Crane Co (CR) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to Crane's first quarter 2013 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 2013 earnings release conference call. I'm Dick Koch, Director Investor Relations. On our call this morning we have Eric Fast, Max Mitchell, Rich Maue, and Andrew Krawitt. We will start off the call with a few prepared remarks, after which we will respond to questions.

Just as a reminder, the comments we make today on this call may include some forward looking statements. We refer you to the cautionary language at the bottom of our earning release and also in our annual report, 10-K, and subsequent filings pertaining to forward looking statements. Also during the call we'll be using some non-GAAP numbers which are reconciled to comparable GAAP numbers in a table at the end of our press release, which is available on our website at www.craneco.com, in the Investor Relations section. Now let me turn the call over to Eric.

Thank you, Dick. Before commenting on our first quarter earnings, I would like to briefly touch upon the management changes we announced yesterday. As mentioned in the release, I will be retiring in January 2014. It's been a privilege to lead Crane over the past 12 years and I'm very proud of all that we have accomplished. We posted record earnings per share and free cash flow in 2012 and we expect another overall record performance in 2013. In December we announced the acquisition of MEI, which will create a third growth platform for the Company and our stock price reached an all-time high during the first quarter. Max Mitchell has played a key role in many of our accomplishments. And I'm pleased he was chosen by the board to succeed me. I am confident that he will lead Crane to continued profitable growth. As we have been for the last several years, Max and I will continue to work closely together over the next nine months to ensure a smooth transition.

Now I'd like to move on to our first quarter 2013 results. As outlined in our press release last night, excluding the MEI transaction costs, I am pleased to report record first quarter EPS of $1.04 per share, an increase of 21% versus $0.86 last year. Operating profit increased 15% as margins reached 14.3%, a substantial increase over 12.1% last year, with improvements broad-based across the organization. Although we experienced a modest decline in sales and remain cautious on the global economy, our backlog position and improving order and quote activity during the quarter was encouraging and it supports our full-year 2013 sales and earnings guidance.

As I mentioned a moment ago, we have an agreement to purchase 100% of the equity of MEI Conlux Holdings for $820 million or approximately 9.6 times MEI's 2012 adjusted EBITDA. We structured this transaction to use at least $180 million of our international cash and $70 million of US cash for a total of $250 million and we plan to borrow the remaining amount of approximately $570 million. We have commitments in place for all financing requirements. The acquisition remains contingent upon regulatory approvals and we are working to obtain these approvals as quickly as possible. We continue integration planning in connection with the acquisition and look forward to a successful closing late in the second quarter. Rich Maue 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 first quarter of 2013 to 2012. Aerospace and Electronic sales decreased 6% to $165 million compared to $175 million in the first quarter of 2012, while operating profit increased 5% to $40 million. Operating margin improved 260 basis points to 24.3% from 21.7% in the prior year. Sales in the Aerospace Group were $104 million compared to $109 million last year. Commercial OEM increased 1%, as strong sales to large aircraft and private jet manufacturers was offset by a decline in regionals and in our seat actuation business. Military OEM was also down modestly. Aftermarket sales were lower by 8% compared to the first quarter of 2012, with a decline in commercial spares and in military modernization and upgrade sales. The decline in military modernization and upgrade sales largely reflected the completion in late 2012 of the carbon brake upgrade program for the C130 aircraft. The OEM aftermarket mix was 62% to 38% in the first quarter of 2013, which compares to 61% to 39% in the first quarter of 2012.

Operating profit in the Aerospace Group increased by approximately $2.6 million driven by productivity and solid cost management, as well as lower engineering spending due in part to the timing of certain development programs. Market conditions in the aerospace industry remain positive. The International Air Transport Association's forecasting slightly improved profitability for the airline industry in 2013, with passenger traffic projected to increase 5% worldwide. And air cargo volume is expected to increase 3%. We continue to benefit from increasing OEM build rates across a broad range of platforms and we are cautiously optimistic about commercial aftermarket spares improving in the second half of the year.

The Electronics group sales were $61 million in the first quarter of 2013, approximately $6 million lower than in 2012, reflecting delays in defense-related programs. Operating profit decreased modestly, as improved operating margins from strong productivity and solid cost management only partially offset the sales decline. Aerospace and Electronics backlog was $398 million at the end of the first quarter, up 5% from $378 million in December of 2012, representing growth in backlog in both businesses. We continue to believe our Aerospace and Electronics backlog, combined with orders we expect to receive in 2013, is supportive of the full-year sales guidance of 2% that we provided in February.

