Q2 2021 Crane Co Earnings Call
[music].
Greetings and welcome to the Crane co 's second quarter 2021 earnings conference.
Cool.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
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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 second quarter 2021 earnings release Conference call.
I am Jason Feldman, Vice President of Investor Relations on our call. This morning, we have Max Mitchell, our President and Chief Executive Officer.
Officer, and rich Maue, our senior Vice President and Chief Financial Officer, We will start off our 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 bottom of our earnings release and also in our annual report 10-K and subsequent filings.
Introduced 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 accompanying slide presentation, 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 you, Jason and good morning, everyone. Thanks for joining.
Pertaining to day.
Another exceptional quarter really with solid results across the board.
We finished the second quarter with record adjusted EPS from continuing operations of $1.83 up 205% compared to last year and record adjusted operating margins of 7.
The call Dean <unk>, 6%.
We delivered core sales growth of 19% with a number of strong leading indicators reflected in core order growth of 45%.
And core backlog growth of 7% compared to last year.
Based on this performance, we are raising our adjusted EPS from continuing operations.
Patients guidance by 30.
To a range of $5.95.
For $6.15.
Which is effectively our fourth guidance increase so far this year.
Please allow me to take a moment to put this in perspective.
The midpoint of the updated guidance at.
<unk> 5 is above our prior peak pre COVID-19 adjusted EPS of $6 <unk> in 2019.
While we expect to exceed that $6 <unk> prior peak this year.
There are some notable differences this year compared to <unk>.
Fixing team and.
In particular for $6 <unk> in 2019 included earnings from engineered materials, which is now classified as discontinued operations and excluded from our 2021 guidance as we have mentioned previously this is about 44 cents of EPS now <unk>.
<unk> thousand 90 day in discontinued ops.
Further <unk>.
Most of our end markets are still in the very early stages of recovery and remained well below their pre COVID-19 peak levels.
Only real exceptions to this our crane currency and our defense business.
Thinking about 2022.
2 and beyond and it's worth noting that the commercial side of our aerospace <unk> electronics business will still be almost $200 million below 2019 levels. This year.
And a recovery to pre COVID-19 levels in this business alone would add more than 1 dollar per.
Per share to EPS.
At payment and merchandising technologies the cash.
Core non currency business will be slightly more than $200 million below.
Covid levels with more than half of that amount.
Our very high margin core payment solutions business.
Throughout the recovery on beyond this business will continue to benefit from very favorable long term macro drivers, helping our customers drive productivity and security by automating the payment and transaction process.
With many of those trends strengthening with ongoing labor shortages.
And wage inflation.
Inflation.
Yeah.
And the process flow technologies, we are just beginning to see an inflection to positive core growth on the process side of the business over the last month or 2.
And while sales growth has just barely inflected positive.
We haven't had a backlog in our process valve business. This high.
Since 2014 on.
On sales will certainly follow.
So how are we driving earnings above 2019 levels without a full market recovery yet.
Message is the same.
Execution on our growth initiatives together with the consistent cadence and discipline of the crane business system to drive growth productivity.
Activity and cost savings and.
And as mentioned many times before we have delivered on margins and free cash flow, while maintaining 100% of our investments in strategic growth initiatives throughout the entirety of the pandemic because of their importance and our ability to sustainably drive long term.
Growth.
These initiatives will continue to drive above market growth.
Paired with the market recovery and our consistent execution. We are very excited about our growth prospects strong top line growth solid operating leverage driving substantial growth in free cash flow.
<unk> incredibly delivering on expectations discussed at.
At our February Investor Day event for Crane was at an inflection point for accelerating growth after years of organic investments and consistently excellent execution in.
In the first quarter, you saw a substantial evidence of that inflection.
And the.
A related themes from Investor day reading through.
At our May Aerospace electronics Investor event. We showed you numerous examples of how we continue to effectively drive above market growth expecting 7% to 9% compound average growth over the next 10 years.
Also in May we announced.
Sales of engineered materials as part of our strategic portfolio management process to increase our overall growth profile, while continuing our simplification journey.
