior communication. We expect this trend to continue and despite the further delays announced by Boeing related to 787 first flight, we expect engineering expense reductions to exceed the previously communicated $25 million year-over-year reduction. We continue to reach key milestones for the 787 brake control program and during the second quarter we successfully completed a version of the hardware and software which was subsequently cleared for first flight. 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. Our position remains that we are not required to undertake this additional development work without customer funding.

Electronics group sales of $59.3 million increased $1.5 million or 3% primarily driven by relatively stable demand on key military programs. This sales growth together with continued strong operating performance resulted in a $3.5 million, or 55% improvement in operating profit compared to the second quarter of 2008. The operating margins in electronics are appreciable better than 2008 reflecting sound project execution and cost control. We expect this solid performance to continue for the balance of the year. In the second quarter, Engineered Material sales of $41.8 million decreased $31 million, or 43%, reflecting lower demand across all areas of the business. Second quarter 2009 sales declined 58% in the recreational vehicles business, 43% in transportation and 27% in our building product segments. Although segment sales remain at depressed levels, the year-over-year comparisons in the second quarter were generally more favorable than the first quarter. Our expectation is that sales levels will be relatively stable for the balance of the year after allowing for normal seasonality in the fourth quarter.

Engineered Materials posted an operating profit of $4.6 million in the second quarter of 2009, compared to $1.5 million in the first quarter and $8.1 million in the second quarter of 2008. Our second quarter 2009 operating margin was 11%, flat with last year on a 43% decline in sales. It is clear that our effective execution of cost reduction initiatives which began mid-year 2008 has enabled the very respectable margins in a business that has sustained significant declines in demand. Our continued efforts to responsibly manage the cost base of the business through ongoing headcount reductions, price versus material discipline and lower manufacturing and general costs are reading through. The restructuring actions with Engineered Materials including the reduction of our manufacturing footprint from eight to five plants remain on track to deliver pre-tax savings of approximately $7 million in 2009.

Overall, Merchandising Systems segment sales declined 37%, versus the second quarter of 2008 reflecting continued difficult end market conditions. Operating profit declined $11 million, or 62%,and margins eroded 6 points year-over-year to 9.1%. Demand decline for both our vending and payment systems products during the second half of 2008 and we experienced further sharp declines in 2009. Fundamental drivers of vending and market weakness have not changed as commercial office space vacancies remain high and factory employment levels continue to decline. The payment systems business continues to be impacted by the global slowdown in retail and transportation end markets as well as gaming were regulatory changes in Russia have closed that market. However, our new product introduction efforts continue to yield positive results in the marketplace as we stimulate near term sales and capture incremental market share.

We continue to make excellent progress related to the move of our North American vending production operations from St. Louis, Missouri, into our Williston, South Carolina facility. Dedicated teams following detailed project plans have reached important milestones and we expect to complete the transition on schedule. Headcount levels have been flexed during this process to support successful project completion and to ensure no disruption to our customers or our market leading position. As the transition draws to a close at year end, headcount levels will be reduced to align more closely to the ongoing operational requirements of the consolidated operation. We expect these actions and other restructuring related initiatives within Merchandising Systems to save approximately $9 million pre-tax in 2009. Fluid handling which represented 48% of Crane's total revenue in the second quarter experienced a $38 million, or 13% reduction in sales and a $20 million, or 42% decrease in operating profit compared to the second quarter of 2008. The second quarter core sales decline of 15% was significantly greater than we expected and far exceeded first quarter decline of 5%.

Sales weakness remained in the short cycle MRO business and in addition sales level in the energy, chemical and pharmaceutical businesses showed an accelerated decline reflecting continued project delays and cancellations. Unfavorable foreign currency translation of $30 million, or 10%, also had a significant impact on our sales performance. These declines were partially offset by sales of $35 million generated from Delta Fluid Products and Krombach. These late 2008 acquisitions which broaden our product offerings and enhanced our manufacturing capabilities are performing well despite very challenging market conditions. The fluid handling operating profit decline of $19.5 million in the quarter principally reflected the leverage associated with the core sales decline as well as negative foreign exchange impacts. Our first quarter margin was 13.8% and our second quarter was 10.3% for an average first half margin of 12.1%. For the second half of the year, we think we have the ability to hold margins in the same range.

