Q4 2020 Crane Co Earnings Call
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Greetings and welcome to the Crane co 's fourth quarter 2020 earnings conference call. At this time all participants are in a listen only mode. A 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 and as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Jason Feldman, Vice President of Investor Relations. Thank you Sir you may begin.
Thank you operator, and good day, everyone welcome to our fourth quarter of 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, We will start off on a call with a few prepared remarks, after which we will respond to questions. 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 <unk>.
Bottom of our earnings release and also on 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 and tables at the end of our press release and the accompanying slide presentation, both of which are available on our website at www Dot Crane co dot com in the Investor Relations section.
Please also mark your calendars for our February 25, Investor day event as well as our May 26, Aerospace and electronics Investor Day, we expect that both will be virtual events and additionally, additional logistical information will be forthcoming now let me turn the call over to Max Thank you Jason.
Wow, what a year.
Advanced warning to our investors listening today I want to take a little more time today rich and I are going to cover a lot of ground. So we'll take it will take some time to help US go through our prepared remarks before we take Q&A, but we've got a lot of great information to share.
As outlined in our press release last night, we reported full year adjusted EPS of $3 84, compared to 602 in 2019 with the decline, reflecting the impact of COVID-19.
For the fourth quarter EPS, excluding special items was $1 compared to $1 58 on the fourth quarter of last year.
Fourth quarter adjusted EPS was about <unk> <unk> below what we expected as of early December.
At year end, we saw a number of sporadic and isolated disruptions globally clearly tied to the rising COVID-19 infection rates in all countries that resulted in a number of small shipment delays due to everything from minor absenteeism shipping constraints route changes delayed supply receipts to delayed customer inspections. This is.
<unk> was entirely timing related we believe transient and shifted to the first quarter of 2021.
Before I turn on turn to our outlook. There are a few key messages I want to convey about our performance from 2020.
While all businesses globally were challenged in this unprecedented environment, we executed extremely well.
There are many examples I could highlight but that execution was most evident in our deleverage rates on free cash generation.
Excluding the impact of acquisitions and special items, our overall deleverage rate in 2020 was 35%.
Maintaining that type of deleverage rate on a modest normal decline in sales could be expected, but 2020 was different because of the magnitude of the sales decline and because of the substantial negative mix we experienced.
The rate of sales decline was most significant at our two highest margin businesses commercial aerospace and crane payment innovations.
We were able to accomplish this solid performance in part because of our thoughtful and decisive action on cost reduction measures, but it also reflects years of work operationally to ensure that our footprint is appropriately sized and flexible enough to quickly adapt to sharp changes in demand.
You also saw the strength of our execution on free cash flow generation, which was extremely strong at $275 million declining at less than half the rate of adjusted earnings.
The free cash performance reflects very effective management of both capital expenditures and working capital, but it also part of our longer term trend.
Over the last five years, we've averaged 100% free cash conversion are structural and step function increase from the high 70% range. We had delivered historically again further evidenced of our differentiated execution capabilities.
Those differentiated execution capabilities, driven by our crane business system management approach or.
Our even more critical during challenging times.
Disciplined cadence and execution remains at the core Cvs.
It's this disciplined cadence and understanding of our businesses that gave us the confidence to provide very detailed and granular financial guidance last April when most industrial companies declined to provide any type of outlook.
I am pleased to report our April guidance proved to be very accurate and we ultimately delivered 22 cents above our April adjusted EPS midpoint.
Our differentiated execution capabilities are paired with a strong balance sheet and portfolio a strong resilient durable businesses.
This portfolio on balance sheet strength combined with our leadership experience on our confidence on our long term prospects drove two key decisions early on in the pandemic.
First we knew we needed to take quick we need to act quickly on cost reductions given the 2020 demand outlook and we delivered $105 million of gross cost savings last year, an impressive figure for our cost base, particularly since we intentionally didn't execute on most actions until may.
The second decision was that we would pursue those cost actions, while continuing all key strategic growth investments at pre COVID-19 levels and without any material schedule impact.
We were emphatic that we continue the investments that will help drive growth for many years ahead.
We were extremely careful and disciplined as we make choices about where to reduce costs in many cost reductions proposed by our businesses were rejected by Richard on because of the impact of those actions would have had on our growth prospects.
So those are some of the key messages, we delivered solid results last year, given the demand environment we.
We have proven over time that we have differentiated execution capabilities and we have a strong balance sheet paired with strong and resilient businesses.
In addition to all that and most importantly, I'm incredibly proud of the 11000 Crane associates across the world.
And of how we performed during a difficult and challenging period.
I'm also proud of the actions, we took to ensure the safety and wellbeing of our associates and where possible to retain and support them through the pandemic.
Starting in early March we quickly adopted new safety protocols and procedures worldwide in most cases more stringent than and in advance of government mandates.
We also quickly adopted a new emergency pandemic exception pay program, providing two weeks of additional paid time off to all associates globally that were directly or indirectly impacted by the pandemic above and beyond normal vacation and sick pay.
The EPA program provided substantial flexibility for our associates, which could be used to cover paid time off for associates diagnosed with COVID-19, we're required to quarantine for those who had the stay at home to care for children due to school or daycare closure and to ensure continuity of pay and benefits, where crane manufacturing facilities or offices.
