Crane Co (CR) 2010 Q1 法說會逐字稿

Good day, everyone and welcome to Crane's first quarter 2010 earnings 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. Richard Koch. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Crane's first quarter 2010 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 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 the table at the end of our press release which is available on our website at www.CraneCo.com, in the investor relations section. No let me turn the call over to Eric.

Thank you, Dick. I'm pleased with our performance in the first quarter as it reflected the combination of the effectiveness of the strategy we executed last year and the leverage of slightly better than planned sales volumes. Our first quarter performance was better than we expected and March was clearly the strongest month of the quarter. The economy seems to be recovering at a more accelerated pace than anticipated as confidence improves and business and consumer spending increases. Sustainability of this trend is still unclear, but there seems to be a solid based building for what could be a better than expected global recovery.

For more than a year, we have been disciplined in the implementation of our strategy to increase our customer facing resources, take market share, and introduce new products while simultaneously reducing our cost base. We said at our investor conference in February that this would allow us to significantly leverage additional volumes as the economy recovers, and we began to do this in the first quarter. We have seen tangible evidence of this strategy in many of our businesses, and the results speak for themselves. With sales down 4%, operating margins improved from 8.1% to 10.1%, and earnings per share increased 17% before the charges for special items in the first quarter of 2009.

Throughout the downturn, we have continued to stay focused on maintaining and improving our customer metrics such as on-time delivery, lead time and quality. Our Crane business system and operational excellence program have been key enablers to our progress in these and other areas. Operationally, we feel that we are well positioned to handle increased volumes as the economy recovers. Crane's financial strength and liquidity remains strong, with $320 million of cash, no near term debt maturities and businesses that generate free cash flow. With better than expected results in the first quarter, and current order trends, we now expect our results to reach the high end of our EPS guidance of $2.15 to $2.35 per share.

Tim will now take you through the businesses and provide some additional financial information.

Thank you, Eric.

I'll turn now to specific segment comments which compare the first quarter of 2010 with 2009. Aerospace and electronics sales of $133.6 million declined $18.3 million or 12%, while operating profit increased $7.3 million or 42% to $24.5 million in the first quarter of 2010. Aerospace group sales declined $14.4 million or 15% during the quarter. Overall, OEM sales declined 14% as a 16% decline in commercial OEM was only partially offset by a growth in military OEM sales. After market sales decreased 18%, which contributed to an OEM aftermarket mix of 62% to 38%, compared to last year's first quarter of 61% to 39%.

Operating profit in aerospace increased by $7.7 million, as the impact of lower sales was more than offset by a $10 million decline in engineering expense, primarily associated with the 787 and A400M programs, and other strong cost controls across the business. In the first quarter of 2010, aerospace engineering spending was $11 million, compared to fourth quarter 2009 spending of $13 million and first quarter 2009 spending of $21 million. We expect engineering spending to decline a total of $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 A320 landing gear control and indication unit.

Electronics group sales in the first quarter of $54.7 million decreased $3.9 million or 7%, including the slightly positive net sales effect of the Merrimack acquisition and the GTC divestiture. Electronics operating profit, which included $1.9 million of purchase, accounting and transaction costs associated with the Merrimack acquisition, declined 4.8%. Excluding the Merrimack acquisition costs, electronics operating profit percentage growth in the first quarter was in the mid-teens, enabled by tight program execution, lower engineering spending, and continued general cost reductions. Resulting operating margins were at near record levels.

We are pleased with the integration efforts and performance of Merrimack in the first quarter, and we are working to realize numerous related sales and manufacturing synergies. 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 group orders grew by 20% in the first quarter and are expected to remain strong through the balance of 2010.

Engineered material sales grew 41% during the first quarter, reflecting our strong share positions, and better than expected demand in each of the three major market segments. RV sales in the first quarter which were at their highest level since the second quarter of 2008, grew 151%, as OEMs worked diligently to fill growing order books. Transportation-related sales grew 23% compared to the first quarter of 2009, as a result of improved industry build rates for drive vans and reefer containers. The rate of the sales decline in our building product segment slowed, reflecting improved market penetration in the metal buildings segment. Operating margins in the first quarter of 2010 were 15.9% compared to 3.9% in the first quarter of 2009. In addition to the margin expansion on higher sales, our improved first quarter results reflect the strengthened market positions, and the benefit of cost reductions associated with our 2008 and 2009 productivity actions, which included the shutdown of three manufacturing facilities, and significant headcount and general cost reductions.