And today, you can see even more evidence of that inflection.
On our core sales growth as well as in our leading indicators, including orders and backlog.
Backlog.
Consistently executing on our investor thesis that as we are well positioned for accelerating organic growth as our end markets continue to recover.
We are outgrowing, our end markets because of our consistent and ongoing investment in technology, new product development and commercial excellence.
Solid execution continues to leverage that.
To say earnings and strong free cash generation, which creates substantial flexibility for capital deployment.
And continued evidence of the value we create through acquisitions with stellar performance at Crane currency Cummins Allison and.
Ines.
Inflection, we have clear momentum with increasing traction from our growth.
Growth, we will continue to generate substantial and sustainable value for all our stakeholders.
At this point I'll turn it over to rich for some additional financial commentary.
Thank you Max and good morning, everyone.
As usual I'll be providing segment comments that will compare the second quarter of 2021 to 'twenty.
And this excludes.
Adding special items as outlined in our press release on slide presentation.
At Aerospace <unk> electronics sales of $158 million were flat with the prior year.
Adjusted segment margins, However, improved 420 basis points to 19, 6%.
And.
2012, with total aftermarket sales turned positive growing 3% after a 29% decline in aftermarket sales last quarter.
Commercial OE sales increased 4% in the quarter after a 32% decline last quarter.
Defense OE sales declined 4% in the quarter and are flat.
On a year to date basis.
We continue to believe that the fourth quarter of last year marked the trough for both sales and margins at aerospace <unk> electronics, we expect sales to continue to improve slightly on a sequential basis throughout the rest of this year as the pace of the recovery continues to improve and our expected timing.
<unk> of our recovery to pre Covid levels continues to get pulled forward.
More specifically, we are seeing North American airlines bring a substantial number of aircraft back into service to meet expected domestic demand levels with the in service fleet now at about 90% of mid 2019 levels.
On the Internet.
International side traffic continues to improve albeit a little more slowly with substantial room for recovery further recovery as global <unk> are now a little better than 50% of 2019 levels.
In general Pent up demand will drive recovery faster than expected as COVID-19 restrictions continue to.
Yeah.
And our confidence on our outlook for this business is about more than just a market recovery.
We are seeing growth.
<unk> from consistent and continued investment in technology.
Our growth investments over the last decade have not wavered and we are seeing the benefits of those investments today.
He's these investments also continue to expand our addressable market and align align our business with accelerating secular trends, most notably electrification and.
And we are delivering on truly breakthrough innovations that are critical enablers to our customers' growth strategies and that are transforming the growth trajectory of our business.
Really exciting opportunities in our power conversion business, the sensing and fluid and thermal management.
Taken together and as we explained at our Investor and Aerospace Investor Day in May we expect our long term overall compound annual growth rate of 79% through 2030.
Process flow technology.
Sales of $311 million increased 30% driven by a 22% increase in core sales and an 8% benefit from favorable foreign exchange.
Process flow technologies operating profit increased by 83% to $49 million.
Adjusted operating margin increased.
<unk> 450 basis points to 15, 7%.
Reflecting the higher volumes strong execution and benefits from last year's cost actions.
Sequentially trends improved across the board with FX neutral backlog up 5% and FX neutral orders up 8.
Technology.
Compared to last year, FX neutral backlog increased 11% in FX neutral core orders increased 28%.
During the first quarter order growth was strongest in our short cycle commercial business.
However orders at our core process business inflected positive.
8% on a year over year basis in March and that trend continued throughout the second quarter.
We are also seeing clear evidence of improving end demand and in some cases the start of released pent up demand.
We expect the recovery to be led heavily by the chemical end market, which is continuing to show signs of strengthening around the world.
And remember that the chemical market is our most important market, where we have the strongest position in the most differentiated offering and generated more than 35% of sales on the process side of this business.
We are seeing continued strength in MRO sales.
And project activity is clearly picking up for necessary debottleneck.
Bottlenecking activities as well as larger capacity expansions.
