Crane Co (CR) 2012 Q3 法說會逐字稿

Good day, everyone, and welcome to Crane's third quarter 2012 earnings conference call. Today's call is being recorded. At this time, I'd 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 third quarter 2012 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 Andrew Krawitt, our Principle Financial Officer. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just a reminder, the comments we make on this call may include some forward-looking statements. We 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 the press release, which is available on our website at www.craneco.com in the Investor Relations section.

I would like to invite you to attend our Crane's annual investor conference, which will be held on Wednesday morning, February 27. Please save the date on your calendars. Now I'd like to turn the call over to Eric.

Thank you, Dick. Crane reported record operating profit in earnings per share on a continuing operations basis in the third quarter with strong execution across the organization. Excluding repositioning costs and a favorable post closing adjustment related to our divestiture of Azonix, which essentially offset each other, earnings per share from continuing operations increased 14% to $0.99. Core sales growth moderated to 2% in the quarter, while operating margins, excluding repositioning costs, increased to a record 13.6% versus 12.4% a year ago.

I am particularly pleased with the improvement we achieved in our Fluid Handling segment, where our margins increased to 14.2%. Disciplined pricing, sound project management, and improved operational efficiency all contributed to the solid execution in the quarter.

We're on track to have the repositioning actions initiated in the second quarter complete by the end of 2012. As we said on our July conference call, pretax savings associated with our repositioning actions are expected to approximate $12 million annually beginning in 2013, of which $10 million relates to Fluid Handling.

Given our cautious outlook on the global economy, we continue to drive productivity initiatives and a cost-conscious culture across the Company. We have trimmed our 2012 sales forecast to 4%, the low end of our previously communicated range, reflecting this caution. Although cost savings will be somewhat -- will somewhat offset the weaker sales outlook, it is now more likely that our earnings per share will be in the lower half of our previously communicated guidance range of $3.75 to $3.85.

2012 has been a year of substantial improvement for Crane, and we are poised to report record earnings for the full year. Reflecting our confidence in the Company, we repurchased an additional $20 million of Crane stock during the third quarter. We are on track to achieve operating margins of 13% in 2012, a level that we predicted we would achieve when our core sales returned to $2.6 billion. This would be an increase from the 12.3% we reported in 2011 and a full 180 basis points higher than in 2007, when Crane sales were at a similar level. Our previously announced repositioning actions, combined with continued vigilance on staffing levels and discretionary spending, are helping to position us for what will likely be a slower growth global economy in 2013.

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 third quarter of 2012 to 2011. On a continuing operations basis, Aerospace and Electronics sales of $171 million were similar to a year ago, while operating profit increased 12% to $40 million. Operating margin improved to 23.2% from 20.7% in the prior year. Sales in the Aerospace group of $106 million were equivalent to year-ago levels. OEM revenues were essentially flat versus the prior year.

Sales to large aircraft manufacturers and business jet OEMs increased, while sales to regional aircraft manufacturers declined. Both commercial and military related sales were approximately equal to year-ago levels. In addition, after-market sales were flat compared to last year. A decline in spares revenue was offset by higher sales associated with modernization and upgrade programs, as well as an increase in our repair and overhaul business. The OEM after-market mix was 59% to 41% in both the third quarter of 2011 and 2012.

Operating profit in the Aerospace group increased by approximately $5 million, driven by improved mix within our OEM business, strong cost control, and lower engineering spending, in part due to the timing of certain development programs. Market conditions in Aerospace remain generally positive, with moderate oil prices and continued expectations for growth in passenger miles. We note that the International Air Transport Association is forecasting improved profitability for the airline industry in 2013. As we look forward, we remain cautious about the Aerospace after-market, but expect to benefit from increasing OEM build rates.