Fluid handling backlog was $256 million at quarter end, a decline of $20 million, or 7% compared to March 2009 levels. New order rates declined in the second quarter as demand softened across the chemical, oil and gas, pharmaceutical and building products and services industries. By their nature, new orders, particularly from major projects, can have a significant impact on the sequential order comparisons and we are watching this closely. In the absence of improved orders there will be pressure on our second half sales and backlog. We will continue to respond as appropriate to align our cost base with demand. In our controlled segment, sales decreased to $17 million compared to the second quarter of 2008 and we recorded an operating loss of $1.7 million reflecting lower demand for oil and gas and transportation and use applications that impacted many of our controls business units. Supporting our continued focus on cost and productivity, a comprehensive systematic, culturally embedded processor reduced costs in all parts of our business is fully in place and yielding results that exceed our original expectations. We have discipline processes in place to verify the traction of all of our cost saving initiatives and to extend and accelerate them in response to ongoing marketplace demand as required.

In the second quarter as market demand profiles continue to be depressed in our short cycle businesses and our longer cycle businesses showed accelerating declines, we identified and accelerated additional cost savings initiatives to help offset the resulting sales deleverage. Our new forecasted cost savings in 2009 of $125 million substantially exceeds our previous estimate of $75 million and reflects the expected results of our intensified cost focus on all areas of spend. Restructuring charges are expected to be $0.10 per share, down from $0.15 per share in our previous guidance as we expect charges may be partially offset by potential facility relocation activities including gains from related asset sales and incentives. As part of our cost reduction efforts we reduced companywide employment excluding the impact of acquisitions by 276 people in the second quarter of 2009. We expect an additional reduction of approximately 700 people in the second half and forecast year end 2009 headcount levels excluding the impact of acquisitions to be approximately 20% below year end 2007 levels.

Our revised guidance which assumes reduction in sales from our previous estimate of $2.4 billion to $2.2 billion in 2009, driven by projected declines across all businesses except electronics and deleverage in the range of 35%, results in a decline in operating profit of $70 million to $75 million which is further offset by the $50 million increase in our cost reduction actions resulting in a net OP decline of approximately $25 million. The second quarter tax rate was 30%, essentially unchanged from the second quarter of 2008 and we continue to estimate that the full year tax rate will be approximately 30%. Our balance sheet remains strong and we ended the quarter with $233 million in cash and access to our $300 million revolving credit agreement. 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 second quarter were $7.5 million, compared to $10.7 million in the 2008, and our 2009 capital budget is $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.

Thank you. (Operator Instructions).

We will take our first question from [Dean Dray] of FDR Capital Markets.

Good morning, gentlemen. This is [Ajay Kaeta] on behalf of Dean Dray. Eric, I just wanted to understand the moving parts on guidance. Your guidance includes restructuring, right?

Yes.

So your previous guidance you had $0.15 in expected restructuring and now that is $0.10. Is that because now you are expecting some gains to offset some of the restructuring and the $0.10 is a net number?

Yes, the $0.10 is exactly right. Previously it was $0.15. We expect similar number of charges if not a little bit more from severance. But we were anticipating some gains from - - as Tim said, a facility relocation activities including gains from related asset sales and incentives.

Got it. And then on the cost savings it's an impressive increase from $75 million to $125 million. Maybe if you could help us understand the various components, a portion of that is from lower R&D spend on the Aerospace side. Maybe if you could sparse the details out a little bit here.

The way I would characterize it is that the additional cost savings first off are coming from further headcount reductions. We are also having clear success in momentum in driving day to day costs out of the business across the entire Company. And in addition we are exceeding our previous kind of engineering reduction target. I would point to all three. I would note that it does not include any additional facility closures than what we had previously planned. At this at this point.