Particularly for specialty chemical applications.
We are seeing this most significantly right now in the United States, and China with Europe projects likely to pick up next year.
General industrial activity has also strengthened but primarily in the United.
On mid states.
Conventional power and oil and gas markets remained fairly sluggish however, remember that collectively upstream oil and gas in conventional power our small part of this business and less than 10% of segment sales.
As orders convert to sales in these.
Core process markets later this year and.
2022, we expect very strong operating leverage.
For the shorter cycle nonresidential and municipal end markets, we're seeing a continuing a continuation of the strength that we saw during.
During the first quarter.
For process flow technologies overall, our outlook continues to improve we now expect.
<unk> high single digit core sales growth with approximately 5% of favorable foreign exchange on a full year basis.
Full year margins should be somewhere between where they were in the first and second quarters.
At payment and merchandising technologies sales of $328 million in the quarter increased 31%.
<unk> compared to the prior year, driven by 26% core sales growth and a 5% benefit from favorable foreign exchange.
Our currency business core sales increased in the mid teens range with the crane payment innovations business inflicting to a positive 34% of core growth, but still well below.
Oh pre COVID-19 levels.
Segment operating profit increased 285% to $78 million adjusted operating margins increased 500 basis points to 23, 7% really impressive performance again in the quarter as expected and now with our legacy payment.
It's beginning to contribute meaningfully paired with the ongoing superior performance at Crane currency.
For the payment business with a phased economic reopening we continue to see very strong growth in the gaming and retail end markets and during the second quarter vending started to recover as well.
Transportation, particularly.
On the business parking remains softer, although we have seen some substantial fare collection project activity during the quarter.
At Crane currency, we continue to see strength in both the domestic and international markets and we continue to gain share both with our technology on bank note offerings.
As we explained last quarter.
Particularly we do expect margins to moderate further over the course of the year, given timing and mix with full year margin is likely toward the high end of our long term target of 18% to 22% with core sales growth. This year now approaching mid teens with a 4% favorable foreign exchange benefit.
And like our high margin aerospace.
Postpaid business. The recovery has just begun at payment crane payment innovations.
Turning now to more detail on our total company results and guidance.
We had extremely strong cash flow performance for the quarter generating $141 million in free cash flow compared to $102 million in the second quarter of last year year to date free.
Cash flow was 184 million.
<unk> to $62 million last year.
During the second quarter. We also received approximately $9 million from the sale of a property in Arizona following receipt of $15 million last quarter from the sale of another property.
These proceeds are excluded from free cash flow given required.
Wired classification as an investing activity.
However, 1 of these sales was directly enabled by our ongoing restructuring efforts as we moved operations from this facility to other locations.
And the other reflects our proactive approach to identify underutilized assets.
Since 2017, we have received proceeds from real estate and other asset sales main.
By restructuring activities of approximately $56 million, which means that much of our restructuring has been self funded.
As a reminder, on May 24th we announced that we had signed an agreement to sell our engineered materials segment for $360 million.
That process is ongoing and we continue to work on obtaining regulatory approvals.
Possibly on the transaction closes we expect proceeds net of tax to be approximately $320 million.
Our balance sheet is in extremely good shape during the second quarter, we repaid the term loan originated in April of 2020.
In full using cash on hand, and some commercial paper as we discussed in May.
<unk> believe we will have approximately $1 billion of M&A capacity by the end of this year.
Valuations today are quite lofty and we will remain disciplined but I am confident that overtime, we will continue to find attractive transactions.
Where we can deploy our capital to create value for shareholders.
We will also maintain discipline on.
About our balance sheet efficiency.
During periods, where acquisitions are less actionable, we will consider returning excess cash to shareholders rather than maintaining an efficient inefficient balance sheet.
However over the long term, we continue to believe that we will be able to add the most value through acquisitions.
We used a tax rate in the quarter was 18, 4%, which included an excess tax benefit of approximately $4 million or <unk> <unk> per share related to stock options exercised during the quarter for.