Electronic sales were $65 million, down slightly from the prior year. Operating profit decreased slightly as well, while operating margin remained in the mid-teens. Aerospace and Electronics backlog was $393 million at the end of the third quarter, down sequentially from $423 million in June, and $18 million lower than in December of 2011. We estimate that about $10 million of defense-related orders were delayed in the third quarter, and we now expect to receive those orders in the fourth quarter. In addition, approximately $5 million of the decline is related to certain customers changing from longer-term orders to monthly order releases rather than a change in underlying end-user demand.

Importantly, our current backlog -- that is, orders we expect to ship in the next 12 months -- is just slightly below the current backlog that we had one year ago, in spite of these timing impacts. Overall, we believe our Aerospace and Electronics backlog is supportive of our sales projections.

Engineering materials sales increased $4 million or 7% to $57 million. Demand for our RV-related applications increased 27% versus the prior year, as RV OEM build rates remained strong through the summer months and retail registrations were encouraging. Building products related sales were flat, reflecting soft commercial construction markets, and transportation related sales declined 6%. Operating profit, before repositioning costs, increased to $8.3 million from $5.9 million, and operating margins, also before repositioning costs, was 14.7%, compared to 11.1% in the third quarter of 2011, reflecting the higher sales and effective cost controls.

Merchandising system sales of $92 million decreased $6 million versus the prior year, or 6%, primarily reflecting lower sales to bottlers in Vending, and unfavorable currency translation in Payment Solutions. Absent the impact of foreign exchange, Payment Solutions sales rose modestly, despite a soft economy in Europe. Segment operating profit of $9.5 million decreased $1 million, compared to a strong performance in the prior year, reflecting the impact of lower sales while operating margin remained above 10%.

Fluid Handling sales increased 1% to $303 million, with a core sales increase of 5%, largely offset by unfavorable foreign currency translation of 4%. Backlog was $331 million at the end of September, down slightly when compared to $335 million at the end of June, but $17 million higher than in December of 2011.

In Europe, market conditions in the third quarter remained depressed, particularly, for our MRO and book and ship businesses. Larger European-based chemical customers are still generally moving forward with larger projects on a global basis, but some orders are being delayed. Chemical industry demand in North America, which was very strong in the first half of the year, started to slow down in the quarter, particularly for larger project orders.

Refining quote activity, both in the US and the Middle East, is still positive. Demand from global power markets remained soft with some projects on hold in the US, and we remain cautious about China and India. In Canada, fairly robust commercial construction and mining activity has benefited our pipe, valve and fitting distribution business. Fluid Handling operating profit of $43 million before repositioning costs increased 8%, primarily reflecting better project execution, price increases, and improved productivity.

Operating margin increased 90 basis points to 14.2%, exceeding our previous guidance of slightly less than 14% for the third quarter. Although total sales were relatively flat in the third quarter, core sales were up 5%, and we successfully drove productivity and reduced discretionary costs. Despite a tempered sales outlook, we continue to believe that our Fluid Handling operating margin will approximate 14% in the second half of 2012.

Our repositioning activities in Europe are on track, and we expect these actions to be completed by the end of the year. Pretax savings associated with these actions are expected to approximate $10 million annually beginning in 2013.

Turning now to more detail on our total company results and forecasts. While we experienced raw material cost pressure on certain commodities in the quarter, the effect was fairly modest on aggregate, and the increase in our selling prices more than offset this impact. Year to date, we have experienced a negative profit impact from currency translation, but those headwinds are now abating. Relevant foreign exchange rates are now fairly close to prior-year levels, so we would expect the currency effect to be modest in the fourth quarter. On a full-year basis, we estimate the headwind from currency translation to be about $0.05 per share.

Our third quarter tax rate associated with continuing operations was 30% in 2012, compared to 31% in the third quarter of 2011. Our full-year tax rate guidance of 30%, excluding special items, assumes that the US Congress passes legislation during 2012, which would extend the research tax credit retroactive to January 1, 2012. The assumed benefit associated with the R&D tax credit is worth approximately $0.05 per share in 2012.