Our efforts related to the development of new products and new applications for existing products continued to progress well, and in accordance with our expectations. Overall merchandising system segment sales of $70.2 million declined 2% versus the first quarter of 2009. In spite of continued challenging markets, sales were flat in vending solutions as our new products continued to be well received by the marketplace. We continue to experience some market softness in payment solutions, and although sales were down in the quarter, the rate of decline improved significantly over the fourth quarter of 2009.

Merchandising systems operating profit of $5 million increased 67%, and operating margins improved 290 basis points to 7.1% as a result of our reduced cost base. We continue to make solid progress on the integration plan at our Williston South Carolina plant and are on track to substantially complete this project by the third quarter. Fluid handling sales of $247.8 million declined $18.7 million, or 7% in the first quarter. A core sales decline of $34.4 million, or 13% was partially offset by favorable foreign currency of $15.7 million or 6%. Fluid handling operating profit of $28 million was $8.8 million lower than the prior year, largely due to deleverage on the lower volume. We remain comfortable with our expectation of fluid handling margins in the 12 to 13% range for 2010, which was reaffirmed through our recent forecasting process.

We are seeing signs of increased customer spending and somewhat improved project quote and activity levels across many of our fluid handling businesses and regions. MRO activity is also improving in many markets, in part due to restocking to meet end user demand for forecasted turnaround and maintenance activities. Order levels in fluid handling improved each month during the first quarter, and finished strong with a 13% year-over-year growth rate in the month of March. The resulting book-to-bill ratio in the first quarter was greater than one, representing the second consecutive quarter with a positive relationship between orders and sales levels. We remain cautiously optimistic about the current market trends in our fluid handling business.

Free cash flow for Crane in the first quarter was $12.7 million versus $5.4 million in 2009. Recent changes in legislation regarding the tax deductibility of Medicare part D retiree prescription drug subsidies will not have an impact on the company as Crane Co. decided years ago to discontinue post retirement benefits to employees hired after January 1st of 1990. Our balance sheet remains strong and we ended the quarter with $320 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.

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). Our first question comes from Ronald Epstein of Banc of America, Merrill Lynch. Please go ahead.

Good morning, guys.

Good morning, Ron.

Eric, when we think about the -- I guess the efficiency actions you guys took and the costs you took out, how much of that is permanent? So as we really start to see a recovery and volumes go through the business, how much cost do you expect to come back?

I don't know how to answer that. You want to take a shot at it?

Sure. Ron, this is Tim. We feel pretty comfortable that we are going to be able to keep the costs out. These are the costs that we took out in 2009. It was $175 million versus 2008, 8% of sales, and as you would have seen in our investor day in our guided operating margins for the businesses in 2010, we are actually growing our operating profit margin on basically flat sales, which was our guidance for 2010. So we are confident and comfortable that we have got plans in place to drive margin expansion and keep the costs out.

And frankly, where we do see volume picking up in certain of our businesses, our intention here is to only add back those costs that are variable in nature and direct to the manufacturing process, and we have very prescriptive reporting processes inside of the company to keep a close eye on that, and I think the margin results that we saw in those businesses where we had a little sales pickup in the first quarter, are aligned with this approach.

Okay. Great. And then maybe if we can get -- dive down in one of the business units anyway. In terms of aerospace aftermarket, have you guys seen a pick up there yet or kind of can you characterize maybe in more detail what you're seeing in the aerospace aftermarket?

We do feel that the results in the first quarter were a little bit better from in the first quarter were a little bit better from a trend perspective, both in OEM and aftermarket, so the volumes were a bit better. We had originally guided down 8% in both OEM and aftermarket on a full-year basis within aerospace, and based on what we have seen in the first quarter and the order rates, we expected to have been better than that. How sustainable that first quarter level is, we will see. And but we are pretty comfortable that we should be able to do better than that 8% decline that we originally guided for the full year.

Okay. And then maybe one more. If you go into the engineering product, the engineered product excuse me, there was a big bounce in recreational vehicle demand, I suppose. How sustainable do you think that is? Any comments there?

Well, we are very excited to see that market return here in the first quarter and are happy to leverage our strong share position there driving increased sales in the quarter. I think the key here is what the sell-through is going to be and the spring buying season that's coming up is going to be obviously an important indicator of that. that. We do expect that to be strong. How that's going to continue and proceed through the summer and through the balance of the year I think is unclear at this point.

Okay. Great. Thank you.

Thank you.

Our next question comes from Ajay Kejriwal from FBR Capital Markets. Please go ahead.