Engineered Materials sales increased $2 million or 4% to $60 million. Demand for our RV-related applications increased 14% versus the prior year, as RV OEM build rates strengthened, both dealer and retail demand continuing strong through the quarter. In March, the RVIA increased their 2013 wholesale build forecast to 307,000 units, an 8% increase compared to 2012. Building products related sales were flat, reflecting a generally soft commercial construction market and transportation-related sales declined 11% reflecting soft markets and difficult competitive conditions. Operating profit increased to $8.6 million from $8.4 million. And operating margin was 14.2% compared to 14.5% in the first quarter of 2012. The impact of the higher sales together with savings from the 2012 repositioning actions were offset by higher material costs in the quarter. We anticipate modest incremental improvement in operating margins through the balance of the year to be driven by continued cost management initiatives, targeted pricing, and savings from the 2012 repositioning actions.

Merchandising Systems sales of $90 million increased approximately $2 million versus the prior year or 2%, reflecting higher sales in payment solutions driven by growth in the retail, vending, and casino gaming vertical markets. This increase was partially offset by lower sales of vending machines, reflecting weak market conditions in Europe, as well as lower sales to certain bottlers. Segment operating profit of $10.2 million increased $5.5 million or 116%, reflecting strong productivity gains in both businesses. The impact of the higher sales in payment solutions and the absence of $1.5 million patent litigation settlement in vending solutions in 2012. Operating margin increased to 11.4%, which compares favorably to 5.4% in the same quarter last year. We expect a modest improvement in sales in 2013 led by higher global demand for payment solutions. Operating profit in 2013 is also expected to increase driven by continued strong productivity gains and the impact of the higher sales.

Fluid Handling sales declined $12 million to $313 million or 4%, resulting from weak orders in certain of our short-cycle book and ship businesses, as well as project delays in our ChemPharma energy business. However, Fluid Handling remains positioned to benefit from its exposure to late cycle end markets, where bookings and quote activity strengthened through the quarter. Backlog grew 6% to a high watermark of $365 million at the end of March compared to $343 million at the end of December and $353 million last year. With respect to key end markets, while conditions remain generally uncertain in Europe, order and quote activity increased during the quarter and there are encouraging signs from European-based customers who remain committed to projects on a global basis. Chemical industry demand in North America slowed in the quarter reflecting low project activity and some project delays, while chemical plant investments in the Middle East and China are generally moving forward. We're finding demand remains positive and we're finding refinery turnaround activities appear to be stable. Demand from power markets in the Americas is showing signs of improvement, while China and India remain soft. And while strong through 2012, commercial construction and mining activity in Canada has slowed.

Fluid Handling operating profit of $46 million increased 7% on the lower sales, primarily reflecting strong project execution, improved productivity, solid cost management, and the benefits of the repositioning actions we took in 2012. Operating margin increased 140 basis points to 14.7% compared to 13.3% in the same quarter last year.

Turning now to more detail in our total company results and forecasts. While we experienced raw material cost pressure on certain commodities in the quarter, the effect was modest in the aggregate, other than in Engineered Materials, as I previously mentioned. Foreign currency translation had a negligible impact on EPS in the quarter and as a reminder, the operating profit impact of foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact. Given recent changes in foreign currency exchange rates, the impact of currency translation on a full-year basis could be slightly unfavorable to what we anticipated back in February.

Our first quarter tax rate was 28% on a GAAP basis compared to 29% in the first quarter of 2012, in part reflecting the $0.05 per-share benefit from the reinstatement of the R&D tax credit retroactive to January 1, 2012 consistent with our previous disclosure and full-year 2013 tax rate guidance. During the quarter, this benefit was partially offset by the impact of the MEI transaction costs, which are not deductible for tax purposes. Excluding the impact of the transaction costs, our non-GAAP tax rate was 27%. Our full-year tax rate guidance of 30%, which excludes the impact of the MEI transaction costs, remains unchanged.

Overall free cash flow was negative $26 million in the first quarter of 2013 compared to negative $50 million in the first quarter of '12. The year-over-year improvement was driven primarily by higher earnings, lower working capital requirements and lower net asbestos payments. In addition, capital spending for the first quarter of 2013 was $5.5 million compared to $7.2 million in 2012. For the full-year, capital expenditures are expected to be $35 million.

Our balance sheet remains strong and we ended the quarter with $385 million in cash. As Eric mentioned earlier, commitments are in place to cover 100% of the financing needs of the MEI acquisition, which is expected to close in the second quarter. Specifically, we increased the size of our multi-year revolving credit facility, which matures in May of 2017, from $300 million to $500 million and we also added a $400 million, 364-day facility in advance of the close of the MEI acquisition. Later in the year we expect to term out a significant portion of the acquisition-related debt and refinance our currently outstanding $200 million bond that matures this September.

