Crane Co (CR) 2009 Q4 法說會逐字稿

Good day and welcome to the Crane's fourth quarter 2009 earnings conference call. Today's call is being recorded. At this time I would like to turn the conference call over to the Director of Investor Relations, Mr. Richard Koch, please go ahead.

Thank you Operator. Good morning, everyone. Welcome to Crane's fourth quarter 2009 earnings release conference call. 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, the 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 the table at the end of our press release which is available on our website at www.craneco.com in the Investor Relations section. You are cordially invited to attend our annual conference -- investor conference -- on Thursday, February 18th in New York City from 8:30 A.M. until noon. Please mark your calendars and let us know if you will be attending.

Now, let me turn the call over to Eric.

Thank you, Dick. I am pleased with our fourth quarter operating profit, earnings and cash flow. We executed well in what are still difficult end markets. We exceeded our cost reduction target and operationally we were tight. Before Tim takes you through the details of the quarter, let me make some comments on our full year performance and results.

The general economic climate in the second half of 2008 and all of 2009 has been extremely challenging for us and for many other global industrial companies. While our full year 2009 sales declined 16% compared to 2008, we responded with increased cost reductions, delivering GAAP earnings per share of $2.28. We have called out these special items, which on the whole are quite positive, in our press release and non-GAAP tables to make the comparisons easier. Excluding special items sales declined $426 million or 16% in 2009. Operating profit declined $58 million from $263 million in 2008 to $204 million in 2009 and margins were 9.4% versus 10.1% respectively. Earnings per share were $2.15 in 2009 versus $2.93 in 2008.

After a difficult first half in 2009, the impact of our cost reductions began reading true as operating profit in the third quarter was essentially flat to the prior year and improved 21% over the fourth quarter of 2008. We also generated strong free cash flow in the second half, well ahead of our free cash flow guidance for the year. Despite decreases in sales and earnings for the full year 2009, I'm proud of our accomplishments performance of our people and the effectiveness of our strategy. Our strong cash position and free cash flow allowed us to aggressively invest and attack the marketplace throughout the year. Our core values strategy and business systems were tested and reaffirmed and we have entered 2010 as an even stronger Company. While I feel confident about our ability to execute our plans, the timing and trajectory of the economic recovery is less certain.

The early cycle end markets related to some of our business units are beginning to recover, such as recreational vehicles and engineer materials and to stabilize in others such as MRO and fluid handling. However, the longer cycle end markets such commercial aerospace and nonresidential construction and plant capacity additions globally are continuing to decline. Given this uncertainty we continue to focus on opportunities to ensure our cost base is properly aligned. At the same time we continue to make investments that strengthen the front end of our businesses, develop new products and improve customer metrics, which is the strategy we continue to use to win in the marketplace and to gain market share. This strategy coupled with our reduced cost base has positioned us well for the uncertain 2010 environment.

In addition to closing the year with strong earnings and cash flow there were several developments in December I would like to highlight. First we signed agreements with GE Aviation Systems and the Boeing Company, resolving our claims relating to the brake control monitoring system for the Boeing 787. Under the agreements Crane's supply contract will be direct to Boeing and Crane will resume work on a funded basis on a modified version of the brake control monitoring system. We received payment aggregating $18.9 million in January associated with our claims. We are very pleased to have resolved this matter and we look forward to continuing our traditional successful supplier relationship with Boeing and working with GE on the landing gear system.

Secondly, we signed a definitive agreement to acquire Merrimac Industries, Inc. -- a leader in the design and manufacturing of RF microwave components, assemblies and micro multifunction modules for $16 per share, in cash, to a tender offer for all its outstanding shares. Merrimac has a strong product platform and a solid customer base for space and military applications that compliments the leading microwave offerings within our electronics group. We expect this acquisition will have a slight dilutive impact on our 2010 earnings but will be accretive in 2011. We continue to follow a disciplined process to identify other acquisitions that will strengthen our existing businesses.

Finally, we sold General Technology Corporation for $14.2 million and recorded a tax benefit of $0.09 per share. GTC was part of the electronics group and generated sale of $26 million in 2009. I believe the actions we have taken and the strategies we have implemented in 2009 will serve us well in 2010.

Now let me turn the call over to Tim MacCarrick who will provide additional details on our fourth quarter and full year result.