Good morning, gentlemen. Just wanted to follow-up on that engineered materials segment. Very impressive margins, incremental margins coming in very nicely, so just wanted to get a sense of how we should be thinking about, you know, next couple quarters, you're kind of starting at the lower revenue base and, how you put costs in and then longer term how should we be thinking about, more normalized incremental margins in that business.

So Ajay, we are very pleased with the margin performance we had in the quarter and the engineered materials business in the first quarter really operated in that variable cost mode that I mentioned earlier as the volume came back a bit, so we feel comfortable that margins in that business can be in the high teens. It's consistent with the guidance that we have got for the year. We do -- we do see some pressure from a commodity pricing perspective at this point. Basically the oil and styrene based products so that's something that we are watching very closely. We feel like we are well positioned to manage that as best we can but we do see some price pressure there on the commodity side, but even considering that, we would expect margins to be in the high teen area for would expect margins to be in the high teen area for this business going forward.

Good. Maybe on payroll, you've given good color on engineering spend for this year, so how should we think about next year and maybe it's a little early, but just in terms of year on year change and I know you're working on several programs, so should we be thinking about engineering spend going up next year or it remains flattish?

So, we continue to Invest in appropriate programs going forward. We think we are well positioned in terms of the R&D spend that we have normally within the business, which is in that 12 to 14% range of sales. Obviously, we are still coming off of an elevated level as we are bringing these four major programs to conclusion. So we will see another $10 million of engineering expense reduction in 2010 and I think the way to think about the future is that the engineering expense and the R&D investments there will be in that 12 to 14% of sales which is a consistent, appropriate level of investment for us to continue to be on the offense in that market and ensure that we are on, you know, the programs that we need to be on.

20% operating margins in terms of how we think about the business model.

20% operating margin --

We think of the business what Tim appropriately said 12 to 14% engineering expense. We expense everything, nothing goes on the balance sheet. And with that, we feel we ought to be able to drive the aerospace group's margin at around the 20% level.

Awesome. Thank you very much.

That's the way we think of our business model.

Thank you.

Our next question comes from Matt Summerville of KeyBanc. Please go ahead.

Good morning. Eric, this is kind of a follow-up to your statement on aerospace. If you kind of back out the cost for Merrimack, your margins were probably 19.5%, maybe a little bit better.

Yes.

In the quarter and you don't have any volume yet.

Yes.

And biggest one against you from an OEM aftermarket standpoint so I'm more curious into really in this next upcycle, you've got to think there's more than 50 incremental basis points of margin off these levels when volume comes back. What do you think the margin power of this segment looks like over the next two to three years?

Again, I just point to a couple of things. We have consistently said that the aerospace group margins ought to run approaching 20% and we worked diligently over the last several years on our electronics business where pre-Merrimack, this business is running in the mid to high teens, which is exactly where we say that defense electronics business should and if you look at Merrimack pre- the new accounting and purchase you look at Merrimack pre the new accounting and purchase accounting charges, the 1.9 that we highlighted, that Merrimack margins are running above level also. I feel that we have got a smooth sailing here with two well-run and operated businesses and we -- we haven't done this formally, but we haven't done this formally, but we have capacity in our plant that we ought to be able to leverage very efficiently as the volumes return and I think we will just leave it at that.

With regards to fluid handling, I think, Tim, you gave a little color month to month how order trends look there. I was wondering if you could do the same thing at least to maybe just give us a better feel for how that looked in your aerospace business. I guess I'm trying to get a sense for whether the underlying momentum in aftermarket really has yet to improve for you guys.

My own guidance is that it's better, it's a little bit better but I can't call it an absolute trend. We got the whole potential disruption of the volcanic ash and the disruption in the travel and that lack of profitability on the airlines so I wouldn't - -- our current thinking is it's going to stay better -- but I wouldn't get carried away with it.

Okay. And then lastly, just with regards to the fluid handling business, you know, help us to understand you're starting out the year, I think a little better than 11% on an operating margin basis. What has to happen or what's giving you comfort that 12% to 13% is still the right number and then maybe you can walk through kind of what you're seeing from an average selling price versus raw material cost standpoint in the fluid business.

Sure, Matt. So, you'll recall that at our investor day in February, we indicated that we expected fluid handling performance here if the first quarter to probably be at a lower level than the remaining quarters of 2010. at a lower level than the remaining quarters of 2010. That said, we delivered operating profit in the first quarter pretty much on plan as we expected. We just recently completed a full detailed business by business March reforecast for the full year, which clearly reaffirmed the expectation of the fluid handling margins to be in that 12 to 13% range. So, you know, we see -- we see margins a bit better through the balance of the year, obviously, and expect to fully be in that range and we are comfortable with that guidance on a full-year basis.

