Crane Co (CR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Crane's second 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. Welcome to Crane's second quarter 2010 earns release conference call. I am Dick Koch, Director of Investor Relations.

During our call this morning, we have Eric Fast, our president and CEO, Andrew Krawitt, our principal financial officer, and Richard [Maui] our principal accounting officer. We will start off our call with a few prepared remarks, after which we will respond to questions. Just as a reminder, the comments 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, 10k, 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 sections. Now, let me turn the call over to Eric.

Thank you, Dick.

I'm very pleased with our second quarter results. Revenues increased on a year-over-year basis for the first time in eight quarters. Our sales increased to 1.3%, coupled with solid margin improvement across our businesses, leading to operating profit growth of 44% and EPS growth of 41%.

These results were driven by significant restructuring and other cost reduction actions taken in 2009 as well as additional cost reductions we have achieved in 2010, most notably in our aerospace group as we wind down development work on a number of key projects.

We are encouraged by our modest sales increase in the quarter. Some of our short-cycle businesses have already rebounded while we still await growth in our longer cycle businesses. We think there is momentum for growth later this year and into 2011, even after adjusting for the foreign exchange head-winds that we expect in the second half of 2010.

Reflecting our aggressive reduction in cost and continued focus on (Inaudible) efficiencies, operating margins improved over 300 basis points to 11.7% on a 1% increase in sales. We believe further margin improvements will materialize as revenues increase. Free cash flow of $42.8 million in the quarter was almost double last year's second quarter level and reflected our higher earnings as well as continued intention to working capital management.

As we noted in press release last night, strong performance in the first six months in our forecast for the balance of the year have allowed us to raise our earnings guidance, increase our dividend by 15%, make a $25 million discretionary contribution to our pension plan, and repurchase shares of our common stock for $10 million. I believe we will continue to see the economy grow all be it at a slower rate than the first half of 2010.

Our lier short-cycle businesses are showing sales increases while we are seeing improving prospects in later, longer-cycle business in aerospace and fluid handling including both project and aftermarket activity. At the same time, we are maintaining our strategy of funding key initiatives to accelerate our growth as market demand returns by focusing on new product development, enhancing sales marketing and engineering capabilities, and process improvement within the businesses. We are relentless in our focus on our customer facing metrics such as; leave time, on time delivery and product quality as we continue to work to win market share.

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

Thank you, Eric. I'll turn now to segment comments, which compare the second quarter of 2010 to 2009.

Aerospace and electronic sales declined 5% to $139 million, while operating profit increased 37% to $26.2 million in the second quarter of 2010. Aerospace sale declined $1.9 million or 2% during the quarter. OEM sales declined 3% while aftermarket sales decreased only 1%, aided by certain additional provisioning sales. The OEM to aftermarket mix was 58% to 42% in both the second quarter of 2009 and 2010. Operating profit in aerospace increased by $9.2 million, as the impact of lower sales was more than offset by an $8 million decline and engineering expense as several major development programs including the 787, joint strike fighter and A-400M moved into final stages.

In the second quarter of 2010, aerospace engineering spending was $11 million, compared to first quarter 2010 spending of $11 million and second quarter 2009 spending of $19 million. We are on track to achieve our previously-announced target of a $20 million reduction of engineering spending in 2010. We are cautiously optimistic about our aerospace business in the second half of 2010. Our first half sales of $165 million are tracking above our expectations and our investor day guidance.

There are a number of favorable trends right now, with airline fuel costs at moderate levels, flight frequency and capacity up around 6% each, load factors around 77%, and a modest reduction in number of parked aircraft. In addition, the recent air show in England recorded approximately $28 billion of orders for new planes, boding well for the aerospace market in the coming years.

Electronic sales in the second quarter decreased $5.8 million or 10%. The sales decline was cause by a variety of factors including a slower-than-expect release of orders from the government to OEM customers and development program that will go into production slightly later than expected. Our sales forecast for the full year of $240 million remains the same as our investor day guidance since we expect that the second quarter sales decline was due to timing issues and these sales will be realize in the second half of the year.

Year-to-date through June, our electronic groups sales were $108 million, which underscores the strength we expect in the second half of the year. Electronics operating profit declined $2.1 million compare to the second quarter of 2009, reflecting the lower sales. Yet operating margins were mid-teens as a result of disciplined cost control.

