Q1 2020 Earnings Call
[music].
Greetings and welcome to the Korean Company first quarter 2020, <unk> earnings Conference call at this time up to 10, certainly listen only mode.
Question answer session will follow the formal presentation. If he wants to acquire operator assistant store. The conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded it's now my pleasure to introduce your host Jason Feldman. Please go ahead.
Thank you operator, and good day, everyone welcome to our first quarter 2020 earnings release Conference call I'm, Jason Feldman, Vice President of Investor Relations. Our call. This morning, we have not Mitchell, our president and Chief Executive Officer, and Rich Maue, Our senior Vice President and Chief Financial Officer will start off our call. It a few prepared remarks, after which we will.
But the question.
Just a reminder, that the comments we make on this call.
Forward looking statements, we refer you to the cautionary language at the bottom of 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 non-GAAP numbers, which are reconciled the comparable GAAP numbers and tables at the end of our press release and accompanying slide presentation, both of which are available.
On our website at Www Dot Crane, Co. Dot com any investor Relations section now, let me turn the call over to Matt. Thank you, Jason and good morning, everyone.
As outlined in our press released last night.
We reported first quarter adjusted EPS of $1.15.
We estimate that impacts from cobot 19 had an approximate 15 to 20 cents impact.
First quarter results.
Given by some supply chain disruptions softer demand in certain end markets and minor operational challenges that some facilities related to government health directives and our efforts to ensure the safety of our associates.
Until early March we were solidly on track to exceed our original guidance for the year.
Sales of 798 million declined 4% compared to the prior year with a 10% decline in core sales.
Operating margin, excluding special items, 12% compared to 14.4%.
Last year.
Given the extremely broad based and substantial impacts were seeing related to the current virus pandemic, that's probably about as much attention as our first quarter results Merit.
I will spend most of this call discussing our outlook provide you as much detail as I can about what we're seeing today.
And what we expect moving forward.
First however, let me start off with a few key messages I would like you all to take away from the call first.
We have a solid balance sheet, Ukraine ample financial flexibility for the current environment strong track record of free cash generation and consistently disciplined capital allocation.
Second we have a diverse portfolio is strong and resilient businesses that will recover nicely when the markets improve.
Third we have managed through downturns before when I say, we don't just mean crane I mean, I have as well as rich the rest of cranes senior leadership team.
Lastly.
You all know that we have an extremely strong track record when it comes execution and cost management.
And it's an outstanding operated with differentiated CBS capabilities, along with a high performance culture based on ethics and integrity those CBS capabilities, along with our performance based cultural even more valuable in challenging times like these they enable us to make data driven decisions quickly with flexibility to adapt as condition.
Since change and with accountability.
And a few minutes several discuss some of the cost actions we have already taken.
However.
And this is at least as important as our cost actions if not more so we are continuing to invest in all key strategic growth initiatives and our people.
We will be ready to emerge from this pandemic in a strong position and ready to gain share from competitors.
Turning to our guidance obviously in the current environment forecasting is extraordinarily challenging and our ability to accurately project future financial results is lower than at any point I can recall.
The guidance, we will be providing today is based on actual March results trends in sales and orders since the end of March.
Market research from a variety of sources.
End market extrapolations customer input and discussions and a thorough analysis of our entire supply chain.
And a comprehensive evaluation of numerous potential global scenarios, capturing different timing and phasing of business Reopenings, we've been as thorough as we can to date.
All that said our current best estimate for full year 2020 as for adjusted EPS of $3 to $4 in 25 cents, but total sales of 2.8 to 3 billion, reflecting a core sales decline of 17% to 22% driven by end market deterioration related to the cobot pandemic.
That EPS forecast includes incremental cost savings of at least $100 million this year.
We expect free cash flow of approximately 200 $250 million with capital spending of approximately 45 million, which is a targeted reduction of 40%.
We expect the second quarter.
To be the low point for adjusted EPS. This year in the range of 40 cents to 50 cents per share.
Given the challenges inherent in forecasting today.
Competence in our outlook is lower than usual, which is partly reflected in the unusually wide EPS guidance range. However, I think it is extremely important to give you our latest and best thinking about how we expect markets to perform probably even more so than in more normal periods for several reasons.
First this outlook captures the various scenarios, we believe to be the most likely to occur.
And this is the range that weve used for internal planning. These are the assumptions guiding our cost and cash management actions.
Second while the Investor community has historically been pretty good at identifying inflection points in various end markets. It has historically been very slow to calibrate estimates to rapidly changing conditions.
We think our guidance reflects where the year, we'll end up and we would rather have concrete discussions with you about a realistic range rather than waiting for everyone to inch towards the outcomes, which seem more likely to us.
Third I'm going to give more color the normal about the assumptions by business underlying our forecast feel free to have different views, but I expect this information will help all of you better realistically adjust your estimates.