Thank you, Eric. I will turn now to specific segment comments which compare the fourth quarter and full year of 2009 with 2008 and which exclude the special items described in our press release.

Excluding special items on a $19.2 million or 12% sales decline, aerospace and electronics operating profit increased 130% or $14.1 million to $24.9 million in the fourth quarter of 2009. Aerospace group sales declined $14.6 million or 16%. Overall, OEM sales declined 22% with commercial OEM declining 29% and military OEM sales increasing 17%. Aftermarket sales decreased 6%, which contributed to a favorable OEM aftermarket mix of 55% to 45% compared to last year's fourth quarter of 59% to 41%.

Operating profit in aerospace increased by $7.8 million as the impact of lower sales was more than offset by a $15 million decline in engineering expense, primarily associated with the 787 and A400M programs. In the fourth quarter of 2009, aerospace engineering spending was $13 million compared to third quarter 2009 spending of $15 million and fourth quarter 2008 spending of $28 million. For the full year 2009, engineering spending was $67 million or $44 million lower than full year 2008 and exceeded our October estimate of a full year decrease of $40 million. We expect engineering spending to decline an additional $20 million in 2010 as we complete key programs including the first version of the 787 brake control and monitoring system, the A400M, the joint strike fighter and the A-320 landing gear control and indication unit. Notably, both the 787 and A400M aircraft utilized Crane brake control and monitoring systems on their first flights in December.

Electronics groups sales in the fourth quarter of 2009 of $56.5 million decreased $4.6 million or 8%. The impact of this sales decline was more than offset by solid program execution, lower engineering spending and continued general cost reductions, which were key drivers of strong operating profit growth compared to the fourth quarter of 2008 and resulting operating margins reached record levels. The electronics group continues to deliver solid operational performance and customer metrics as it maintains and strengthens positions on key programs including the 787 where we have provided power supplies for the common core computing system and flight controls. Electronics groups orders grew sequentially through the fourth quarter and helped to position us well for continued solid performance in 2010.

In the fourth quarter, engineered material sales grew year-over-year for the first time in more than two years. Sales of $44.1 million increased $2.5 million or 6%, reflecting significantly higher sales from recreational vehicle customers. The improvement in the RV market was partially offset by lower sales in our transportation and building products businesses, where revenues declined 11% and 24% respectively. The four special items operating margins in the fourth quarter of 2009 were 13.2% compared to negative 1.9% margins in the fourth quarter of 2008. Our significantly improved fourth quarter results reflect a strengthened market position, share growth and cost reductions associated with our 2008 and 2009 productivity actions, including the shutdown of three manufacturing facilities significant head count reductions and intense scrutiny of all other costs.

Sales to RV manufacturers increased sharply in November and December and we are cautiously optimistic this trend will continue into the first quarter. Demand from transportation related customers declined from third quarter levels, in part due to seasonality and we expect there will be a leveling off of demand in 2010, after three years of decline. The building products market continue to be impacted by slow nonresidential construction in the fourth quarter and we expect a further decline into 2010.

We are making good progress in our continuing efforts to develop new products and new applications for existing products, including interior content for recreational vehicles, all composite floors and new product formulations for refrigerated trailer applications. As we continue to partner with key customers, product trials are progressing well and in accordance with our expectations. Overall, merchandising systems segment sales of $71.7 million declined 8% versus the fourth quarter of 2008, reflecting continued difficult end market conditions, particularly for payment systems where weakness continues in the retail transportation in non-US gaming markets. Operating profit of $3.5 million which included some further impact from the favorable legal settlement announced in the third quarter increased $0.7 million and operating margins improved 120 basis points to 4.8%.

Following two quarters of slight sequential growth in overall merchandising system sales, fourth quarter sales were 6% lower than the third quarter in part due to normal seasonality. Vending orders and sales did increase late in the fourth quarter which is encouraging, but the trend in payment solution sales which declined 29% in 2009 remains a concern. We remain positive about our strong market position in both the vending and payment solution segments. We continue to receive positive customer feedback regarding our new BevMax Merchant and Currenza product lines and we have received important strategic orders for our Streamwear product offering which is designed to significantly improve vending root profitability by providing on-line information regarding the performance, sales and replenishment needs for connected vending machines.

Finally, we successfully completed the relocation of our North American vending production operations from St. Louis, Missouri, to our Williston, South Carolina, facility. This project was very well managed with close alignment to the standards of our operational excellence program. And over the next several months we will be working to optimize plant production and productivity in the consolidated facility.