Were required to close because of local health regulations.
As the year progress, we took difficult measures to adjust our cost based on lower demand levels.
<unk> a substantial reduction in force.
And businesses to align our workforce size with expected demand levels.
However, every possible effort was made to protect our associates as much as possible. During this challenging period for example, none of our businesses mandated unpaid furloughs in the United States.
We did not implement any salary reductions except for corporate officers and the board of directors.
We maintained all benefits, including our 401 K match in the United States and we continued our with our annual merit salary increase process.
Further in recognition of the extraordinary efforts shown by our associates around the world and because of the financial impact of COVID-19 was beyond our associates control all associates normally eligible to receive an annual bonus received a minimum payout of 50% of their target, even though most schemes calculated at zero.
We follow this approach because we believe it was fair and appropriate way to think on and recognize our associates for their extraordinary efforts through these trying times and to build lasting goodwill and morale, which we believe will assist with associate retention in the years ahead.
Overall I'm extremely pleased with how crane performed last year, given the challenges we faced.
Looking ahead to 2021.
We currently expect EPS growth of 30% with a range of $4 90 to $5 10.
This outlook reflects order rates that accelerated throughout the fourth quarter across most of our businesses and visibility to our recovery in most of our major end markets.
That optimism is tempered somewhat in the near term by Covid infection rates that remains stubbornly high in many regions additional lockdowns and several key European markets on.
On the potential for some additional near term restrictions and disruptions.
If those concerns prove on warranted there would be upside to our sales forecast and incremental sales should leverage at high rates given our current cost structure.
However, what seems apparent to us is that we are seeing the beginning of the end of the pandemic. The remaining uncertainty may impact the timing of a full recovery in certain end markets.
But we believe that we have passed the inflection point or trough, we expect substantial and sustained improvement throughout 2021 and beyond.
Specifically market strength in towards the end of 2020 and order rates accelerated sequentially through the fourth quarter.
Orders were higher in December than in any other months of 2020 with broad based core year over year growth of 11% led by Crane currency, our defense electronics business and engineered materials.
<unk> orders also improved substantially at crane payment innovations and at our process valve business.
At fluid handling, we expect an inflection to positive core growth by mid year.
Possibly in the second quarter with accelerating growth after that point.
We have a very strong process business well positioned with the right solutions for some of the harshest and most hazardous environments, which is where we expect to see the greatest market growth over the next several years, particularly in chemical pharmaceutical and general industrial markets.
In addition to the long runway of market driven growth. This segment has a robust pipeline of new product development programs. Those new programs will help fluid handling accelerate above market growth rates as well as improve the margin profile of the business and we look forward to sharing more about this at our at next month's Investor Day event.
At payment and merchandising technologies on positive on our 2021 growth and margin prospects on the payment side of the business, we have a more complete offering than ever before that offerings starts with our long history of providing best in class critical components and technology for billing coin validation we.
We have added to that capability over the years and today. It is combined with a growing range of complete system solutions, a comprehensive connectivity and cashless offering and with the recent Cummins Allison acquisition, a strong service network to provide greater capabilities to our customers and high margin recurring revenue.
New stream for the segment as well as new service growth opportunities well underway.
From the currency demand for cash remains extremely high both from the U S and abroad. This has been one of the businesses that has actually benefited from COVID-19.
We expect another very strong year on.
At our international business, along with sustained high levels of demand domestically confirmed by the federal Reserve's currency order a few months ago for its fiscal 2021.
That print order reflected an increase of one 7% to $3 8 billion notes or 31% to 66% increase with particular.
<unk> strength in the demand for 100 dollar notes, where we have the greatest content.
We continue to win and increase our content in this business given the strength of our security offering which is unparalleled.
And from a margin perspective, the segment will be back into our long term target margin range of 18% to 22% this year.
Even though a full recovery at our high margin Crane payment innovations business will not occur until at least 2022.
Turning to aerospace <unk> electronics, we have an enviable set of solutions differentiated technology and alignment with strong secular trends.
While commercial aerospace was our end market that was impacted most severely by COVID-19.
As temporary this should not obscure the quality of this business and its prospects.
There are too many exciting opportunities in this segment from me to possibly cover today. In fact, there are too many to effectively discuss at our annual February Investor Day event. So we've scheduled a dedicated investor event on May 26 to focus exclusively on aerospace <unk> electronics, our growth initiatives on our growth expectations for the next decade.
I have complete confidence.
That is the Covid pandemic subsides this business will be back to delivering margins consistently in the low to mid 20% range along with sustainable high growth.
Notably over the last few months there were two extremely positive developments for the commercial aerospace business first the Covid vaccine rollout has begun and while it's unclear how quickly. This rollout will progress over time. This will give travelers confidence to start flying again, and we believe pent up demand will accelerate recovery not only in consumer markets, but also business travel.
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Second to seven seven Max Recertification paves, the way for Boeing to resume shipments.
We'll start clearing boeing's inventory of finished plains and permitting a measured ramp up of production for this important high volume platform again.
While the commercial recovery will still take some time, we believe we have visibility of the start of that recovery.
In the interim our defense business has been performing incredibly well, both delivering sales and profit today, which while continuing to win new business positioning us for further growth over the next 10 plus years.
And lastly, engineered materials is poised for an extremely strong recovery.