At a high level, let me characterize the top and bottom end of our range as follows.
Starting with the bottom end of our range as I stated earlier.
Our forecast for the second quarter adjusted EPS is 40 to 50 cents, which reflects a core sales decline.
Approximately 27% to 30%.
The bottom end or full year range basically assumes that this level of sales decline persist for the remainder of the year no improvement from second quarter levels in the second half.
In that scenario, we would expect sequential improvement in EPS in the third and fourth quarter, but entirely related to the cost actions we've taken.
In this scenario, we also envision some incremental cost actions beyond those we're currently implemented.
At the high end of the range, we expect a gradual improvement in underlying demand starting mid year with a core sales decline for the second half in the mid to high teens.
Based on what we know today, we think our range is balanced and the ranges wide enough.
But we think both the top and bottom ends of our range are relatively unlikely outcomes.
From a leverage perspective remember that our original guidance for 2020 had low leverage related to unfavorable mix at crane currency.
The impact of the 737 Max production pause.
And the impacts of the two acquisitions.
Compared to our original guidance for 2020, our revised guidance reflects total deleverage rates in the 30% to 35% range inclusive of our expected cost actions.
That will be an impressive performance, particularly considering the mix involved here, we expect our most profitable and one of our highest leverage businesses commercial aerospace electronics to suffer the steepest sales declines.
The next few quarters with our commercial aftermarket business hit, particularly hard.
Compared to 2019 that total deleverage is closer to 40% to 45% due to the mix in acquisition factors I mentioned earlier.
Let me now move to guidance assumptions by business segment.
But fluid handling a little over 60% of the segment's revenue is in our process valve business.
Because our process valve business is one of our longer cycle businesses. We are seeing the impact of the current environment more heavily on our order rates that in sales.
At least for now.
Through the end of the first quarter and MRO activity has remained fairly stable with MRO orders up 1% in January and February and then down 1% in March.
However to give you a sense of the severity and speed of the change in our project business.
Project orders were down in the high single digit range in January and February and then down 26% in March.
We're already seeing project push outs and customer request for delays. We have also seen at least one case of a major project already halted in mid construction.
Through the 2014 15 industrial recession, we saw projects delayed and some that hadn't started were cancelled.
But I can't recall the last time, we saw project shutdown completely after construction began.
By vertical market.
Our general industrial business, where we rely most heavily on distribution experienced a substantial change over the course of the quarter.
Genuine February global orders were down in the mid single digit range, then declined 17% in March.
China is down the most than in China. The decline started earlier in the year.
But even in the us general industrial orders.
Were down more than 30% in March.
Refining orders increased approximately 13% in the first two months of the year and then declined more than 30% in March. These trends have continued over the last few weeks.
In contrast, chemicals held up fairly well with March order rates relatively unchanged from earlier in the quarter.
While the overall process valve business is clearly being impacted by the current cobot environment, our nuclear valve services business about 60 million of annual sales is holding up very well given that it provide service replacement valves for nuclear power generation, which is non discretionary.
In the first quarter process valve core sales declined approximately 11%.
For the full year, we expect our process valve business to see core sales down somewhere in the high teens range with total reported sales this year somewhat better given ins acquisition sales contribution of approximately 55 to 60 million.
Our commercial valve business is close to 40% of fluid handling segment sales.
And it includes non residential construction exposure, primarily in Canada, the UK, the middle East and use with some additional in human municipal exposure in the U.S. This is a very short cycle business core sales were down in the mid single digit range in the first quarter, but more recently since the start of April rate of sales did.
Klein is in the 30% range.
For the full year, we expect core sales down in the 20% range with the UK and middle East markets sparing the worst.
Across fluid handling we've also had a number of supply chain disruptions over the last two months, most notably related to castings from India and China.
Fortunately most supply chain related delays will just push out revenue rather than result in the loss of business and we already had some shipments plan for the first quarter shift to the second quarter.
At payment and merchandising technologies, we have three different businesses in this segment, which are being impacted and despard ways.
Our vending business was just under 200 million and sales last year.
To date. This is one of the most impacted businesses at Crane.
You may have seen Coca Cola's recent earnings report with total April month to date volumes down 25% attributed almost entirely to its away from home category, which includes restaurants and vending among other channels.
That away from home part of their business was down approximately 50%.
We are seeing the same thing.
Vending machines are typically located in setting such as office building schools manufacturing facilities given that many if not most of those locations are currently close demand has dropped sharply down in the 50% range. So far in April.
And this is a short cycle business with limited backlog.
For the full year, we expect this portion of the business to see sales decline in the 30% to 40% range.
And our payment business. This is another short cycle business seeing substantially lower demand across all verticals, including retail casino vending financial services and transportation.
