Q3 2020 Crane Co Earnings Call
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Greetings and welcome to Crane Co. third quarter 2020 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.
Please note. This conference is being recorded I will now turn the conference over to your host Jason Feldman Vice President of Investor Relations. Thank you you may begin.
Thank you operator, and good day, everyone welcome to our third quarter 2020 earnings release Conference call I'm, Jason Feldman, Vice President of Investor Relations on our call. This morning, we have Max Mitchell, our President and Chief Executive Officer, and Rich Maue, Our senior Vice President and Chief Financial Officer will start off our call with a few prepared remarks, after which we will respond to quit.
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Just a reminder that 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'll be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide.
Isn't station both of which are available on our website at www Dot Crane Co. Dot com in the Investor Relations section now, let me turn the call over to Max Thank.
Thank you, Jason and good morning, everyone.
As outlined in our press release last night, we reported third quarter adjusted EPS of one dollar five.
This was better than our guidance of 70 cents to 85 cents.
Partly related to timing and partly related to fundamental strengthening in a few markets spin.
Specifically currency recreational vehicle and fluid handling demand were all better than we expected, reflecting better underlying markets strengthen those businesses aerospace electronics demand held up somewhat better than expected in the quarter. Although we believe that this was largely timing related.
Adjusted sales of 737 million declined 5% compared to the prior year with a 13% decline in core sales, partially offset by a 7% acquisition benefit and a 1% benefit from FX.
Operating margin, excluding special items of 12.4% compared to 14.8% last year that reflects a de leverage rate of 64%. However, excluding the impact of the ins and Cummins Allison acquisitions, the deleverage rate was 34%.
That reflects very solid execution, given the magnitude of the market decline.
And given that the steepest core sales declines were at some of our highest margin businesses, including aerospace and electronics and crane payment innovations.
Our updated guidance is based on actual results through September combined with our detailed analytics and scenario assessment planning.
For the balance of the year.
Our operational performance and execution have been excellent this year and to date markets have performed modestly better than expected. However, we do expect a more muted fourth quarter, given seasonal factors as well as a flattening out of the underlying recovery.
Based on our performance to date and our revised market outlook, we are substantially narrowing and raising our adjusted EPS guidance range for full year 2020 to $3.75 to $4, which now reflects a core sales decline of 17, 19%.
We continue to expect incremental gross cost savings of at least 100 million this year.
We're also narrowing and raising our free cash flow forecast to $230 million to $260 million.
Let me move now to our recent performance by business segment, and our forward guidance for the remainder of 2020.
However, we will not be commenting on the 2021 outlook in our prepared remarks or in Q and eight today consistent with our standard practice, we will provide 2021 guidance on our fourth quarter earnings call in late January.
Fluid handling core sales declined 15% in the quarter, a little better than expected.
Adjusted margins of 11.4% were solid with a total deleverage rate of 38% and with deleverage rate of approximately 24% excluding the impact of the ins acquisition overall execution has been outstanding and fluid handling.
In April we gave full year guidance for the core process business to be down in the high teens and our commercial business down about 20%.
Both the process and commercial businesses are on track to do a couple of points better than that.
On an FX neutral basis core orders declined 16% compared to last year, but rose 2% sequentially.
FX neutral core backlog increased 5% compared to last year, but was flat sequentially.
The change in orders is more representative of underlying demand conditions and the year over year backlog increase was driven entirely by our nuclear services business, which has been largely unaffected by covet and has substantial seasonality impacting the timing of its backlog and sales.
For the fourth quarter, we expect fluid handling to see a small seasonal sequential decline in both sales and margins largely related to a decline in projects and non residential construction activity as we enter the winter season.
At payment and merchandising technologies.
Core sales declined 8% with margins of 15.8%.
The overall leverage rate was 27% and excluding the Commons Allison acquisition that deleverage rate was 7%, reflecting extremely strong execution on productivity and cost controls as well as somewhat favorable mix.
You may recall that in April our full year sales guidance for the segment.