For the full year, we now expect an adjusted tax rate of 25% rather than the previous 21% guidance.
As Max explained we are raising our adjusted EPS guidance by 30 to a range of $5.95 to $6.15.
Reflecting the strong second quarter performance and our expectation that end markets and execution will be ahead of where we forecasted them earlier this year.
Remember that our original guidance for 2000.
'twenty, 1 was $4.90 to $5.10.
And that guidance included 44 cents of earnings contribution from engineered materials.
That means we have effectively raised guidance about $1.50 on an operational basis since the beginning of the year.
While uncertainty remains related to Covid varian.
And sporadic supply chain constraints overall, we have a high level of confidence in our revised guidance.
On our team's outstanding performance, driving incremental price and proactively and effectively managing inflation.
And their supply chain.
Our revised guidance also reflects the same cadence.
Of earnings progression, we have discussed since the beginning of the year, specifically, we continue to expect a step down on EPS next quarter, given timing and with fourth quarter. Following its usual pattern is the seasonally weakest quarter across most of our businesses.
Our revised guidance assumes core sales growth of 7% to 9%.
<unk>, which is 200 basis points higher than our prior may 24th guidance.
Favorable foreign exchange is also now expected to contribute 3.5% up 100 basis points from late May.
Free cash flow guidance was increased to $320 million to $350 million.
$20 million from prior guidance, reflecting higher earnings.
And slightly lower capex at $70 million.
Corporate expect.
Corporate expenses now expected to be $80 million up $3 million compared to prior guidance full.
Full details of our adjusted guidance are included both on our earnings press release as well as our earnings slide presentation.
Overall, an excellent year.
Year, continuing to unfold with outstanding execution from all of our teams driving exceptional results.
<unk> margins free cash flow and.
And we remain excited about continued tailwind in 2022 and 2023 as end markets continue to recover.
Operator, we are now ready to.
Take our first question.
Thank you we will now be conducting a question and answer session.
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Thank you. Our first question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Everyone.
Good morning Nathan.
Can I start off.
Process.
Yeah. It's a good good revenue numbers very strong backlog garage, which implies very good order rates.
Can you give us a bit more color on what's driving those order rates you know.
Between the various businesses and then within the actual process side of that what market geographies.
Product et cetera are driving that shrunk on order growth here at the moment and whether you think this is sustainable.
Yeah, Okay. Thanks Nathan.
I would say that what we've been seeing on a year to date basis.
A combination largely from our year to date basis, the commercial side came back faster.
Ahead of the process markets, but now process continuing to inflect wishes.
<unk>, what we expected on what we.
Felt on our early guidance revisions on guidance, what I would say is that on that side, that's where frankly the tailwind will continue into 2022.2023 and we're in the early stages of that cycle in particular.
Particular in chemical.
18 to 24 months is.
What we would expect and we're very very early on there.
And chemical in particular orders up 44% compared to last year on on a $3.12 basis really across all regions.
Orders are now close to.
19 levels.
Midway through that year, so really strong North America chemical.
Chemical producers are rushing to expand capacity debottlenecking et cetera. So.
And again I'm focused on process Nathan.
Europe also starting to pick up on projects like I mentioned in the prepared remark.
Not really that large in Europe, yet more maintenance, but we do believe that debottlenecking is coming in Europe.
Not not really large projects in 2021 on Europe.
And then in Asia also I would say.
A particular large expansion from 1 of our end customers.
And Singapore.
<unk>, which is a nice win that we had so I would say, it's pretty broad broad based and chemical largely North America and China.
What I would what I would offer there on the chemical and the process side in particular.
Okay and my follow up question is also going to be on process flow.
Interesting renaming of the segment.
For certainly business at least 1 business and and maybe more than 1 business within that segment that don't really fit into the new definition of what youre looking for a day.
Considering opportunities to continue to simplify the portfolio here as you mentioned multiples are pretty high at the moment.
Not a bad time to be a seller.
Any commentary you can give on on simplifying the portfolio and process flow or anywhere else that you might be considering.