We do believe that there may be some benefits at least for the retail in financial services verticals in the medium term as banks in retail locations like grocery and big box stores look to improve not only productivity, but now also hygiene by limiting direct contact between customers and employees. However, we don't expect to see that benefit for some time.
On a full year basis, we expect this business to see a core sales declined in the 20% to 35% range for the contribution of approximately 150 to 170 million in sales from the Commons Alison acquisition.
The crane currency, we've seen no impact on demand, we're dealing with some manageable supply chain issues related to transportation logistics of finished product we've seen some minor disruption in our raw materials market.
However, we expect has been is business to finish the year on target.
And well above last year's sales, albeit with negative mix. We have mentioned over the last few quarters with lower us government and higher international sales compared to last year.
Overall for the segment, we expect total sales, including the Cummins Allison acquisition benefit up slightly to down as much as approximately 10%.
At aerospace in electronics on the commercial side, we have already talked on previous calls about the headwinds we expected from the 737 Max production Pos.
Now we are seeing Oems cut build rates for most other major aircraft models as well.
And as I'm sure you read about some OEM facilities have been temporarily closed related to corporate 19.
Or weaker demand in order cancellations.
Based on our current view of build rates, we expect full year, 40% to 45% decline in our commercial OE sales.
The aftermarket portion of the business Airlines have reduced flight schedules substantially and this is already having a material impact on our spares and repair and overhaul businesses.
We expect recent commercial aftermarket run rates to remain at April levels down in the 60% to 65% range for the remainder of this year.
Remember that the overall profitability in leverage rates on commercial aftermarket are generally very high.
Actually among the highest across our entire portfolio.
Overall, we expect the commercial portion of our business down approximately 45% on a full year basis.
In contrast to defense business, which was about.
35% of last year's sales is performing slightly ahead of our original expectations for 2020, we expected that business to grow in the low double digit range. This year.
The segment overall, we expect full year core sales down approximately 20% to 25%.
Engineered materials is another of our shorter cycle businesses most of the RV manufacturers shutdown production completely for most of April we don't expect production to resume until early may.
In the medium term rvs, maybe incrementally attractive to families looking for domestic and isolated safe vacation alternative.
For now however, high unemployment rates, we consumer confidence will reduce demand heavily for some time.
You may have seen the April 19th Wall Street Journal article that even discussed the challenges the pandemic is causing.
For our vendors, who are dealing with camp ground closings or restricting access.
Fortunately the RV industry have spent more than a year, reducing inventories at the dealer level. So we are at least entering this week period with without much excess channel inventory.
We're also seeing weaker conditions across building products.
There are a number of near term opportunities related to temporary koeppen health facilities, where our products maybe use but our core markets include retail and restaurant settings, which have cut back on construction and renovation activity heavily.
Aspartame one is also week driven by substantially lower transfer build rates.
Overall, we expect segment sales down in the low 30% range for the full year.
Overall to difficult challenging set of market conditions as a broad based global diversified industrial.
We have visibility to a large cross section of different vertical and geographic end markets and what we are witnessing is hitting a wider range of markets more severely.
What we have seen in any prior downturn.
We are all still absorbing the first stage direct impacts, but the secondary impacts will continue to spread the supply chain challenges move around due to closures as virus hot spots emerging and possibly reemerge in different locations and as various government responses helps in some places and has unintended consequences elsewhere.
We applaud the efforts of local and national government leaders around the globe, we're dealing with the pandemic to the best of their abilities as well as the healthcare professionals everywhere, who are working tirelessly on the front lines and all those workers in the food supply chain and other essential industries.
However, it is clear to us that a phase reopening of the global economy.
Which is the best in most likely path forward will constrain the pace of the recovery.
While our current best case, consistent consistent with the midpoint of our guidance assumes sequential sales improvement in the second half of this year that improvement will be measured.
The high end of our guidance range implies mid to high single digit sequential sales growth in the third and fourth quarters, often extreme low point in the second quarter.
That also implies a second half year over year core sales decline in the mid to high teens.
If we're wrong and growth rebounds faster than than we expect we will clearly over deliver to these expectations, but we think it's important for us to set the appropriate expectations internally and externally.
Regardless in these challenging and highly uncertain times the value of our consistent management cadence and disciplined execution will differentiate us from peers.
As we've discussed at Investor day events for years, we have a rigorous data driven made management cadence a constant focus on continuous improvement extreme accountability in all aspects of our businesses.
These disciplines help us manage every aspect of our operations, but I'll spend the next few minutes talking about our cost actions and supply chain conditions.
I mentioned earlier that our guidance assumes.
100 million of gross realized cost savings in 2020.
Rich and I, along with our senior other senior Vice Presidents have conducted thorough reviews with each of the businesses to discuss these cost actions and we have direct line of sight to the 100 million with specifically identified actions a few takeaways I want you all to be aware of related to these actions.