Engineering material sales grew 40% during the second quarter, reflecting improved end market demand, leading share positions and strong technology. Sales to the RV industry in the second quarter continue their strong increase of the first quarter and grew 115%. The RV OEMs are generally encouraged by their backlogs and are cautiously optimistic sale will grow with recent wholesale activity. Transportation related sales grew 21% compared to the second quarter of 2009. As a result of continued higher but stable industry build rates for drive [ends] and refrigerated trucks.

Building products sales increased 2%, reflecting improved market penetration in the metal building segment and higher sales for other commercial applications including remodeling. Operating margin in the second quarter of 2010 were 17.3%, compared to 11.0% in the second quarter of 2009.

In addition to the margin expansion on higher sales, our improved second quarter results reflect strength in market positions and the benefit of cost reductions associated with our 2008 and 2009 productivity actions and significant head count and general cost reductions. Work continues on new product and applications development activities which involve RV, transportation, and maritime applications and we are pleased with the progress we are making.

Overall merchandising system sales of $75 million increased 2% Versus the second quarter of 2009. The sales increase in vending solutions more than offset lower sales in payment solutions. Signs of an uncertain external environment remain as order levels varied throughout the quarter.

Merchandising systems operating profit of $8.1 million increased 21%, and operating margins improved 180 basis points to 10.9% as a result of the absence of a restructuring charge in the prior year and the benefit of a legal settlement where we received the final payment from the defendants in a previously disclosed patent infringement case. We continue to make good progression on integration and optimization of our South Carolina plant and are seeing improved operating efficiencies from numerous operational excellence initiatives.

Our view of merchandise systems for the full year remains consistent with what we communicated at our February investor day. Our sales will be about the same as 2009, with higher vending sales approximately offsetting lower payment solution sales. Operating profit will benefit from reduced manufacturing costs, somewhat offset by an unfavorable mix between vending and payment solutions.

Fluid handling sales declined 3% to $255 million in the second quarter, a core sales decline of 4% was partially offset by a positive foreign currency impact of 1%. Our second quarter core sales decline of only 4% compared favorably to the double digit core sales declines we experienced in the previous four consecutive quarters. Orders improved over the prior year and backlog data suggests that sales may have bottomed out and will improve in the second half, at or perhaps slightly ahead of second quarter levels. This is not withstanding estimated foreign currency head-winds of approximately $30 million in the second half of 2010.

We believe that a significant part of the MRO restocking at distribution has already taken place and that the MRO orders we have seen represent real end user demand. With future MRO rates expected to be stable to up slightly.

We are seeing signs of increased customer spending in certain segments and geographies, and somewhat increased project quote activity across many of our fluid handling businesses, as customers consider restarting projects. Food handling operating profit of $32.2 million was 19% higher than the prior year as a result of lower costs and more favorable product mix. The favorable product mix reflected a higher MRO versus projects mix, in the absence of several large projects last year that had a high proportion of third-party [fundle bells]. Operating margins were 12.6% versus 10.3% in 2009.

In summarizing Crane's overall results in the second quarter, we achieved significant margin expansion and profit growth, despite modest improvement in sales We continue to believe we are positioned for further operating margin improvement when we return to revenue growth in our longer cycle businesses.

During the second quarter, our free cash flow of $43 million was considerably ahead of the $23 million we reported last year, reflecting our higher earnings and continued working capital discipline. Our lower capital spending is timing related and we continue to estimate that our capital spending will be in the $30 million to $35 million range.

We repurchased 313,500 shares of our common stock for $10 million, consistent with our practice of managing delusion relative -- related to our stock incentive plans. Our policy is not to preannounce these purchases, but to report them at the close of the quarter.

From a currency translation perspective, in the first half of 2010 for Crane overall, we had a favorable impact on our sales of approximately $20 million, with our fluid handling division representing $18 million of that tailwind. For the second half of 2010 overall, we expect a $40 million head wind from foreign exchange, with fluid handling representing approximately $30 million of that amount. So, for Crane in total, we expect to have full-year revenue head-winds of approximately $20 million or 1% versus prior year. That's compared to approximately $40 million of tail-winds that we expected back in February.

The currency impact on our operating profits tends to be about 10% to 15% of the revenue impact. We had a currency tail-wind of about $0.03 per share in the first half and are estimating a currency head-wind of $0.06 per share in the second half. Of course depending on exchange rates in the second half of the year.

On a full year basis, a negative currency impact of approximately $0.03 per share is included in our recently increased EPS guidance of $2.35 to $2.50. Our balance sheet remains strong, and we ended the quarter with $336 million in cash. We also access to our $300 million revolving credit facility. We have no significant debt maturing in the near term, as half our long-term debt of $400 million is due in 2013 and the other half is due in 2036.