The rename as a recognition of the great work that this team has done over many many years to continue to drive.
Our technology solutions.
I think in every portfolio.
Theres going to be some pieces of our business that may not completely aligned with.
With that exact ne.
Naming.
It also.
On the.
On the fluid handling designation was just on old outdated in my opinion.
Ah referenced it didn't make sense any more for.
For us internally and for.
For investors to truly understand who we are on how we move forward.
No.
It's an exciting.
Designation because.
Even internally it helps us really think about the opportunities that we continue to chase.
On the M&A opportunities that we continue to.
For the Adjacencies.
And we look forward to continuing to execute on that we've consistently looked at the portfolio. We continue to strategically look at the portfolio and we will as we move forward.
Nathan I would just say that as of right now we have no no plans to do anything different.
Okay. Thanks for.
2 questions I'll pass it along.
Thanks Nathan.
Our next question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.
Thanks, a couple of questions can you just give a little bit more color in terms of the first half second half sort of cadence for step down.
Sure.
<unk>, obviously been implied even though.
Particularly them at the high end of the range on.
On a sequential basis are there inflation versus price considerations, we need to think about sounds like.
On payment margins or maybe you can explain a little bit just due to mix, but can you talk about.
3 or 4.
Yes.
For taking matters driving on a first half second half cadence here. Thank you.
Yes, Matt just this.
This is what I would say is that our guidance is consistent with what we've said since the beginning of the year, meaning our first half being stronger mix elements being a large component of timing.
Mainly in the payment space, we had a very very.
<unk>.
First quarter.
And subsequently the second quarter also in payment, but notably in currency.
I would say that the expectations for the balance of the year is really not all that different from how the cadence of earnings.
Was outlined earlier in the year, so we have a bit of a step down on currency.
Strong just project timing and it's what we expect so that would be the largest component.
Look at some of the other pieces.
In fluid handling for example, SRA process flow technologies for example.
We've had some exceptional margin performance here in the quarter. We were ahead on price cost frankly, when we.
But it's not real early.
Highly disciplined in our approach and we were a little ahead. So we'll see some of the cost coming in the second half, but our margin profile. There is going to be solid. So I would say just high level a little bit of incremental cost. We were ahead on price and then mix elements largely in the payment space to.
We started question.
Thanks.
Alright, yes, sorry go ahead.
I was just going to say as a follow up with respect to crane currency. If you gave it I missed it so would you mind, providing the organic performance there in the quarter similar to what you did for CPI and then.
As we.
To answer your cloud for government print ordered for fiscal 'twenty 2 I'm curious on the last couple of months your thought around what that will likely look like evolved at all.
On the print order.
Matt I would say we're waiting the.
<unk> White co should be out shortly reminder.
Reminder.
Annual cycle and September starts on October.
Usually that comes out 60 days before.
Reminder.
Last year was the first time.
There was a range published 7.6 billion to $9.6 billion.
No.
The bep for both from what we hear just like all manufacturers.
Had issues through Covid.
Constraints and challenges so forth.
<unk>.
The print is on the low end of that spectrum.
And maybe even slightly under the.
70.
6 range, we have no official word yet.
I'm not speaking for the customer.
Just say my best guess would be.
Because of this range for this.
Demand thats required that would ideally be filled just getting smoothed out over a number of years I think we can expect.
That's a very similar quarter.
As is what's actually being produced this year, so probably in the I don't know maybe the 7.7.
7.2% to 76 range something like that but it's going to be very consistent on a year over year basis I'll, let rich answer the yes.
Organic yes.
Yes.
Currency side in the quarter.
Quarter.
In the mid teens, Matt was the growth there.
On.
On the payment side.
Was about 35% on the payment innovations business and I think what's exciting you just to follow on that rate again, as Max alluded to or mentioned in his prepared remarks, we're still a couple of hundred million dollars below pre COVID-19 levels.
<unk> on that part of the business so.
An exciting tailwind.
Following the end of this year here into next year in 2023.
Great. Thank you guys.
And you're also going on.