100 million gross cost savings in 2020, as our current expectation based on our most recent forecasts and thinking about the demand environment, we will adjust from that baseline as the year progresses.
We've been restructuring consistently across our businesses for nearly 20 years you may recall that we already had several additional facility consolidations in progress well before cobot came to all of our attention, which we announced with our earnings in January 2018 and January 2020.
At this time, we do not see the need or opportunity for future facility closures beyond those we had already identified.
Throughout the reviews over the last few weeks our teams have been aggressive and cutting costs. However, there have also been quite a few proposed cost actions, which we rejected.
We will cut cost as aggressively as appropriate, but I will not take actions that will jeopardize the long term prospects were positioning of any of our businesses. All strategic growth initiatives are still funded and we've reviewed all proposed reductions in force in great detail to ensure that we are protecting as many associates critical to our long term success as possible.
Even if we are not able to fully fully utilize them in the near term.
I am determined to exit this pandemic in a stronger position than our competitors and positioned to gain share as markets improve.
From an operations perspective, all of our manufacturing facilities worldwide remain open as most of our manufacturing sites are deemed essential infrastructure related businesses. None are currently close because of shelter in place or similar government directives.
Operationally in addition to demand adjustments and scheduling challenges related to covert 19, we are addressing and planning for certain challenges related to our global supply chain that we expect to continue.
We are tracking our supply chain situation at the individual purchase order level as well as by supplier by country by business and managing extremely effectively.
To give you a sense of what we're seeing over the course of the last two weeks and our process valve business. The biggest source of delays shifted to India, where a majority of purchase orders have some form of delay.
In terms of dollar value China's the region with the next largest amount of delays, but China has improved significantly, whereas we don't expect.
Any relief in India until at least early May the shutdowns may begin to abate.
While we don't source, a substantial amount of materials or components from Italy. It is a region, where the greatest percentage of our outstanding purchase orders, while over 95% are experiencing major delays.
Mexico isn't bad yet, but only a modest number minor delays, but it does appear to be worsening as well.
On the other extreme we have no current supply chain issues at all from Korea, Australia, and only minor delays and use.
That picture does vary from business to business, but the general trends are similar.
Well with that overview of our recent business performance and outlook, let me turn it over to rich for some additional commentary on our financial strength and some further guidance details.
Thank you Max and good morning, everyone first off I'd like to make a few general comments related to our preparedness and the general compliance work environment.
While everyone in the world is having to learn new ways of working I feel we are ahead of others in what we saw coming in in our preparation.
Not just the numerous proactive steps, we've taken to address the safety and well being of our associates.
But also the many actions required to ensure our systems and controls support remote office work, enabling the continued high quality execution of all critical activities.
To date everything has run quite smoothly, we are maintaining our cadence of deliverables on all fronts and on time.
Our global leaders have acted with compassion and decisiveness and I am proud of our strong associate morale across the organization in the face of uncertainty.
In addition, I want to thank our associates globally for their teamwork and commodity as well as as we continue to partner with our customers and their needs and challenges to work together for mutual solutions to what lies ahead.
Crane will continue to be a strong and trusted partner that our customers can always rely on for critical engineered solutions.
Our balance sheet strength and cash flow generation.
Allow us to remain confident managing through this downturn.
Continuing to drive our long term strategic growth initiatives.
We are managing all aspects of our cash flow carefully.
Capital expenditures in the first quarter of 2020, or 8 million compared with 20 million last year.
First quarter 2020 free cash flow was negative 43 million consistent with our normal seasonality and compared to negative 120 million last year.
Going forward, our revised expectation for capital expenditures in 2020 is approximately 45 million.
As most discretionary capex will be deferred.
We are prioritizing spend toward investments that ensure we come out of this period stronger.
As you probably saw from our recent 8-K filed on April 16th we closed on a new 343 million dollar term loan.
Proceeds from that term loan will be used to repay commercial paper repay a $40 million euro portion of our revolving credit facility and for general corporate purposes, while it wasn't necessary. This action provides us with more financial flexibility in this time of uncertainty improving our liquidity position considerably.
As of April 16th 2020, we have approximately $811 million of liquidity comprised of 549 million in cash and 262 million available under our revolving credit facility.
As a reminder, we do not have any bond maturities before 2023.
We believe that we have ample liquidity for the current environment and we have no need or plans to draw on our revolving credit facility at this time.
We expect that we will reduce leverage naturally over the course of 2020, leaving the year stronger and a stronger financial position than we entered it.
While this is certainly a difficult and unprecedented period. Our key messages are the same as they have been for many years, we have a diverse portfolio of strong and resilient businesses.
We have a solid balance sheet and a strong track record of free cash generation.
We have a deep and experienced management team that has dealt with downturns before.
And while we always focus on productivity and cost management, we will continue to invest for growth for the long term.