Was up slightly to down 10% and we should be somewhere in the middle of that range down in the low to mid single digit range.
For the payment innovations business core sales are trending towards the bottom end of the range. We gave in April.
With the full year likely down in the 35% to 40% range, primarily due to a few end markets recovering more slowly than we expected spin.
Specifically, our vending vertical remains depressed as the pace of return to schools and offices has been slower than we thought also in retail projects have taken longer to gain traction than we anticipated.
At currency. However, we are having a good year better than even our pre cobot expectations for the business both the us and international businesses are growing in the double digits. This year on easy comparisons.
But the upside is primarily related to our us business.
At Aerospace electronics core sales declined to 20% with margins of 15.6%.
Both sales and margins were slightly better than we expected based on the timing of rate reductions and aftermarket shipments.
Our overall outlook is unchanged.
And we continue to expect full year sales down in the 20% to 25% range, but probably closer to the better end of that range down around 20%.
However, the mix has been less favorable than we anticipated with strong defense growth, but with commercial aerospace remaining at depressed levels.
From a market perspective, OE build rates were lowered by both Boeing and Airbus, which will impact Q4 and next year.
On the OE seem to be building at a higher production rate than they are delivering to airlines.
We still expect a full commercial recovery to take a few years. However, we do continue to believe that the long term growth prospects for commercial aerospace are strong.
Lastly, and engineered materials core sales declined 4% with margins rebounding to an extremely strong 18.6%.
After an extremely weak second quarter with most RV manufacturers shutdown through April and most of May the recreational vehicle market has seen strong demand driven by consumers looking for safe vacation options.
Our other end markets building materials and transportation remained depressed, but overall this segment will end the year with sales down closer to 20% than the down 30% we guided to in April.
Let me now turn the call over to rich.
Thank you Max and good morning, everyone.
To start with a brief update on our financial status, our balance sheet strength and cash flow generation allow.
Allow us to remain confident managing through this downturn and continuing to drive our long term strategic growth initiatives.
We are managing all aspects of our cash flow carefully and our efforts are clearly evident in our cash flow performance to date.
Capital expenditures in the third quarter of 2028 were $7 million compared to $15 million last year third.
Third quarter 2020, free cash flow was $124 million compared to $104 million last year and year to date free cash flow was $188 million, putting us solidly on track to deliver on our updated full year free cash flow guidance of $230 million to $260 million.
We now expect 2020 capital expenditures of approximately 40 million down from our prior forecast of $45 million.
As of September Thirtyth, we have more than $1 billion of liquidity comprised of $605 million in cash and short term investments and 413 million available under our revolving credit facility.
As a reminder, we do not have any bond maturities before 2023.
We believe that we have more than ample liquidity for the current environment and we have no need or plan to draw on our revolving credit facility at this time.
We expect that we will further reduce leverage naturally in the fourth quarter, leaving the year in a stronger financial position than we entered it.
From a cost perspective, we are on track to modestly exceed our target of 100 million and gross realized cost savings in 2020.
Based on our outlook today, we are appropriately balancing near term results with longer term investments to strengthen our competitive position and prepare us to outgrow in the eventual recovery.
All strategic growth initiatives are still funded and we have 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're not able to fully utilize them in the near term.
For the fourth quarter, our revised guidance implies adjusted EPS of 91 cents to $1.16.
Remember that we told you in July that we expected a substantially lower tax rate in the fourth quarter due to the expiration of the statute of limitations on certain tax items the.
The primary offsets to the lower tax rate in the fourth quarter, our lower sales and operating profit in both engineered materials and aerospace and electronics.
At engineered materials that decline is consistent with historical seasonality for the RV and construction markets.
And aerospace and electronics and as a result of timing related to certain defense programs, which flattered the second and third quarters.
At the expense of the fourth quarter as well as a further decline in commercial OE deliveries and commercial aftermarket activity.
With that said, let's get to your questions.
Alright.
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Our first question is from Matt Summerville with D.A. Davidson. Please proceed.
Thanks, Good morning.