As a reminder, our guidance is for 2013 core sales growth of between 1% and 3%. Our 2013 EPS is expected to be in a range of $4.10 to $4.30 per share, representing an increase of 11% to 16% over 2012 earnings per diluted share of $3.70, before special items and on a continuing operations basis. We expect 2013 free cash flow to be in a range of $190 million to $220 million, including the effect of asbestos-related cash flows. Our 2013 guidance does not include the impacts of the pending acquisition of MEI. Excluding inventory step-up and one-time transaction and integration costs, we expect MEI to be accretive to earnings within the first full year of acquisition by approximately $0.25 per share, inclusive of $0.05 in synergies. Now back to you, Dick.

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

(Operator Instructions)

Brian Konigsberg, Vertical Research.

Yes, first of all, could you just touch on maybe what margins -- maybe just focus on Merchandise System to start. Obviously, that was an extraordinarily strong quarter, much better than we had expected. I'm just curious about your view of the sustainability of that margin profile through the year. Was there anything special that kind of tails off after the quarter, maybe give us some color on that.

So, no. I think some of the performance that we saw in the quarter in particular, on a year-over-year basis had to do with the absence of a settlement charge that we had in the prior year, which was about $1.5 million last year. So, from a year-over-year perspective, that did benefit us. I would say that the growth that we saw in Payment Solutions contributed.

And then our ongoing process to ensure we achieve the productivity goals that we set forth at the beginning of the year. So, the margins from our perspective were not a surprise and in line with what we would have expected and in line with what we expect on a full-year basis for the segment.

Nothing unusual.

Nothing unusual. Okay. And then just on Fluid Handling. So, a nice sequential uptick up there, as well. Maybe you could just talk about how much of that was just core operations versus the benefits of restructuring actions already in place and should that continue to improve through the year based on how those benefits actually layer in. If you could give us some color there that would be helpful.

From an overview point of view, I don't think we want to breakout the -- the restructuring that we counted on to get a full $10 million, the repositioning that we did in Europe in the second quarter we completed. We expect to get $10 million and will get $10 million through the course of this year. I don't think we want to get into trying to breakout what was restructuring or not. We got to $10 million and we started to see it in the first quarter.

I think the margins, we're a little bit concerned about mix among the businesses going into the first quarter. And frankly, margins in every business were a little bit better than what we anticipated with the exception of Crane Supply, which is our distribution business in Canada where we saw lower sales and margins. But generally the margin improvement was across the board in all the businesses other than that.

Is it safe to say that you have not hit your full run rate in Q1 as far as restructuring benefits in fluid?

No. We saw the full benefit of the restructuring in the first quarter.

So you're at the run rate? Okay.

Yes.

Great. I'll pass it off. Thank you.

Great, thank you.

Matt McConnell, Citi Research.

I wanted to start by saying congratulations to Eric for a great career at Crane. It's great to see Max now officially named as a successor. Congratulations to you both on that.

Thank you very much. Appreciate it.

And then, you talked about the driver of that 6% revenue decline in Aero and Electronics. Could you bridge the gap with how you get to the increase for the year? Is that mainly an improvement in commercial spares, or did the year-over-year impact of the defense retrofits was that tougher this quarter than the rest of the year? Could you just give some visibility to how that improves through the year?

Yes, I'll just start with the retrofits it's going to be a headwind for the next three quarters primarily. That is a piece of it. When you look at the decline that we had in the first quarter, it would imply that we need to have about a balance of year increase in core sales growth of about 4%, 4.5%. We continued to see OEM build rates being strong, passenger miles flown to continue to increase. To your point, we also do expect commercial spares to come back in the second half.

Again, as passenger traffic grows and we see that outpacing perhaps airline capacity. From a defense-related perspective in electronics, we do see orders continuing to recover as we move through the balance of the year. Although timing is difficult in that area given uncertainty around defense-related budget actions. I think the important point here with respect to defense is that we don't see orders being canceled necessarily and just delayed.

So, we see it from a backlog perspective as being a bit -- from a bit timing. Overall we think that the backlog in both Aerospace and Electronics where it sits today and together with those orders that we expect, both in the after-market and in defense to support the full-year forecast that we have.

And between the push outs and the roll-off of the retrofit project, is there any mix shift that's contributing to that margin, because I think that might be an all-time high. At least it's a 10-year high, I think. Is there any mix issue that's contributing to that margin in Aero?

Yes. So, the margin performance in the quarter you're referring to, Matt?

Yes.