With that said, let's get to your questions.
Thank you will now be conducting a question and answer session, if you'd like to be placing the question Q. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question Q you may Prestart Q, if he'd like to move your question from a queue for participants using speaker equipment.
And maybe necessary to pickup or handset before pressing star one one moment, please well we poll for questions.
First question today is coming from Nathan Jones from Stifel. Your line is now lives.
Good morning, everyone.
Morning.
I'd like to start just on that on the balance sheet.
Great and and what your plans for these cash I mean, you're sitting with a large chunk of cash.
It's very likely that you are going to produce positive net cash during the year.
Maybe you can talk a little bit about the plans for potentially deploying that cash sitting on the balance sheet weather.
The repurchases are possible, whether you would look at M&A in the back half of the probably not over the next few months I guess unlikely salads are going to peak in the Bakken just the way you're thinking about.
Actually deploying that cash off the balance sheet over the next few quarters.
Yeah, Nathan So this is rich.
The decision to move ahead with that term loan was designed to essentially as an insurance as an insurance policy frankly, very cheap insurance policy. So.
With the uncertainty that I saw in the business.
Exiting March into April.
Felt it was important to make sure that we had this increased liquidity available to us from a planning perspective in terms of how we deploy it right now is to just maintain the liquidity over the coming call at quarter, a two for sure.
And certainly we'll look at the pace of any recovery that we might see and then make decisions from that point forward, but at this point, it's meant as an insurance policy.
For us to move through this process of pretty significant uncertainty.
Right now judge in terms of.
Hi, Kevin.
We don't see any M&A activity.
Most likely for the balance of the year until things we have more clarity.
On on the future.
Okay fair enough in terms of your on working capital.
You guys and where the inventory at the end of first quarter that was higher than you'd expected given the light drop off have you seen any change in receivables collections customer behavior. There that that gives you any concern about customers being able to pay that bills.
Any color you can give us on what you think.
Around working capital for the balance of the.
Sure naked on on the inventory side definitely a little bit of growth there coming at a margin that you can see that our backlog actually grew in a few of our businesses notwithstanding some.
Some order degradation.
And that's essentially.
A function of some supply chain constraints that we saw for product coming in that we needed to see.
In order to make shipments and so forth. So I would say was on the it was on the edges, mainly in aerospace and couple of our fluid handling businesses, but honestly really around the edges more than anything.
From a receivables perspective, the teams are doing a phenomenal job, we haven't had any bad debt write offs to date.
We are tracking and some of our business is ahead of last year on a three month DSL basis, a couple of them were trailing a little bit we are seeing some customers slow and payments.
Frankly, we've had some customers ask us to change terms and.
You know strategically we're looking at those opportunities to potentially foster additional business and looking to leverage best we can while we help our customers. So.
No significant issues and to report so far but it will be something clearly that with our cadence will be managing closely moving forward.
Do you think that's possibly I mean, I guess, it's using your balance sheet, a little bit to fund some customers.
It's an opportunity to gain market share how do you think about the risk of doing that versus potential to gain market share.
Yes, it's back I would say balanced assessment across the businesses some customers were going to be.
Certainly.
Those that are more strategic who are very strategic to us, making a certain level of decisions and others, perhaps not we have to we have to weigh everything in relation to whether or not.
There is incremental incremental risk on collection.
I think I think the key takeaway here is that we're evaluating every opportunity across the business to make sure that we're making the best decision.
We do have that that balance sheet strength that you point out that enables us to do that.
Fair enough. Thanks for all the data Max that was that was really good I'll pass it on.
Thanks, Nathan Thanks Nathan.
Thank you next question is coming from Matt Summerville from D.A. Davidson. Your line is now live.
Thanks, and yes, I would echo the sentiment Max Thank you call that detail.
I wanted to ask just a question on the military side of Aerospace <unk> electronics still looking for that business to grow it sounds organically double digit what are you seeing the business sort of underpins that outlook and then also with respect to the currency the physical currency business.
Inside of payments, whether or not we could see some upside if either of the U.S. government or international central banks start literally trading on the printing press.
I'll start off enriching determinant bid on the second question first on currency, we we're executing well and a slightly above plan, we see no major moves.
Yet from both us government or international auto.
As we know we have the.
Annual like orders would be up again in September we expect that to increase given some we've given some previous expectations around that new range still on track with that inventories being burned down.
So we think everything's to plan right now I think it's a little too early to determine the impact of Coburn 19 on currency. So stay tuned will hopefully give you some more color.
In the second quarter to see if there's any many new opportunities.
Military.
Our teams have continued to execute on our product development Roadmaps.
On power conversion Highpower microwave and we're winning a number of those.
A number of those opportunities.
So we're seeing some some nice program wins on on a wide.
Range of programs on a rich if you not anything else is.