Okay. Off that 50 million, how much of that would be related to the 787 engineering span?

If anything, the 787 costing us a little bit more than what we thought in the first quarter. But the 787 is a significant chunk. We expect the trends there have been pretty much on target during the first quarter and the second quarter. We expect while they will be a little bit higher than we thought in the third quarter, basically we are tracking and we will get a lot of benefit in the fourth.

Got it. Moving to fluid handling, maybe if you could provide some color on the end markets. Any markets that held up better than average. I know you mentioned a couple markets in the release. Just your take on what you are seeing in the refineries, chemicals and other markets there.

I can't see a significant difference in our end markets. Our MRO is down about 20% across the board and projects whether it's refineries, chemical plants, are being canceled, delayed and slowed down. Tough, very tough, difficult end market conditions globally.

And you mentioned orders in the second quarter were below sales and kind of expected to continue. Are you seeing destocking also contributing to some of the order rates? Or is this end market demand that is showing up here?

I would think some the MRO is destocking. But I can't honestly point to anything specific there.

Thank you.

Thank you.

We will take our next question from Matt Summerville at KeyBanc.

Thank you. This is actually Joe Radigan in for Matt. Eric, can you talk about how the incoming order rates progress during the quarter sequentially, particularly in fluid handling?

I would say that they didn't progress.

Okay.

They in fact declined each month during the quarter. We expect them to continue to be weak as we go through the remainder of the year which is the reason why we've lowered our overall sales guidance for the year.

Okay. So is it fair to say that in fluid handling on the project side, those delays that you are seeing, is it fair to say that those - - you don't expect those to come back at all and in later part of '09. If they come back that's a 2010 event?

That's a fair comment. What we see is in our early short cycle businesses, Engineered Materials are bending business, we are seeing potentially stabilizing orders over the last several months. That look like they are stabilizing. That they found the bottom. We are not swearing to it. But when I look at the order trends over the last two or three months both the leaders of those businesses and Tim and I would say that it's bumping along the bottom. In the case of commercial Aerospace, our late long cycle businesses in commercial Aerospace and in fluid handling it looks to us like this is a start of a decline that will go well into 2010. And we are getting ourselves prepared to deal with that.

Joe, this is Tim. It's important I think also to recognize that as project activity resumes, because we are at the later end of those projects, whether it's a plant construction or refinery construction, the valves typically go in towards the end, so there could be a timing aspect associated with that as well.

Okay. On the margin side in fluid handling, given what you have been able to do on the cost takeout side, do you think that we have reached a low point in operating margins. I guess volume is going to be a big determiner of that. But - -

I will make a couple points here. First off, the second quarter did have a number of large projects that had low margins in it. And when - - and several of those large projects actually included bundled bucks and buyout valves that we bought from other people to complete the package, so by definition it's going to be a lower market. When we looked at the current - - when we looked and priced through our whole fluid handling backlog we didn't see that repeating. I would also note Tim's comments where he said our first cap margins were around 12% and we said that we think we have the ability to keep margins in that area for the second half of the year. That's our best thinking at this point.

Okay. Fair enough. Thanks. I'll get back in queue.

Okay.

(Operator Instructions). We will take our next question from Paul [Malone] at Sidoti & Company.

Good morning, everyone.

Good morning.

Was there any meaningful pricing going on in the quarter in the fluid handling business or price action, I should say.

No, not significant. It was price was slightly positive as it was in the first quarter.

Okay. And Tim, you mentioned lower OEM sales more than offsetting the roll off in engineering spend in Aerospace. As we look forward should we expect that the engineering spin roll off to be incrementally positive?

We do expect that, Paul. I think we are going to continue to see declines in that spend level and as we mentioned earlier we expect to exceed the $25 million savings that we had guided earlier. So we do expect that trend to continue.