Fluid handling sales declined $25 million or 9% in the fourth quarter. A core sales decline of $53 million or 19% was partially offset by favorable foreign currency of $13 million and incremental sales of $15 million from Krombach which was acquired in December of 2008. The four special items fluid handling operating profit was $36 million and was lower than the prior year by less than $3 million on a $53 million decline in core sales as cost reductions partially offset volume deleverage. Fluid handling backlog has stabilized at approximately $250 million over the past three quarters and the book-to-bill ratio in the fourth quarter was slightly greater than one for the first time in several quarters. While we remain cautious about our late cycle fluid handling businesses which serve the chemical, pharmaceutical and nonresidential construction end markets, we are beginning to see some potential signs of improvement in project quote requests and MRO activity seems to be stabilizing.

In our control segment, sales decreased $15 million compared to the fourth quarter of 2008. And we recorded an operating loss before special items of $1.3 million reflecting lower demand for oil and gas and transportation end-use applications. In 2009, we reduced costs year-over-year by $175 million, exceeding our revised goal of $150 million. During 2009, as sales levels remained under pressure, we continually accelerated our productivity programs to ensure our cost base was sized appropriately. This full year level of savings equates to approximately 8% of our 2009 sales which we view as a significant accomplishment and a reflection of our cost sensitive culture. We will maintain this cost focus discipline in 2010 and have planned modest declines in head count and manufacturing infrastructure while at the same time we continue to make investments in additional front end resources and support new product development activities.

Full year 2009 cash provided by operating activities, which included a $17 million discretionary pension payment at year end, was $189 million or $2 million lower than 2008. Free cash flow was $161 million versus $146 million in 2008. Successful execution of Crane business systems tools and processes enabled a significant reduction in working capital that uses $47 million in cash during the year. We were particularly pleased with the results of our inventory reduction program which declined $65 million and on a constant currency basis resulted in an $80 million decline in inventory year-over-year.

Our fourth quarter and full year free cash flow was also favorably impacted by lower capital expenditures. Capital spending in the fourth quarter was $7.1 million compared to $11.5 million in 2008. And for the full year, capital spending was $28 million compared to $45 million in 2008. We contributed $33 million into our defined benefit pension plans in 2009 compared to $10 million in 2008. Of the $33 million, $17 million was contributed to our US defined benefit plan in December on a discretionary basis to improve the funded status of the plan and to reduce future expected contributions.

The fourth quarter 2009 tax rate was 23.5% which reflected the impact of the $5.2 million tax benefit associated with the divestiture of GTC. This benefit is a special item in the non-GAAP table. Separately, the Company's tax position in the fourth quarter of 2008 was reduced by $5.2 million due to the full year benefit arising from the expansion of the federal R&D tax credit during the quarter. By comparison, the fourth quarter 2009 tax provision was reduced by $1.5 million of R&D tax credits as these benefits were recorded quarterly this year. This results in an unfavorable year-over-year comparison of $3.7 million or $0.06 per share. This difference is not reflected in the non-GAAP table, but helps to explain why our non-GAAP operating profit is up 21% in the quarter but our non-GAAP EPS is only up $0.01.

Our balance sheet remains strong and we ended the quarter with $372 million in cash and access to our $300 million revolving credit agreement. We have no significant debt maturing in the near term as half of our long term debt of $399 million is due in 2013 and the other half is due in 2036. As we indicated in our press release, as we look forward to 2010, sales are expected to be relatively flat compared to 2009 at approximately $2.2 billion, with favorable foreign exchange offsetting the $26 million sales decline related to the GTC divestiture. Core sales and fluid handling and merchandising systems are projected to be flat and a sales decline in aerospace is expected to be offset by modest sales increases in the electronics engineer materials and controls segments. The 2010 sales guidance does not include the impact of the pending Merrimac acquisition.

Our 2010 earnings per share guidance is $2.15 to $2.35 per diluted share, reflecting the lower 2009 year end cost base, additional decreases in aerospace engineering expense, new 2010 savings initiatives and a tax rate of 30%. On a comparable basis and before special items, 2009 earnings per share were $2.15. Accordingly, our 2010 EPS guidance reflects a flat to 9% growth compared to 2009. We will provide details of segment sales and operating profit at our annual investor conference in February.