Joining me that with with respect to aerospace electronics can you give a little bit more granularity in terms of how the commercial and military OE versus aftermarket businesses performed in the third quarter, and maybe a little bit more detail as to the timing impact you're talking about moving from Q3 to Q4.
Sure so.
Commercial OE.
Yes, I would say I would say overall, Matt a.
Pretty consistent performance relative to the second quarter.
Flattered, a little bit on them on a modestly relative to our expectations, but commercial OE OE was down.
45% relative to the prior year.
Commercial aftermarket down little over 50% compared to last year.
Military OE up about call it 25% compared to last year and military aftermarket up.
A similar amount so a very solid overall performance on the defense and military side and the expected weakness on commercial on the commercial market after activity from a timing perspective it was.
Modest, but but certainly didn't draw some revenues from Q4 into Q3, primarily on the military side as well as in Q2, we benefited a little bit as well.
But I would say it was a modest impact but it did it did benefit the quarter a little bit more than we had anticipated.
Got it and then with respect to the payments segment. You mentioned just touched on a couple of verticals for CPI can you do a little bit of a deeper drilled down into kind of what you're seeing by vertical and maybe where you are seeing in line performance to the down 35 to 40, where you're seeing businesses may be.
Underperform that outperform that so just some more granularity on cpis. Please.
So.
The two segments that are being impacted a little bit worse.
Worse than we had anticipated coming into the cycle here post co bid would be vending, we did mention that in the prepared remarks, I believe but certainly the return to work returned to schools has continued to slow the.
Net vertical down a little bit more so than the others and then in retail while we remain pretty optimistic about the future here with that business and automation and.
Impacts from.
Demands around increased hygiene Wi.
We feel good about that but in the near term the project activity has been slow a.
A little bit slower than we expected and hence our our view that will be towards the higher end of that down range that we had communicated earlier in the year.
The other verticals.
Gaming performing I would say as expected, perhaps a little bit better, but modestly better certainly from the second quarter.
Transport also.
Fairly stable I would say from the second quarter.
Great. Thank you.
Our next question is from Damian Harris with EPS. Please proceed.
Hi, good morning, guys.
When David Good morning.
Oh, I was hoping you might be able to provide a little bit more color on the currency.
Obviously, you've seen some large swing there.
From time to time.
Correct that was probably up a little bit better than 100% in the third quarter.
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Wondering how we should think about the most recent.
Our quarter, and what kind of incremental EPS.
Translate.
Yeah.
Well, David I would say that.
On easy comps. So your range is accurate in the quarter.
In terms of what we've been up international continues double digit we just we just continue to execute well.
With our value proposition.
Hi, Hi, technology solution provider that people value.
On the U.S. order.
We've always said this was going to be a lumpy business and.
We certainly were looking for a recovery.
And co bid this is one of those.
Businesses that are impacted.
Positively due to covance uncertainty drives demand in cash.
The way I think I'd like to have you think about this order I'm going to read directly from the Federal Reserve no print order and just the specific words to better address so I'm reading verbatim to better address possible shifts in no demand and no production due to the pandemic.
The full fiscal year 2021 print order is summarize below as a range by denomination.
During fiscal year, 2021 board and BP staff will adjust production that reached nomination within these ranges to best match available production.
With demand throughout the year to best match available production. So this is a very unusual order is a very unusual time, we've never seen a range given historically.
So.
The way I think guide how do you think about this is the way we're thinking about it is.
There is an immediate demand that the fed would like to see satisfied but there are there are production constraints both at the BP.
And that we have that's going to smooth this over over a couple of years I think the demand that we're going to be able to satisfy its probably closer to the lower end of that range.
And so you might say that it helps ensure on the one hand, we're not going to overproduce and see as dramatic downturn, I think theres going to be some consistency in smoothing from 21% to 22, and we will continue to see how this plays out.
This is new territory for the fed the BP and for US and we're working with are very important customer on this as we as we move forward.
So hopefully that helps.
In terms of EPS impact for 2021.