Free cash flow was $57 million in the third quarter of 2012, compared to $40 million in the third quarter of 2011. Free cash flow for the first nine months of 2012 was $59 million, compared to $37 million in the first nine months of 2011. We are maintaining our 2012 free cash flow guidance in a range of $150 million to $180 million. As a reminder, the fourth quarter is a seasonally strong cash flow period for the Company, and we expect to generate significant cash through working capital reduction.

Capital spending for the third quarter of 2012 was $6 million, similar to the investment level in the first and second quarters. For the full year, capital expenditures are likely to approximate $30 million.

During the third quarter, we repurchased approximately 500,000 shares of our common stock for $20 million. As Eric mentioned earlier, these repurchases reflect our confidence in the Company's future and also indicate our willingness to more than offset stock incentive plan dilution if conditions warrant. As previously communicated, our policy is not to preannounce these purchases, but to report them at the close of the quarter.

Our balance sheet remains strong, and we ended the quarter with $281 million in cash. In addition, we have access to our $300 million revolving credit facility, which we recently updated and matures in May of 2017.

Now back to you, Dick.

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

(Operator Instructions)

Robert Barry, UBS.

Great work on the fluid margins. I'm very happy to see that. But I wanted to start there and get your sense of how things will track there going forward. It sounds like, I don't want to put words in your mouth, but maybe it will stay flattish at this level? And that the next fuel step up in improvement won't come until next year when you start implementing the restructuring? Is that fair?

Yes, as we mentioned in the remarks, Rob, we're still comfortable with 14% margins for the second half of this year, which would imply around that level in the fourth quarter as well. And we are not in a position to give specific guidance for next year, but we will do that as we prepare for Investor Day.

Rob, this is Eric. I was encouraged by the fact that we hit this without any benefit from the repositioning actions that we're currently -- we got no benefit from those and we don't expect to get any benefits in the fourth quarter, and we are already hitting this level. And as we discussed, there is $10 million of benefit that we expect to get that full $10 million in by 2013. So, I think we initiated this early, and we got at it, and we've got a tailwind here going into 2013.

Yes. That was very encouraging. Maybe just shifting focus to Aerospace and the margins there. I mean, very strong performance. I think you alluded to some reduction in engineering spend. That may have helped. How sustainable is that?

Well, as you observed, Rob, Aerospace R&D expense was lower in the quarter versus the third quarter of last year. In part, this is because we are winding down spending on some key programs. Part of it is timing related, so for example, we are investing less than we expected this year on programs related to the Comac C919. So the development of the overall aircraft is moving a little more slowly than we anticipated. We're meeting our obligations, but we're just spending a little bit less than anticipated. I would say in the fourth quarter, we expect engineering spending to increase a bit sequentially, but we don't see any significant changes to our current run rate.

Okay. And just finally, maybe, if you'd care to weigh in with your thoughts on sequestration and the potential impact to your business. Kind of how you're dimensioning it or thinking about it at this point?

Well, I would say it is, believe it or not, it's still too early to really make predictions on that. I would mention -- as we kind of said in the past, we are on a really broad portfolio. Our programs -- most of these programs are concentrated in ISR -- Intelligence, Surveillance and Reconnaissance -- and we think generally that part of the budget will hold up better than other parts of the budget, but it's a bit early to comment, specifically, on prospects for sequestration.

I would say, Rob, in the list of the top 5 or 10 things that I worry about, it's not one of the things I'm worried about.

Okay. Great. Thank you.

Matt McConnell, Citi.

Thank you for taking my question. Could you give us a sense of what is left to do in the Fluid Handling restructuring in Europe? And then maybe an update on, when this is finished, how much of your production will be in low-cost countries? And, is there more kind of slow movement of capacity over time? Just give me a sense of where this restructuring kind of fits within your longer-term plan there.