Now back to you, Dick .

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

(Operator Instructions) Our first question comes from Wendy Caplan of SunTrust. Please go ahead.

Hi, yes, this is Linda [Goutmann] in for Wendy Caplan. I just have two questions. One is in regard to strong demand for RV that we saw this quarter -- would you attribute most of this to restocking and if so, what do you expect for future quarters?

First up, clearly there was some restocking that's happened in the channels. Clearly that's over and as Andrew said -- and I think you heard from every OEM, RV OEM, they think their backlogs are balanced with sales out of retail but, no, we're going to have to all watch the next several months and see if that happens.

Okay. And then the next question is, regards to fluids handling segment -- do we need to see volume around a $300 million quarterly run rate before operating margin gets back to the mid-teen level, or is there an additional restructuring benefit we may see come through?

There's absolutely no additional restructuring benefit or charge that's going to come through here. First off, we were at 12.6% operating margins at the current level revenues and if we get the revenue increase, I see no reason why we won't leverage that to improve margins. We've been consistent we expect fluid operating margins at these revenue levels to be in the 12% to 13% and we're tracking exactly what we thought.

Okay, thank you.

You're welcome.

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

Morning. Couple of questions -- first on fluid handling; Eric, can you comment as the quarter progressed what had you saw in terms of incoming order rates and when, you know, you expect to see based on the conversations you're having with your customers now, more of an inflection point on the project side of the business?

Well, I would say -- not unlike the first quarter, it seemed to get stronger as we get through the quarter. I would point out that in fluid handling, this was our third consecutive quarter of positive book to bill. Clearly our numbers are better in core sales in the second quarter than the first quarter by quite a significant amount. I would say globally we are seeing -- as I think Andrew mentioned -- steady to increasing MRO activity at a level higher than it was a year ago as well as orders. As we see it now, Matt, the -- even with the $30 million FX head wind in the second half, you should expect fluid handling revenues to be, at to slightly above where it was in the third and fourth quarter last year. So we're seeing the benefit of the increased utilization, for example, in the chemical plant.

And then with regards to the engineered materials business, given, the sort of surge, obviously, against easy comps we've seen in the RV portion of the business, growth resuming in the transportation side, building products leveling out -- how do you expect seasonality to unfold in that business? Do you expect to kind of see the normal sequential tail off in the back half of the year, given how the comparisons work? Or should we expect something maybe a little more robust than that?

I think on -- clearly the normal seasonality will be there. Clearly the RV restocking at retail is over, but, you know, the transportation market continues to be -- was up 21% -- our business was up 21%, continues to be very strong. I'd feel -- I just -- feel very good about our business in terms of our customer metrics, our new products, the management team. Our efforts to take kind of market share across the board. The only time I see us lose piece of business is for price. Which says something about our strength.

So, yes, I do expect some seasonal weakness, and we do have the end of the restocking in RVs, but, we've got good margin in this business, and I don't see why we don't continue to produce good results here.

Just a final question on aerospace -- based on kind of how build rates are looking on the programs where you have significant content from an OE standpoint and kind of what you're see in a more real-time basis in the aftermarket -- when do you expect the aerospace group to benefit from this coming, hopefully this coming cycle in aerospace?

Well, I think that's a $64,000 question. What I would point to -- first off, you saw a much stronger second quarter than a first quarter -- both OEM and aftermarket. Secondly, as Andrew pointed out, all the airline statistics are very positive. And as we look at our own business, we would expect, in the second half of the year, for the aerospace group, positive year-over-year comparisons, excluding that one time Boeing payment that we got at the end of last year on the break control. So, this would be the first time we're seeing that, and our current internal expectations are that.

Thanks for the color, Eric. Appreciate it.

You're welcome.

Our next question come from Paul Mammola of Sidoti and Company. Please go ahead.

Hi, good morning, everyone. If we can start with fluid -- Eric, can you give us a sense of how the end markets played out? Obviously, sales are down 3% overall but how was oil and power, chemical, farm, and water?

It's a little -- we don't track anally it like that. I would characterize it as chemical business -- chemical markets are better than what we expected with improved activity. I would say that's true globally. Power has been weak here in the states, but not as strong as kind of energy or chemical. And our water business is fine.

So, you would characterize oil and gas as one of the stronger of the few?

Chemical is the best.

Interesting. So no pricing pressure in any of those, though?

Well, we, again, with the MOR, steady and approved levels, you get better pricing on the MRO. Which is a positive. The project pricing is always competitive. I just think we have a record of being disciplined on the projects and making sure we don't -- we don't do anything stupid.