I think on hold off until we get through our plan period understand.
In the next month as we head into our meetings with our teams.
And give you a little more clarity in.
In January.
Yes, David I, just I just had a couple of a couple of points I would just add and just to remind that the Q4 comps will be much different than they were in Q3, right. We had a really strong.
It goes to the whole segment, but the comp was really created largely I would say by the currency business last year, so the fourth quarter.
It's going to be a very a different a different year over year comp bright with a strong very strong fourth quarter that we had last year, but still.
I feel good about what's happening with with currency.
The only other comment that I would add to what Mike said was we tend to leverage pretty well in that business and when you consider that the slower Rick.
Recovery are somewhat slower recovery that we're seeing on payments. It's it's a nice it's a nice mix for us to have as we enter into 2020 warm.
Okay, that's really helpful color guys.
And then I just wanted to ask you about the RV business, certainly nice to see an inflection to positive growth there in the quarter.
And then kind of a long time coming so just wondering do you feel like we're just getting started there in terms of an up cycle.
And maybe you could perhaps expand on the lot of rates youre seeing in that business and how much catching up there Mike you will be given some of the stronger consumer demand this year.
Yeah, well, we do think that.
We obviously with the with the results in the third quarter saw a nice pickup you see the volume you see the margin margins moving from 7% to 18% 19%.
We're continuing to see that.
We saw that through the entire quarter, the fourth quarter, we would expect to see some seasonality and adjustments.
Reflecting not as strong of a quarter in Q4, as we historically have but.
What we're hearing from customers is that there is good demand here for the for the next at least the next 12 months, but.
But how that plays out, we'll we'll see and we'll be run that to ground.
In the coming quarter.
I think damian that.
I jokingly said.
At Investor Day, when we were calling this.
A little early that up.
Our RV demand is going to see an increase because of limited vacation options and.
That's exactly what's what's playing out so.
I mean.
All the data would indicate that there is a entire new entrant coming in.
To the RV lifestyle that never considered it before.
Just the September numbers that we reported.
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From RV EA.
Towables are up 35%, so while motor homes are kind of flat.
Well we have.
Little more content on some of the higher end vehicles. It's good news all in really and todays entry level buyers tomorrows.
Upsize buyer. So I think it's just a fascinating trend I think it's going to continue.
We.
We've got some work to do with our team to understand what we are going to expect for next year I think the strength will generally continue.
And it's a positive for the business.
Thanks, guys appreciate the color I'll get back in queue.
Thanks, Jamie.
As a reminder, this Taiwan and your telephone keypad, if you would like to ask a question. Our next question is from Ken Herbert with Canaccord. Please proceed.
Good morning, Ken.
Hey, good morning, Max and rich and Jason.
I first wanted to ask on fluid handling the backlog growth in the quarter.
Could you parse that out a little bit either by you sort of where you're seeing maybe any strange there. But then also I know part of the story in fluid handling over the last.
Several quarters, if not years has been has been a share gain and your ability to to generate better than industry growth, especially with some of the new product introductions can you just talk maybe about what you're seeing in that business from a from a fundamental standpoint, and then relative to crane specific performance.
Just to just to catch up on the on the backlog and the performance that we're seeing through the third quarter right to just give you a little bit more granularity.
Just recall that we have the ins business that we acquired late in the year.
Last year I should say early early this year.
And we have the valve services nuclear businesses had really had a very strong year. This year with nuclear outages continuing in us winning winning additional share in that business neutralizing for that Ken in the third quarter, our year over year was up.
Well, sorry, it was down about a point right and sequentially up a point so it's a little bit more muted when you actually isolate those two elements from from the backlog what I would say is that we do believe that we're outperforming the market with the initiatives that we've been driving over the last several years with respect to new product introductions, and what we're doing with channel strategies and so forth.
So those.
Those continue and we're looking forward to sharing more of those with you.
Come come our Investor day.
Do you get any sense that the nuclear works is like.