What I would say that Matt is.
We have a pretty marquee set of customers in the defense and the defense area.
On the Lockheed's raytheon's, the northrop's of the world and up they're continuing to make some pretty significant investments in as Max points out our strategic growth initiatives aligning with those those types of customers. We're continuing to invest that we've been very successful over the last couple of years and it's really the momentum of what we we stay.
Good to see or have been seeing over the last couple of years just carrying forward.
Continued radar application, great Grafton ground based radar applications high power applications and so forth. So it's really the momentum of of what we started seeing over the last couple of years built on the investments.
Strategically that we've been making in that business.
Great. Thank you guys.
Thanks, Matt.
Thanks next question is coming from Ken Herbert from Canaccord. Your line is now live.
Hi, Ken.
Ken perhaps your phone is on mute.
Ken If you could hear me actually out here you.
Please return to the Q by pressing star one.
Our next question today is coming from Damian Harris from RBS. Your line is now lives.
And David.
I have a problem that a technical problem gave me a pressure foreigners. Please pick hey, good morning, guys I was on the at apologies.
Please proceed.
This one dominating this ones on the site for the square.
Thanks for really appreciate all the color.
And kind of getting.
Fine details on the various segments some portions of the business I'm wondering first ask you quickly about the cost actions.
Give us a little bit additional color it seems like.
Basically are expecting to realize.
More or less all of that starting the second quarter I'm, just wondering how much of the cost actions you'd characterize as more permanent structural.
Type changes you're making.
Versus.
More variable cost, but probably come back at one week, while we get into recovery mode and I guess just.
Taking about the Hundredd up to 150 million you've laid out.
What are you thinking in terms of future actions, what those could look like and.
And when you might act take take incremental actions.
Thanks.
So damian on the nature of the cost actions.
What I would say is.
We started up pretty quickly on all the the easier things.
Cutting back on everything discretionary immediately.
And I have cascaded now into.
Some decision, making that are thats more difficult and network, where we're embarking on those actions now.
In terms of how to characterize that hundred million.
As I as I would look at this.
A good third of it is.
Maybe a little bit more call it 40% is fairly.
Fairly fixed over the next couple of years is the way I would think about that and the balance being discretionary that we hope would come back things like travel.
As an example trade show sort of type of.
Tradeshow participation thing things like that.
So.
That would be how I would characterize the 100 100 million. The teams have plans in place to the extent things worsen.
From a from where we sit today at call. It the midpoint of of our guidance or towards the higher end of that guidance range. So additional actions that are being planned across the business as I call. It plan B.
And it would range from incremental.
More difficult decisions related to head count for example, as well as further discretionary.
What I would say from a structure perspective that we don't have significant any significant facility related decisions that were making at this time, we don't see that as in the cards today.
Okay. Thanks, that's helpful.
And then.
In the CPI business, and I guess would come in Dallas and there is while now.
Which maybe be able to give us a little bit additional perspective on.
The key end markets there.
Yes, I think about.
Gaming and casinos, obviously in retail you guys have and.
Strategically focused on the shelf checkout and you alluded to in financial services.
That's that's obviously not.
Alluding to meet the near term headwinds, but maybe some opportunity there could you maybe just kind of walk through sort of the.
The risks and opportunities you're seeing right now and those key end markets for CP VI.
Sure so from promote from a risk perspective or.
Where we where we see things more challenging clearly in gaming casino end markets are without question.
Significantly challenged I'm sure you've you've read about all those.
Those those challenges in that in that and space that market space Thats being hit I would say the hardest in our business.
We see actually retail as.
Caught in the mid term and providing ample opportunity for us in this space.
But right now the level of Capex and spending in that space is been curtailed pretty significantly. So we're seeing pretty good hit there as well, but again I think moving forward, we see we see that one.
I'm.
Presenting some good opportunities for us moving forward.
Transportation end markets also investments being curtailed pretty significantly here in the short term, hoping that we would see that.
Improving the latter half of the year.
[music].
And then if I move to financial services as Max mentioned in his prepared remarks, an area that I think in the near term hit a little bit here, but I think probably one of the ones that will come out maybe a little bit faster towards the towards the end of the year or in the fourth quarter.
And David from up.
In terms of the end markets, what we've been driving from a productivity standpoint to our customers as well as connected solutions has has been winning.
Across all.
Solutions honestly, so for retail gaming financial services transportation vending. In addition, keep in mind, we were driving new solutions OEM solutions and pay pod pay tower safe Smart saves. So we've been very very aggressive assertive. This is absolutely just a dislocation with all most of these end markets shutdown for this quarter.
And there's going to be a bit of a reset until things can come back, but we still feel very very positive about our solutions. The salute the solutions that we drive our position in each end market.
When it comes back will be.
We leveraging it.