As a reminder, if you would like to ask a question press star 1 on your telephone keypad.
Our next question comes from the line of gaming, Chris with UBS. Please proceed with your question.
Hey, good morning, everyone and congrats on the quarter.
Thank you. Thank you.
So a couple of follow up questions on currency.
You mentioned that youre going to be above.
Dollar EPS target that.
That you had put in place for this year. When you made the acquisition I'm presuming that the U S. A U S portion of that is higher than what you had expected at the outset just curious how the international side is fairing relative to your.
The targeted.
Above the place a few years ago and Max you had mentioned debt on the U S fed order, possibly kind of being.
Sort of flattish for fiscal 'twenty, 2 coming up here.
Net currency business still grow and thats sort of orders cost strength of the U S.
Some questions on love all those questions.
You'd put them.
Because it's all about.
So just to clarify U S was it didn't come in higher than what we expected to be in that range, we probably expect I expected it to come in even higher because of.
Just capacity constraints with BP, it's been tampered somewhat so with what we've really seen.
And as you know significant continued strength with international.
The team is doing a phenomenal job Mike.
In micro optics thread, winning new orders for both selling threat security feature as well as <unk>.
Printing as well as paper so it's just a.
The team is doing an incredible job all in on U S for the future is.
But growth Damian.
It's far beyond just the annual order.
We are working closely with our important customer in the U S.
On mixed series and you've seen this in the press.
In terms of.
On a potential redesign.
We thank them for the future.
Everything from Harriet Tubman note too.
So there will be new series on those new series, there will be enhanced security features.
We are very optimistic that we will have significant content.
So even on the existing.
The demand profile for the foreseeable.
Future. Other this is out of $24.25, as we think about this.
On.
On new series, but Theres already work being done prototypes trial runs preparation.
We will have added content on on the existing.
Currency in the U S that will drive enhanced revenue margin.
Do you want anything else zone.
Does that cover everything.
I missed anything Damian.
No that's fair.
Really helpful. Thanks Max.
And then I guess just switching to.
Amy we have seen flight hours on airline bookings really picked up in recent months I don't get the sense that you've also.
Altered your guidance much for for any could you just maybe walk through what your commercial Aero expectations are for the year end.
And I guess.
Kind of more medium term is is the thinking still 'twenty 4 'twenty 5 ish for the full recovery.
Or.
Some recent activity changed your thinking there.
Yes, just to just to.
Pick that often order on your first question I would say, yes, largely the same I would expect margins to actually pick up versus our guidance that we provided back in the first.
First quarter I think we had said we do modestly better than 15%.
We're going to be we're.
Longer than that for sure maybe maybe as much as 150 basis points on the year.
And that's driven in large part to what we're seeing on.
The mix of product sales, we have a little bit faster recovery in aftermarket all the commentary that we provided was.
Effectively what you are speaking to on asking.
About which is the recovery is coming a bit faster. So from our perspective, we initially thought 2024, and we think it's at least.
Coming in by about a year.
Great.
Helpful. Thanks, I'll pass along thanks.
Thanks, Amy Thanks Damian.
We have no further questions at this time Mr.
Mitchell I would like to turn the floor back over to you for closing comments.
Thank you Christine another excellent quarter on delivering on our message of inflection on momentum continued consistency of execution supporting the investor thesis. We delivered in February we are in the very early stages of a strong market recovery, we have invested heavily in our organic growth initiatives.
Chimps and results are reading through and consistent above market sales growth we.
We are growing opportunities for acquisitions and process flow technologies, and aerospace electronics building on our core competencies and we.
We have an incredibly strong foundation to build upon grounded in the crane business system.
Driving consistent execution, along with a culture of.
Ethics and integrity.
As the late Great Racing legend, Bobby answer <unk> success is where preparation and opportunity meet.
At Crane, we are well prepared to fully capitalize on every opportunity that presents itself.
The tank is full for tires fresh we're in the pole position.
<unk> on the track is clear ahead of us shaken day. Thank.
Thank you Kal.
Thank you all for your interest in Crane and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.