Did you see any near term ended that I know that business can be incredibly long cycle, but what is it fair to assume that that strength continues beyond just demonstrate just this year.
Yes, so just keep in mind our nuclear.
Services business unit is around this the annual turnaround work that is mandatory so there is a.
Cycle of shutdowns.
That we are participate with very very consistent.
Yeah.
Well that that business will continue.
With.
With certainty as we move forward.
Okay, Great and just finally, if I could on the on the aerospace business. How would you characterize on your defense side I know, it's a smaller piece of the business, but but you're seeing good act how would you characterize sort of.
Bid activity and and opportunities there and as it related to that are you at all concerned about sort of spending pressure out in the next few years as a result of of what might happen on the budget.
Yeah, I would say that on the on the defense side.
And across most of our solutions are all of them frankly, we have seen good bid and quote activity.
Throughout the year and that's continuing.
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Wow.
We've been we've been seeing 20% high teens high 20% growth all year long that I would say that that we can expect that to continue with that that type of level.
As we look forward, but we do feel real good about the initiatives that we've been.
Pursuing strategically from a technology perspective, and satisfying when our customers are looking for here Ken. So we're very optimistic about it and in fact to outgrow.
Whatever happens with the market, but but certainly we'll see with the election brings and we'll we'll do our best to be able to give you. The the right guidance for next year.
Great. Thank you very much thanks.
Thanks, Ken.
Our next question is from Nathan Jones with Stifel. Please proceed.
Hi, Good morning. This is Matt Mooney on for Nathan Jones This morning, Hi, good.
Good morning.
Morning.
A quick question regarding the payment and merchandising income decremental margin of 20% was much improved 67% posted in Twoq can you give any detailed what drove a better income decremental margins and cannot be sustained at that 30% level going forward.
Yes, so it's been about a little bit of.
A mix of course, assisting with the year over year comp that we saw relative to the currency business.
But also all the cost initiatives.
That we drove mid way through I would say the second quarter and then fully executing on here in Q3, so it's largely mix again and and the cost reduction initiatives and in fact, if you exclude.
If you exclude the acquisition of come in Dallas in the de leverage rate was actually much better than even that so we feel pretty good about the 30% I think the real question is.
How are we going to leverage up when the demand comes back in 2021, which we feel.
Pretty darn good about and we'll be north of that 30%.
Okay. Thank you and then I'm looking at the aerospace <unk> electronics, what can be done to kind of improve the decremental margin going forward and what's what's your thoughts.
Well the Decrementals that you are seeing here relative to the other businesses.
Is higher mainly because of the margin profile in that business in particular, the aftermarket the aftermarket products that we that we provide to the market. So that's a very very difficult.
Margin profile to overcome we're continuing to look.
Look at our cost structure and feel like we've got to balance correctly, we're not going to take actions in this business that.
Structurally impair our ability to continue to win and and make the investments that are necessary for the long term.
Not like a very short cycle business, where you can take cost out real quick or want to frankly.
We continue with a very strong engineering management business with.
The view that we're going to drive long term growth beyond what the.
The market offers us.
Got it thank you I'll get back in queue.
Thanks, Matt.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you operator.
I would like to thank our teams around the world for their continued outstanding execution and perseverance in these challenging times, we remain committed to ensuring a safe working environment for our associates, while continuing to drive execution and innovation to best serve our customers next week, we enter our annual operating plan process and meetings with each of our 10 businesses to review our operating plans for 2021.
It's certainly a unique time to be going through this process, but we believe our regular cadence of reviews and planning discipline provide better clarity and environment with heightened uncertainty like we're experiencing today.
As the late Great Ruth Bader Ginsburg, one said so often in life things that you regard as an impediment turned out to be a great. Good fortune.
Despite the challenges of the current environment, we remain focused on what we can control and I'm extremely excited about the opportunities that lie ahead.
And we are working diligently to position crane for the market recovery.
We look forward to sharing our 2021 guidance with you on our January earnings call with additional details at our February Investor Day event. Thank you for your interest in Crane and have a great day.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.