Appropriately I think it's going to be interesting even to see.
If I mentioned in terms of opportunities look it's very very early I think everyone is seeing new opportunities that may not have existed in the past of new ways of working or new implications.
We were driving productivity I think hygiene takes on a different a different plus here of a cashiers not having to handle the cash directly.
In vending theres been a trend over the years of micro markets that.
Yeah office more secure office settings have.
Food products exposed out and you simply select and paying and grab what you want and go.
In this environment now each one of those or where people can grab and touch food and then potentially put it back.
That's really interesting to see how the marketplace reacts and is the security of vending machine, where people can touch the food does that become actually.
More attractive so all these things still early early days in terms of the solutions and.
Opportunities and how things play out.
Again. This this this dramatic decline in Cpis end markets driven solely by covert 19.
As the economy opens as people begin to get back to a more normalized level in a measured way of we as we have described.
We are positioned to win and we've got the solutions to do that not only cash but also cashless.
Which is a major initiative for US managed services, the new solutions I talked about driving next generation note recycling corn recycling.
I hope that helps.
Hi, guys. It certainly will be interesting to see how things play out. Thanks, so much of the color and good luck guys.
Thanks, Jamie.
Thank our next question is coming from Brett Linzey from vertical research partners. Your line is now live.
Hi, good morning.
Just wanted to just wanted to come back to the deleverage rates on slide eight no if I'm understanding correctly. The those are the incremental pre cost takeout de leverage rates.
Sure in that 50% range, which does imply that the.
The uncontrolled deleveraging is about 65% for the full year.
I guess I would expect that fear for a few quarters, but that those decrementals do seem very sharp from a full year basis, maybe just a little color on what's volume decrementals adverse mix verse, some M&A impacts that might be in there.
You are referring to our new guidance versus our original guidance. So there wouldn't be.
Relative M&A.
Impacts.
If you look at our gross margin profile across the business, we're going to be generally a pretty it'll be at a pretty high deleverage rate.
Brett so.
This is that 48, 49% now moving down to 30, 34% post cost takeout from our perspective, a de leverage rate of that magnitude 30, 34% with those with the 17% to 22% sales decline is noteworthy in particular and maybe this is where you're headed.
Two.
As it relates to the mix impacts for example, with commercial aerospace being hit pretty pretty significantly here in 2020.
So in addition, our crane payment innovations business also being hit which is.
Pretty significant.
Profit contributor relative to so say for example fluid handling are engineered materials.
So mix clearly a big factor, but even so if you digest that and still see at 30% to 34% deleverage rate I would say that that's actually pretty substantial a very good performance yes.
Thanks for that and then just the second question on price are you seeing any deflationary pressures show up in the businesses in April and I guess, what we know what are your expectations for.
Gross price and price cost in 2020 here.
Yes during our forecast reviews, our expectations right now are to hold most of the price that we had planned coming into the year, we'll certainly bounced that as we move through but where we're sticking to price best we can hear moving through the forecast period.
We might have to foresee some of the pressures on the material side, where.
We get requests to make some changes but.
Net net I think we're going to hold.
Our price cost profile as we plan coming into the year.
Okay, Great I'll pass along and thanks again for all the color.
Thanks, Greg.
Thank you as a reminder, that star one to be placed into question Q. Our next question is coming from Caitlin delay anti from Bank of America. Your line is alive.
Good morning, guys, maybe Ed good morning.
Maybe you brought one from me.
Max you mentioned at the beginning of the call that both you and rich have seen and manage through downturns before what lessons have you learned in the past that you are applying the way you're managing the downturn today.
I, probably the number one is that this is unlike any other downturn. In addition to the actions that are needed to take is being extremely thoughtful and careful as we as we move forward. This is going to come back I was hoping it was gonna come back in more of a V shape.
As you've heard in our estimates for the second half I think it's going to be unfortunately, a little more measured.
We are we're not going to cut.
To levels that historically in another.
Economic economic driven downturn, which has a longer period of recovery to quite the same levels until we're taking our time, we're being very thoughtful we're being very methodical with our business units to review before we pull the trigger on any cost actions. So that's that's a very important one because I'm very much in tune with setting us up for sucks.
Yes, as we enter into the back half and into 2021 rich if you don't for anything.
Are you, having having gone through this a few times here at Crane.
Lessons just around cadence in our capability to do what we do well, we've we executed very well under the 14 15 industrial recession, and then in the global recession and Onein.
And you take away a number of different learnings, whether that's the nature of the types of cost that you are taken out and how significant you can actually.
See success in the what I would refer to is the nice but not necessary costs.
And then again, just the cadence and measuring month to month on whether or not we're seeing what we should be seeing so.
Basic lessons I would I would say.
In addition to Wimax said.
Alright. Thank you guys very much based thanks Caitlin.