I forget what the number is on the percent that's in a low-cost country, but frankly, this is -- I consider this normal activity. All's we did was accelerate it here in Europe because of the reduced demand. So we are going to be finished with the programs that we initiated in the second quarter. We will be finished with these by the end of the year, and we are comfortable with that. They are on track, and as we sit here today, I am certainly pleased with the execution. I see no reason why that will change.

I think as an ongoing program, this is something that we have always done and continue to do. And those of you that followed Fluid Handling for a long time, I mean, I think we've closed four or five foundries and plants, and this is just an ongoing process.

Okay, great. How does this -- the progress that you made in the third quarter, does that help you put timing around a 15% operating margin that you're targeting there?

I would say the execution in the third quarter on the repositioning gave me a high degree of confidence that we will get the full benefit of the $10 million next year.

Okay, great. Well, we'll leave it there for that. And then on the M&A side, you finished with plenty of capacity, I think, 9% net debt to cap, and you're going to have strong free cash flow next quarter. So, where do you stand on an M&A pipeline? Is there anything actionable, or what are you seeing there?

So, we view the balance sheet and our cash position as a real opportunity to help us with our earnings growth. We're -- I'm personally spending with the team, quite a bit of time on this. And at the present time, we have nothing to show for it. Typically, we are seeing some opportunities. They tend to be a little bit larger than what we have seen in the past. So I think our largest acquisition was $150 million or something like that. So we are seeing some larger opportunities, and we're starting to see some of them, but as I sit here today, I have nothing to show for it.

And, when you mean larger than -- do you mean larger than the $150 million? Is there kind of a cap that you feel comfortable with?

The way we think about it is, is that we are committed to our investment grade rating. We look at that, and I think the equity is cheap. And so we would want to avoid issuing any kind of equity to maintain that rating.

Okay, great. Thanks very much.

You're welcome.

Brian Konigsberg, Vertical Research.

Thanks for taking my question. Just first on guidance, so you kept the low end of the top line range looking about 4% growth, but if you back into Q4, it does look like you're assuming acceleration into Q4, just given that we are seeing some declines in the order rates and obviously the slowing trends overall. Is there something, in particular, that you see starting to improve? Maybe a little color on that would be good.

I think your observation is correct. It is a bit higher of growth in the fourth quarter than it was in the third quarter. I think we've reduced our guidance given some of the caution that we have looking forward. Fundamentally, we -- it may be a little bit aggressive. We might -- that might be sort of at the high end of what we can achieve. But we've got a forecast that supports it. And we think sequentially, revenues are going to be higher in both Fluid Handling and Aerospace and Electronics, which get us to the 4% overall sales growth for the year.

That's fair.

4% would be the top.

The top. Okay. And just on Fluid Handling, you mentioned some trend slowing in chemicals. Some order delays. Can you just give us a little more color around those comments? Has there been a fundamental shift? Just given the, maybe, the uncertainty in the market with some of the projects you are pursuing?

I would say it's more of a continuation of the trends that we have seen, and there's been some slowing. Overall, we are comfortable with our backlog position. Our backlog is up versus year-end. It is down a touch from the second quarter, but we wanted to indicate that we have some -- seen some slowing in certain areas. And that being said, we're comfortable with where the backlog is.

I would say in terms of execution, we feel comfortable with -- that we're winning, particularly in the process valves, and we feel comfortable that we are holding price here.

And if I could sneak one last one in, one of your industrial peers with a very large asbestos liability, recently entered a transaction where they offloaded to a third-party. Is that something that you have considered? Does that -- is that something that you might pursue, if not?

It's not something we're going to pursue.

Got it. Thank you very much. (multiple speakers)

I've looked at every alternative on asbestos for 10 years. That is not something we're going to do.

Got it. Thank you very much.

John Moore, CL King.

I just have a couple of questions here. Most of mine have been answered. But I just wanted to clarify on the Fluid Handling margins, as you go from the fourth quarter into the first quarter of 2013, and you start to realize some of the benefits of the cost actions you are taking here or the repositioning actions, is there any reason that margins would decline, sequentially? Or, if, I guess, volumes remain steady, I guess is what I'm trying to get at here, can you continue to see sequential margin improvement going into the first half of 2013?