Okay. And to jump back to fluid handling, do you have a sense what inventory levels are like, especially within your own MRO business?

You mean in our customers or in our own plans?

Customers, and then your own distribution channel within MRO.

I don't really give - - I get mixed messages on that. I don't feel I could comment. I would say that as a manufacturer our plants with these weak sales include a pretty sizable reduction in inventory between now and the end of the year as we get ourselves set up on these lower volumes. I think you are hearing that - - I would expect that you would hear that from other manufacturers also.

Yes. Definitely, that's helpful. And Eric, considering the very low base set in 2009, do you think that new product introductions at lower cost structure and merchandising can carry the segment to operating profit improvement in 2010. Do you think that's fair to think about it that way?

Depends on the volume. I'm not given - - it's a little premature to be talking about 2010, I think.

Okay. Fair enough. And then finally, obviously you have your hands full with the current businesses. Given your strong cost structure and your balance sheet, do you think acquisitions are still being evaluated and do you see valuations coming in here.

We definitely continue to be on the hunt for acquisitions. We work very hard here for a year on a modest size one which just fell apart here in the quarter as they failed to meet any kind of earnings expectations. And I think we were disciplined about saying no. That being said, I think prices are coming down grudgingly. And at the moment, while we have some interesting things on the radar screen there is nothing close to near term.

Okay, and would you be willing to tell us what business that's in whether fluid handling aerospace or otherwise?

No, no.

Okay. Thanks for your time.

And we will take our next question from Shannon O'Callaghan at Barclays Capital.

Oh, hi. This is actually John Walsh on for Shannon.

Sure.

A lot of my - - most of my questions were actually already asked. I just had a question kind of about the sequential growth that you had in the operating margin and in Engineered Materials and in Merchandising Systems. I guess kind of given that you didn't really see much of a sequential uptick in sales. Some of that driven by [raws]? Kind of what was the dynamic that drove that margin improvement.

I would say excellent execution and Engineered Materials has driven this. We started the headcount reductions over a year ago. They're down almost in half from 1000 people to 500. Then in the fall plans to reduce the plants from eight to five plants. There is been an incredible detailed comprehensive scrubbing of costs across the board and spending levels. And at the same time we probably introduced more new products than we ever have in Engineered Materials where we are looking to take market share without giving on price. We have been - - we've relied on our customer service levels of long time delivery quality and some new product configurations to try to take some market share here while we maintain that price material spread. It's been difficult but they've done - - anytime you can have sale goes down 43% and generate 11% margin you are doing something right. But almost all of this is on the cost side.

Okay. That's very helpful.

It's a model the way we would have the entire Company look to, frankly.

Great. Thank you very much.

Thank you.

(Operator Instructions). We will take our next question from Ron Epstein of Banc of America Securities.

Hi, this is Elizabeth for Ron. We were just trying to understand why is there even a debate over who will pay for the fleet control system on the 787 if it was designed to Boeing specifications.

Elizabeth, this is Tim. The situation as we have talked about is that there were aircraft level changes. So changes elsewhere outside of the brake control system that require modifications to the plane which could impact the break control systems. And accordingly, one of the ways to solve the problem associated with those aircraft level changes is to make changes to the brake control system and essentially develop a brand-new brake control system. So it's really factors outside of our control unrelated to the brake control system that have facilitated these conversations. Our view is that we are a long time supplier to Boeing and we would be happy to do it. We just expect to be paid for it. At this point there have been really no further progress in those discussions.

Do you know what the modifications were? That would affect the brake control system?

We know what the original specifications were with all of the change orders. We have a pretty good idea of what the new specifications are. Not a complete idea. And that's because not all of the requirements have yet been fined.

Okay thank you.

And with no further questions in the queue, I would like to turn the conference back to your presenters for any additional or closing remarks.

This is Dick Koch, we thank you for joining us this morning and for your continued interest in Crane. Bye, bye now.

This does conclude today's presentation. We thank everyone for their participation.