Understood. If I'm understanding you correctly -- correct me if I'm wrong -- it sounds like you mentioned that you see sales, even with currency, up through the back half of the year. Oh, okay.

They're pretty strong currency head wind we've got there.

Yep, understood. Is it fair to say, based on the commentary, it's coming from the longer cycle businesses? Or the later?

Yes.

Okay.

The way we think about it, on just the,overall for the company, to get this kind of margin improvement on basically flat to 1% sales increase, is really outstanding performance. Because, we've yet to see the benefit from sales increases coming from our later and longer-cycle businesses. And as we start to get that ramp-up as the sales increase, of which we expect to start to see a little bit of that in the second half. You can expect us to leverage that volume.

I agree, and looking forward to it. Finally, sales are up 5% sequentially, operating expenses flat. As you said, that's certainly impressive, but when do you think operating expenses start to creep hire based on your own internal cost projection?

Well, I don't -- I don't really think of it that way. We are doing a -- we continue to do a very disciplined and -- job on keeping out unnecessary costs. We are, without question, aggressively continuing to spend on what I consider to be the growth initiative; new products, engineers, sales, marketing -- ERP systems where we think we can ultimately take out a lot of cost and streamline the operations. So we're -- investing for growth to better position us for strong 2011, while at the same time maintaining the Crane culture of good cost control.

Okay. And you mentioned book-to-bill being up again in fluid handling. Do you have book-to-bill, by chance?

I just think you have to be careful about it in fluid handling because there's some short-cycle pieces of the book-to-bill -- so it's hard to measure again. Did we give it specifically last quarter? I don't think we did.

No.

I don't think we intended to do that, but it was positive for the third quarter in a row.

Okay, fair enough. Thanks for your time, Eric.

Yes, thank you.

(Operator Instructions) Our next question comes from Ron Epstein of Bank of America. Please go ahead.

Hi, this is Elizabeth for Ron. I just had a couple of questions. What sort of trend -- back to fluid handling -- are you seeing out of China?

Nothing of note.

Okay.

We have -- I think from our fluid handling point of view, we have aggressively deployed and built up a first-class sales and marketing group in China and feel like, the flow of business from China, continues kind of on a comparable basis that it has and I believe is on plan.

Okay. All right. And then also, what are you seeing in terms of your M&A outlook -- the pipeline?

Well, I would say that acquisitions remain an opportunity for us. We've got $300 million in cash. We've got borrowing capacity. And I like to think we have a proven record of being buying strategically important companies. We, frankly, are continuing to aggressively hunt, but at least at this point, we don't have anything to show for it.

Okay and one final question, in case I missed it -- did you change any of your margin goals?

What I would say is that at the February investor conference we said that when we get back -- we're running $2.2 billion annual rate in sales, approximately. And we said if we get back to our previous peak of $2.6 billion, we saw that operating margins would hit 13%. And I think if you look at the current run rate in sale that are little over $2.2 billion and we're already at 11.7% or 11.8%, we haven't changed our guidance, but you have to say we're clearly ahead of where we needed to be, in terms of margin

Sure. Okay, thank you.

Thank you.

Our next question is a follow-up from Matt Summerville of KeyBanc. Please go ahead.

Just in terms of raw materials versus pricing, Eric; can you talk about what you saw in engineer materials in the second quarter and what your expectations are with that equation in the back-half half of the year? And then similarly in fluid handling as well?

I can put them both together, Matt. We clearly felt some material cost pressure in the second quarter, particularly in those two businesses -- engineered materials and fluid handling. In selected cases, we've raised prices.

Also, as you know, commodity prices have come down for the last 90 days, last three months, and as we look at this balance of the year, we expect to be reasonably in balance price versus material.

And just -- from a geographic standpoint, you gave, first, a little end market color on fluid handling -- but you have a big presence in that business within Europe and maybe could you talk about geographically speaking, specifically what you're seeing there in fluid and maybe even, full merchandising into that discussion, given you have a pretty good European presence in that segment as well?

I don't know how to characterize this. We have a very strong presence in fluid handling in Europe and it's doing just fine. Much of what we make in Europe, we sell around the world and those global markets are great and so we -- while we might have some short-term currency that dramatic weakening in EURO long-term sets itself up for success in terms of global exports from Germany.

Thanks.

I don't have anything else to note on market -- except Europe -- Europe's been fine as far as we're concerned.

Appreciate it, thank you.

You're welcome.

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

Okay.

Okay. Thank you very much, operator, and thank you all for joining us today. Bye-bye now.

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