First off, we're not giving guidance on 2013 here until January. Secondly, it's going to depend on our core sales growth, right? So, we have a high degree of confidence in our ability to leverage core sales growth. But with this slower growing global economy, the issue is just how slow it's going to be. I feel strongly that we have a company and a portfolio -- and it's particularly true with Fluid Handling -- that if we get some global growth, that we are positioned to win some market share and to win share in the marketplace.

So if you get -- we can do GMP, we can do GMP a little bit plus, and then we can hold price. That's the way we think, and I am confident about our ability to leverage that core growth. So, if you get the core growth, you can leverage that $0.25 on the $1 and the Company is running at 13% operating margins; in the case of Fluid Handling, at 14%. That's the way we think about it.

Okay. No, that's -- that color is helpful. That's really all I've got. Thanks for the time.

Okay. Thank you.

(Operator Instructions)

Matt Summerville, KeyBanc.

A couple questions, first on aerospace, I think Andrew, you indicated that the OE business was relatively flat on a year-over-year basis. Given the relative size of the commercial and business versus regional, I am having a hard time mathematically getting there. It would be helpful if you are able to, maybe, provide a little color in terms of how much the large commercial/ business was up and then how much the regional business was down. And, implied in your comments earlier, then, it sounds like Q4 should be better for the segment overall. What sort of drives that sequential improvement on the top line?

Well, what I would say, Matt, is I would rather not give specifics on how much the large business and regional were up versus down. We want to get some directional -- we wanted to give some direction on that, to help put that in perspective. We do expect a slight sequential increase in the fourth quarter on the OEM side. That's driven by what's on our backlog and what we expect to be able to ship. On the after-market side, there's a little bit less visibility there, but we think that will be relatively similar to last year's level as well. And you put it all together, it's a slight sequential increase, and that gets us to kind of our overall guidance.

As you know, the biggest part of our commercial OEM business is large transports, and that really -- that was up, but we had some weakness on the regional side. And I think overall, when we looked at this quarter and we looked at -- on the OEM side, when we looked at this year versus last year, a lot was flat. I mean, you heard in my comments, whether you cut it military versus commercial, whether you cut it OEM versus after-market, it really was a pretty flat quarter in a lot of ways. So we'll give you a little bit of direction on those components, but it wasn't a stark contrast.

Okay. And then on the Fluid Handling margin, you've been mentioning, I think, for a couple of quarters that outside of the oil and gas portion of that business, Fluid Handling was running near, or at, or maybe even you said above, Eric, that 15% long-term aspiration you have in terms of margins there. I guess what I'm wondering, this quarter, was oil and gas an influencing factor in getting those margins back above 14%, or was that kind of the other businesses leveraging volume?

You know, I forgot to run those numbers. I would say that oil and gas was stabilized and the results were encouraging, but the real -- we still have a terrific opportunity in the oil and gas business for the margin improvement, and that's the area that is going to really help us get to the -- our 15% goal in Fluid Handling.

If you look at sort of how the backlog has been trending in fluid, relatively stable, pretty much throughout the year, once you net the divestiture you made, is there any sort of number you can throw out there in terms of how much you are being impacted by deferrals, delays? Or is -- have you seen out-right cancellations, and is that a concern?

I don't have a number. I see -- I don't hear the cancellations. I hear the deferrals.

Okay.

Definite softening in some of the MRO.

Is that a global statement, Eric, on the MRO side?

It depends on, you know, I would say -- again, global refinery business is pretty good. Chemicals is definitely softened. The power business is spotty globally, certainly nonexistent in Europe. Kind of some here, slowing in China. You know what a mess it is in India. So, it's just kind of by vertical.

Thank you.

Thank you.

Thank you, and I have no further questions in the queue at this time.

Thank you very much, operator. And thank you all for joining us this morning. Take care, bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.