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) Our first question will come from Deane Dray with FBR Capital Markets.

Thank you. Good morning, everyone. If we can start in fluid and it would be interesting if you can expand your comments about some of the end market activity. I'm not surprised to hear some weakness in late cycle business like nonres, but interested in about the MRO stabilization. Does this mean the whole destocking is over?

Dean, good morning, it's Tim. We have seen some continued spottiness I would say on the project side, across the various regions. Some improvement in regional quote activity though. Certainly in the Middle East and Asia. On the MRO side, it appears to have stabilized and bottomed and we feel like the destocking has probably ended, largely. It's a bit regional but we have seen some positive signs on the MRO side.

How about on pricing?

Generally speaking, pricing in the quarter was slightly positive for us across the businesses. Still I think a competitive marketplace. We were able to keep price slightly positive in the quarter.

Now, just still staying within fluid, the margin goal had been about 12% but now you have been trending above that. Do you feel that 12% is the target? Are you thinking about raising that?

We have been pleased with the operating margin performance of fluid handling now for sometime as it's come up over the years. And it's been quite stable in 2009. As I mentioned in my comments on a pretty significant core sales decline our deleverage was pretty minimal. We do remain confident in our ability to hold margins in the 12% range.

And then if I could focus for a moment on the guidance and for 2010, what is the assumed benefit -- incremental benefit for cost savings in '09 that carry into 2010?

We look forward to discussing that in detail with you in February. I think as we've indicated in the past and this hopefully was clear from my comments we expect to hold the cost base in terms of the actions that we took largely in 2009 and we do have additional discreet actions in 2010 and will benefit from some of the carry over impacts. We will take you through the details when we get together in February.

Can you give us a sense of how much savings that you will get on new initiatives in 2010?

Again, we are going to get into the details and we can even talk about that segment by segment when we get together in February.

Okay. Thank you.

Okay, thank you Deane.

Our next question will come from Shannon O'Callaghan with Barclays Capital.

Good morning guys.

Good morning, Shannon.

Just a follow-up on the fluid margins, anything going on there in the quarter in terms of favorable mix or anything else? And are you guys giving up some volume to maintain margins? Can you give me a sense of your strategy there?

I would say we just continue to be disciplined on pricing where we are not -- if it's a project with stupid quotes and it takes stupid quotes then we are willing to let it go and there was nothing unusual in the quarter.

Right.

Very solid throughput all the way.

All right. Similar question around the electronics margins. Can you give a sense what's really going on in that piece of the business and you talk about record margins -- is that an unusual anomaly in the quarter? What do you think?

We are really proud of the progress that the electronics business has made. It's come a tremendous distance I think in the back half of '08 and into 2009. And they had a terrific year. And it started in the plants where we improved our operational effectiveness, where we improved our customer metrics. We took cost out of this business. We maintained our focus on the front end and held close to a number of key programs.

I think this is good old fashioned execution by the team in 2009. And the fact that they've reached record levels of margins here in the quarter is a reflection of those activities. And a reflection of the progress that they've made from obviously a less profitable scenario in prior periods.

Shannon, I think I always said for years it's a business that we expected to do 15% [OP margins]. They happen to be performing above that which is actually quite nice. Long term there is no reason why they are not going to continue to perform at these really solid levels.

Okay. Thanks. That helps. Just on merchandising then, can you -- do you have a quantification of how much this production consolidation may have weighed on the margin there in the quarter. As you look into -- I know you will go through targets in 2010 next year. Can you give us a sense in the quarter what type of things might have been weighing on that margin for the quarter?

Well, in terms of the consolidation, it's been successfully completed as I mentioned and we've talked in the past and feel comfortable that there will be a $6 million productivity roll through into 2010 associated with the consolidation of our plant in St. Louis. In terms of the margin in the quarter, it's really being impacted by the decline in payment systems most notably. We have two healthy businesses in terms of vending systems and payment systems. And the payment systems part of the business tends to be a little bit higher margin business. And as we seen sequential quarter over quarter declines in that business it's had a resulting mix impact on our margins and that's really the major driver in the fourth quarter here.

Is the bottom in sight for payment?

I don't think we are ready to call the bottom in it yet. We've seen continued softness across each of the different individual segments that we focus on there. And I think that although the compares are going to get a little easier because of the fact that the sales have been going down for several quarters, we don't see it bottomed quite yet.