Our engineering expense was a bit lower in the quarter. Our expectation for the full-year was that 8% of sales. We ran closer to 7% in the quarter, which is about a $2 million benefit that we did see in the business. We were also perhaps just a little bit lower in Electronics. I think if you were to come back to that overall run rate that we do expect for the balance of the year, our margins would have been a little bit more in line with what we had expected or would have expected in the quarter and on a full-year basis.

The other point I would make, we don't spend a lot of time talking about it, is that our seat actuation cabin business was a contributor to the sales decline and the margins there are quite a bit lower than the rest of the business.

And will the Engineering expense kind of normalize out through the year? Was that a temporary step-down this quarter?

Yes. It was more temporary, more in line with just changes in certain programs that we're working in terms of timing. We do still expect to hit our full-year forecast in Engineering.

Okay, great. Thank you very much.

You're welcome.

(Operator Instructions)

Matt Summerville, KeyBanc.

Question on Fluid Handling. You mentioned things sort of got better as the quarter went on. I'd be interested if you can provide a little more detail on that in terms of if you think about kind of the book to bill and where it appeared to come in for the quarter comfortably above one, were you seeing -- was January -- did you see something like bad, bad, good, or how -- describe more about how that cadence in book to bill sort of came together there. Kind of -- maybe also the magnitude of delays and push outs you're seeing on the project side.

I like the bad, bad, good it terms of -- it might be a little dramatic, Matt. But generally, we saw very strong March in terms of orders. I would -- just to give you some comfort, after January and February we felt the need to focus here and the direction of the business. We did, even after March, we did -- we reviewed all the major businesses, we took a bottom-up formal forecast in terms of orders and sales and margins.

Max and Louis Pinkham and I spent last week in Europe on -- reviewing the Fluid Handling businesses. And generally, across the board, again, much stronger in March. More quote activity and a fair number of open quotes tempered by real price competition and the discipline of trying to hold price here on these projects a bit. But I would -- it clearly felt better to us in all those reviews.

Has pricing started to firm up at all or is the magnitude of pressure similar to what you've been experiencing or even worse?

I don't think there's a noticeable difference. It's just a very competitive marketplace here.

And then just back to kind of the spares comment in the Aerospace and Electronics business. Does the dialogue you're currently having with customers support a view that in fact that is going to get better in the back half of the year? And what's your sort of view on channel inventories as it pertains to the products you sell? Is cannibalization of the part fleet an issue for your spares business?

Yes, so, certainly we do have a bit of a tougher compare. We had very strong, I think most companies had very strong order activity and sales activity early last year. We believe inventory levels, to your point, are improving a bit. Further destocking in '13 would look from our perspective to slow as we move through the balance of the year.

Again, we point to commercial air traffic and the capacity of the airlines to address that increased traffic growth. So, overall we feel pretty good, cautious, but okay. On the last question on airlines and using, I think what you're referring to is used serviceable material. It's something that we do watch. We don't see it having a dramatic impact at this point, but something that we're watching closely.

Matt, I would add, we don't see much of a change in the second quarter. This is really kind of a second-half call. And it's not easy to get our arms around this. The forecast, our commentary with customers would suggest that we should see a better -- and what's going on in the business suggests to us that we should see a stronger second half. But not till then.

Can you remind us what your comps in the spares side of the business look like in the back half of the year.

I don't know what they were.

I'm sorry, the question again?

What your compares -- the comparisons you're up against in the spares side of the business in the back half of the year. I'm trying to get a sense for how your comps evolve through the remainder of the year.

Why don't you deal with that this afternoon when you follow-up with a call, Matt. We don't have it right here with us.

Okay, sound good. Thanks guys.

Thank you.

Maharth Kapur, Credit Suisse.

I have one question regarding the quote activity. Have you guys been seeing any lengthening of the sales cycle in that -- in the Fluid Handling quote activity picking up, or is it pretty much in line with historical averages in terms of longer cycle, late cycle stuff being taking a while and the short cycle stuff being quicker?

I'm not seeing any changes there really.

No. We'd say nothing inconsistent.

And in terms of the quote activity picking up as you went through the quarter in March, was that -- does that apply to the short cycle stuff, as well, or only to the late cycle? Across the board or not, basically?

I would say that even on the short cycle businesses, Canada was weak, North America was stronger in March, UK was non-descriptive, I would say.

Yes. I would say that for the majority of the momentum that we saw as we moved through the balance of the quarter it was mostly in project, but we did see some pickup in MRO, but mostly project.

Yes, that's fair.

It just seemed like from the press release that the quote activity, the commentary applied across all your segments. But the previous question seemed to focus mainly on fluids. Is it mainly concentrated in fluid or would you say that you've seen kind of quote activity in order build up across all the segments?