Thanks next question is coming from Ken Herbert from Canaccord. Your line is now live.
No one can argue yes, hi, Max and rich how you doing.
Good.
I just wanted to follow up on on the mix question regarding the the cost savings and the decremental margins I mean, it sounds like aerospace if you assume aftermarkets down sort of 65%.
For the remainder of the year would be obviously pretty significant to margins. When you talk about that call it 15% to 20% sort of gap that the savings helps you on the decrementals relative to the if you didnt do the cost savings how much worse is aerospace in electronics in that or can you just provide any more detail around the mid.
Mix relative to sort of is the margin hits and the cost savings.
Yes, Ken just to just still unclear.
In terms of.
Look the mix the mix element, that's impacting the 48 and 49% without.
We would probably because of the significance of aerospace and electronics, we would probably see something slight maybe four or five percentage points less than that maybe.
If thats getting to your question.
Is that answering a question.
No. That's very helpful. I'm, just trying to try to better understand the magnitude or the mix impact by some of the different segments and I would imagine I would imagine aerospace electronics is probably from the promote.
Decrementals standpoint, maybe one of the most impacted segments. Obviously, you mentioned you called out a few other that business lines as well but.
Thats correct, it's by far the most significant.
By far and Okay. That's helpful and to maybe turned the other way.
What it's obviously very early but when you think about on the aerospace <unk> electronics business.
As you look at the aftermarket and sort of.
Looks like the down 65% and probably embedded in sort of the low end of your guidance range.
What would you expect the first thing you would see the would maybe start to 0.3 turnaround there I mean, besides the obvious of just.
People flying a little bit more but is there anything else that you would start to see in that business that might help to give you a little more confidence or where do you want to see that give you a little more confidence that the back half could be a little better than than the scenarios you've outlined.
You know what Ken I think you.
Your analytics on this are spot on.
Just throw it throw you a.
Complement because.
Reggie research and I think youd appropriately.
Insightful and what's what's happening here the park the planes that are being part the cycle, we're going to go through unused serviceable equipment I mean, there's just too many unknowns.
It's too many unknowns I've lived through the cycle a couple of times now on.
On aftermarket and.
I think we're in for a longer period.
Our product line to be significantly impacted.
So it's not just the rates, it's not just recovery I think it's going to be retirements, it's going to be watching the broader indicators is going to be.
What are they doing with those part planes.
So these are the things that are impacting our.
Decision in guidance right now.
Long term.
Long term everything's positive I mean.
It's just predicting when and how and how fast.
If you add into the I just the other thing I'm trying to get to your question on a leading indicator I mean to the extent that we start to see discretionary spending on behalf of corporates increase that travel all these things that would impact passenger travel can I mean, I don't know what else.
The thoughts and views on vaccines and timing, it's going to be those kinds of things beyond that.
The.
The airlines need to need to make sure we had that they have the liquidity that thats needed to continue.
So.
I think to Max's point, you have all the right data frankly from our perspective and in general and enjoying everything that you that you.
Put out there feel free to share some leading indicators you'd like us to make sure. We're we're looking at.
I appreciate the comments I guess just one final question as you look at your spares business within the aftermarket what percentage of that business could be at risk, where we would potentially be a risk. If we do see a lot of retirements like we expect I mean, I know, obviously service will material doesn't displace everything but how do you think about the piece of your business.
That would be impacted by that.
Yes, I mean, it would be the spares in relation to total commercial aftermarket.
So that's maybe you know.
40% would be the spares re the spares element the on condition spares element.
If you if you peel out our knowing that menu.
That would be the most significant.
Perfect Alright, well thanks, a lot of appreciate all the all the detail.
Thanks can you got it.
Thank you we reach of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Thank you. Thank you all for joining the call today as I mentioned at Investor Day Crane is now celebrating its 165th year anniversary in 2020.
Over that time Crane is seen six Pandemics Civil War, Great Depression, two would wars in a myriad of other global challenges over the years, we will manage successfully through this most recent challenge as well as of late Kobe Bryant said, if I panic, everyone else panics.
There's no panic at Crane.
We are transparently and openly dealing with the challenge ahead as United team.
As I mentioned to our associates and my last video message.
I hope that all listeners today and your extended families remain safe and healthy maybe all continue to work to be supportive of one another in our government's during this time.
Let's continue to show thanks appreciation to the healthcare in emergency workers tirelessly assisting those a need as well as our essential services workers.
And maybe you all continue to patients piece and strength as we whether this together and made bring us closer together as family members of the human race across this world.
And the close in the words of RT cranes resolution penned in 18 55 that guides us to this day unresolved to conduct my business in the strictest honesty in fairness to avoid all deception trickery deal fairly with both customers and competitors to be liberal adjust towards employees and to put my whole mind on the business. Thank you for your interest in Crane have a guy.
Good day.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.