Okay. Thanks, guys.

Shannon, we did say that we expect overall merchandising system sales next year to be roughly flat.

Our next question will come from Paul Mammola with Sidoti Capital.

Have you had a look at what some of your bigger customers' Cap Ex budgets look like for this year? Too soon to tell from that standpoint?

Too soon to tell. We don't have -- I don't see it. Haven't seen it yet.

Would you expect it maybe before that investor conference Eric?

I think Max Mitchell in Fluid Handling for example will be able to give you a better color by February. He just came back from a whole ten days overseas.

Okay. Perfect. And on Merrimac, should we assume that that will tip dilutive due to the write up of inventory?

Yes. I think it's very, very slightly dilutive. It's the transaction costs that will roll through in 2010 and it's a pretty slight dilutive impact.

Can you talk a little bit about the technology you are acquiring there and explain why that backlog from the Company has jumped over the past 12 months?

Well, we really have two primary businesses in our electronics segment. A power business and a microwave business. And, Merrimac fits quite nicely into the microwave, complementary products helps us broaden our portfolio a bit as well. And we have seen a little bit of strength late in the year in terms of the order book in the electronics business and the microwave business and we are excited about the opportunity to bring Merrimac into the Crane portfolio here and feel that there is going to be some nice collaboration between our existing microwave business and what Merrimac brings.

Okay. Priority for cash right now and may be common on valuation of fluid handling spaces relative to last year?

Well, we continue to be a Company that's interested in acquisitions. We continue to monitor all of our businesses and certainly we have continued interest in the food handling space. We don't have anything specific and we don't preannounce. We are certainly very close to the market and close to opportunities. And would certainly look forward to utilizing some of our cash position here on strategic acquisitions as we have historically.

Now, Tim, would you say that valuation and fluid handling has become more reasonable relative to the first half of last year?

I think that what has happened is that because we are not -- people can see a bottom to the economy and it looks like it's stabilizing here. We are seeing people be -- have more -- it's easier to get a handle on projection of businesses that are trying to acquire us. So it's becoming easier to have a reasonable dialogue about what's an appropriate valuation for the Company whereas given the volatility last year you were getting some vague disparate forecast and expectations on performance and that gap has clearly narrowed allowing more -- better facilitation of price discussion. Although I would say I'm not seeing any more in terms of number of deals. Clearly the price discussions are more reasonable.

That's helpful. And then finally on material costs have you seen anything in the past say couple of months that could lead to a material uptick in cost in maybe the first half or is it too soon for that?

We have seen material costs trending upwards generically over the last 60 days or so. Although in the quarter for us we were pretty much flat or slightly positive on material costs over the last 45 to 60 days. We have seen that trend towards higher cost levels. We do see that as well.

Okay. Thanks for your time.

Thank you, Paul.

(Operator Instructions) We will hear with Matt Summerville with KeyBanc.

Can you talk about in fluid handling as the quarter progressed and what you're seeing thus far in January, what the tempo has looked like as far as incoming orders and more specifically can you comment on the MRO side -- which end markets you are seeing the greater degree of stability at this point.

I think, Matt, orders have very steady - in fluid handling we look at them before foreign exchange and after foreign exchange. When I look at it on a month-to-month basis it's been very steady. The MRO tends to be -- it almost is varied month to month depending upon which part of the world it's in. Again, as a whole we are characterizing as pretty stable here.

If I think about just conceptually you will have $20 million worth of improvement on RD&E, I would assume and it sounds like you will share at your analyst meeting -- but some further benefit from cost takeout you mentioned the consolidation of merchandising and restructuring beyond that. Where would you place your concerns as far as expense inflation? Is it raw material? Is it pension expansion? Can you talk about some of those buckets and how they are weighing against the positive.

Matt, we really would like -- I don't want to dribble out the picture and I rather lay out the whole picture for you when we get to February. I would say that we have given some guidance here. I think we have been careful. We have been cautious and conservative. And we want to give guidance we are pretty confident that we can hit. We will try to lay that whole picture out for you with the pluses and minuses in the February investor conference as we always do including sales and OP by the segments.

Thanks Eric.

And with no further questions in the queue, I will turn the call back to Dick Koch for closing or additional remark.

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

Ladies and gentlemen that does conclude today's teleconference. Thank you for your participation.