I wouldn't say that. What I would say is, is that we have positive book to bill here across all the segments in very strong way, you can see that our backlog looking at both the short cycle and the long cycle businesses, backlog is up $50 million since the end of last year. But I wouldn't -- we particularly felt it in Fluid Handling. I wouldn't characterize it -- I would say we started to feel that in Engineered Materials. Didn't see it in Vending. Payment Systems is steady. Nothing of particular note in Aerospace and Electronics.

In terms of some of the revenue weakness in the quarter versus street expectations, where -- and you guys have explained where the shortfall was in terms of the reasons for that on the aero side, but where would you say it was the biggest shortfall relative to your plan going into the quarter?

I don't think it would be any different than what we outlined, frankly.

I would say that we were -- I would say that vending surprises from -- we expected the bottling business -- the business from the bottlers to be better and Europe was a little worse.

And you expect that to pick up in the back half, as well, or --

It's a book-and-ship business. Hard to say.

Okay, fair enough. Thank you, guys.

Thank you.

Brian Konigsberg, Vertical Research.

I just had a couple of quick follow-ups. Just on MEI to the extent that you could actually comment on it right now, obviously we've seen the yen come down fairly substantially over the last several months. How does that kind of play into your outlook for MEI's contribution and maybe can you just talk about the dynamics between, obviously, Japan is a fairly big market for them, the sales versus the cost dynamics within that region? These are manufacturing based in Japan and how that transaction might impact you going forward. If you could comment on that, that would be helpful.

I think we would rather comment on MEI's specific pieces of their business after we close, Brian.

Again, we're holding exactly to what we said in terms of first year full-year accretion and synergies that we're going to get here.

And that contemplates what's happened with the yen?

Sure.

Yes.

And then just secondly, just on cash. I believe you said you're going to roll a portion of your debt second half in the year. And you still intend to pay down about, what, $100 million in '13 or is that a first year comment? Can you maybe give a color, some color on kind of how much cash is going to go back to paying down debt related to the deal?

We didn't necessarily give, I don't think, a forecast in terms of what we were going to specifically pay in '13.

Okay.

We expect to be able to pay down a significant amount of what -- we expect to be able to pay down that debt over time over the next few years and we're comfortable in those projections. We look to use the domestic cash flow to pay down that debt. And we'll see some cash build-up overseas simultaneously. But we're comfortable in our projections there.

No changes there.

Okay. Thank you.

Yes.

Michael Callahan, Topeka Capital Markets.

Just a couple of details that I'd segment here. On Merchandising Systems, you mentioned the vending sales were down in the quarter kind of coming off a multi-year trough. Are you guys seeing any indication of an improvement or are you thinking it may decelerate even further? Any color you can give us around that piece of the business.

I'd be surprised if it decelerated any further. We were surprised -- the bottlers surprised us a little bit and a big customer in Europe surprised us a little bit. But I'd be surprised to see any other deterioration there.

And then on Engineered Materials, similar kind of question. RV sales were up. Can you give us just a little more color on transportation and commercial building products, as well, there?

I would say from the demand point of view, RV's been stronger than we anticipated. We don't yet see commercial construction activity really coming through. And I think that's -- you would find those comments across the board. That's not unique to us. And transportation's kind of -- is down, but relatively stable. I would characterize the sales growth overall in Engineered Materials to improve. We would expect sales to be higher on a, modestly higher on a year-over-year basis as we go through the next three quarters.

Okay. Thank you guys.

Maharth Kapur, Credit Suisse.

Just a followup on the vending business. That business has struggled for quite a while. I know you guys have talked about the low operating rate in that business. I'm not sure if you ever talked about the low-cost tax -- has a lower tax basis or not. Eric, what would it take for you guys to consider some kind of strategic action just given that, that payment solution is obviously becoming a bigger part pro forma after MEI? How would you view that business in terms of fit strategically with the rest of the portfolio?

So, we expect that business to get to 10% operating margins. And those of you who have followed us for a long time, we're actually at an interesting part of the cycle in the vending business with the -- hooking them up to the internet, the sale of the cashless devices to complement the payment devices on these machines, the root efficiency they get from the internet, and then importantly the display screens that are being introduced pretty much certainly on the snack piece has been out and out for six months. And will be over the next year on the glass fronts also. I think that we're encouraged by the growth prospects here with the new products and the efficiencies that are going to come from the internet.

Great. Thanks.

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the conference back to your hosts.

Operator, thank you very much and we thank you all for joining us this morning. Take care. Bye-bye.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.