Matt, on the -- this is Eric. On the price of material let me deal with it because we will get to the question on the overall company here but from a Crane Co. point of view, we would characterize that we did a very good disciplined job of holding price in the first quarter. It's clearly a more competitive environment out there, but when we look at our own internal analysis by business, pricing basically held here across all the businesses. We are seeing some material cost pressures, but it's really primarily in engineered materials and as Tim already commented, we were able to have the additional volume commented we were able to have the additional volume leverage offset that material. The material cost increase and generated close to 16% operating margin, so we handled it there. In fluid handling, we are seeing some commodity price increases, particularly in iron, copper, little bit of the high end stainless, and frankly, we have got some selective and modest price increases in certain of the categories that we are putting in place which we are pretty confident that will hold. So we feel steady as she goes in terms of material and price and I would say as a company on the material side, when we go through our supply chain leaders, when we go through our processes and the sophistication of our strategic procurement organization we are just in a lot better shape than I think we have ever been.

Maybe just one final and then I'll get back in queue. When I think about how the year is going to unfold on a quarterly basis, I know you don't give quarterly EPS guidance, that's not what I'm asking for but I'm trying to understand given the different dynamics impacting the business, how we should think about, you know, earnings seasonality for Crane in 2010.

I don't know how to answer that. We haven't really gotten into it. You'd have to look at the past patterns and the mix of businesses. I've got -- we just did a formal forecast at the end of March, but, as a matter of policy we don't comment on quarterly guidance and quarterly forecasts so I'm going to stay away from it, Matt.

Okay.

(Operator Instructions). Our next question comes from Paul Mammola of Sidoti & Company. Please go ahead.

Hi. Good morning, everybody.

Good morning, Paul.

If I could take you back to fluid handling and kind of dig in a bit there, have you seen any projects that were delayed or pushed off actually come back to the forefront for pricing or such?

We are cautiously optimistic here, Paul on the trends and fluid handling. We did see some signs, some positive signs and feel that the environment is a bit stronger here in the first quarter. We did in fact see some quote activity levels improve. We saw some projects get restarted. It's a bit spotty but clearly I think the beginning of a trend here and order rates improved as we went through the months of the quarter here. And I think that those comments apply both to our energy business and our chem pharma markets, so we have seen improvements in activity on the project side, and as well on the MRO side.

So to be clear, the improvement is chem pharma and power gen, so I guess oil would be left off and water would be still steady.

Well it's across our broad chem pharma and energy markets. I'm not making specific comments of the sub segments but generally we have seen greater quote activity throughout those businesses.

I would add, Paul, that we do see clear improving trends and have here for four or five months on the MRO business and we keep pushing to see whether is this just inventory restocking or is it a final demand and the message comes back clearly it's a little of both. So with chemical plants now operating over 75% globally, you would expect chemical plant utilization, you would expect to see that. So we are clearly seeing some end market demand on a day-to-day basis in MRO.

Okay. Good to hear. If we can go to payment solutions. I think the expectation for the year was -- was for something larger than a small decline there. Has that changed?

I don't recall what the expectation was. I think we characterized payment systems sales down just a little bit and that was sharply improved from the fourth quarter where it was down substantially. So we were actually encouraged by the payment solutions results in the first quarter. That being said, the first half of last year is when we saw the deceleration in the Russia gaming market because of the change in regulations and it actually ended, I think at the end of June.

So, we are still pretty cautionary on that business, but as Eric mentioned and I mentioned in my prepared comments, the quarter was an improved and moderated declining trend, which we hope to be at the beginning of -- you know, of a new trend level but we will have to see what happens here.

Okay. And you mentioned I think in the release the margin in electronics. What was that, if you have it offhand?

The margin in electronics we said is in the high teens.

Okay. Thanks for your time, guys.

Yes.

And we have a follow-up from Ronald Epstein of Banc of America Merrill Lynch.

Quick question, no one has really touched on it yet. On the M&A front, how does that market look? What are you seeing out there and how are valuations, that kind of thing?

Well, we are -- I would describe that we are working hard to be active and we are not close to anything at this point. Clearly with the economic environment here certainly stabilized and improving it allows you to be -- to get a better fix on future earnings and I think a higher degree of confidence in what you pay, but I can't say that we have got -- we certainly don't have anything near term at this point, although a hell of a lot more active.

Okay. Great. Thanks.

Yes.

And I'm showing no further questions at this time, sir.

Great.

Okay. Operator, thank you very much. And thank you all for joining us and for your continued interest in Crane Co. Thank you. Bye-bye.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.