Crane Company

Greetings and welcome to CraneCo's second quarter earnings 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. As a reminder, this conference is being recorded. I would now like to 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 second 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 Maui, 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 today 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 and subsequent filings pertaining to forward living statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the investor relations section. Now let me turn the call over to Max.

Thank you, Jason, and good morning, everyone. On last quarter's call, we did what few tried to and gave our best estimate of guidance for the year based on what we were seeing along with our extrapolations around recovery scenarios. While the environment is still highly uncertain, I'm pleased with the directional accuracy of our guidance from last quarter. We have narrowed our full year guidance range and raised the midpoint modestly. As outlined in our press release last night, we reported second quarter adjusted EPS of 64 cents. This was better than our guidance of 40 cents to 50 cents, but largely related to timing. Specifically, margins and fluid handling were better than we expected, mainly because of mix. Sales and margins at Aerospace Electronics were better than we expected as the sharpest fall-off in sales and orders happened a little later in the quarter than we expected. Corporate costs in the second quarter were lower than expected because of the timing of a few items. Adjusted sales of 681 million declined 19% compared to the prior year, with a 24% decline in core sales and a 1% negative impact from FX partially offset by a 6 percent acquisition benefit. Operating margin, excluding special items, of 8.9 percent compared to 15.6 percent last year. That reflects a deleverage rate of 44 percent. Excluding the impact of the instrumentation and sampling and Cummins Allison acquisitions, the deleverage rate was 37 percent. That reflects very solid execution given the magnitude of the market decline particularly since our cost actions were implemented over the course of the quarter, and we did not benefit from the full run rate until the latter part of the second quarter. I will review second quarter results, including a comparison to the expectations provided during our last conference call. Rich is going to provide an update on liquidity as well as details on our specific cost reduction measures to date. Our updated guidance is based on actual results through June combined with our detailed analytics and scenario assessment planning for the balance of the year. Based on this, we are narrowing our EPS guidance range for full year 2020 to $3.30 to $4.10, which reflects a core sales decline of 17% to 21% and incremental gross cost savings of at least $100 million this year. We continue to expect free cash flow of approximately $200 to $250 million, with capital spending of approximately $45 million. Based on what we know today, we expect third quarter adjusted EPS in a range of 70 cents to 85 cents per share. From a cadence perspective, one item to note is that we expect the third quarter tax rate to be approximately 24.5%, dropping to the mid-teens in the fourth quarter given certain timing issues. On a four-year basis, we still expect the tax rate to approximate 21.5%. Commenting on the first half of the year and the impact of the pandemic, I have some themes I wish to comment on. With travel opening up the last couple of months, I've been particularly pleased by my visits across the US to every one of our businesses. We have very effectively addressed our associates concerns and safety related to COVID. Once again, I wish to thank our associates globally for their leadership and support in managing through these difficult times. In addition, I'm proud of how we have taken enhanced measures to be extremely fair and just to our associates in helping everyone through these times of stress and concern. We took appropriate rightsizing actions at an intentionally measured pace to ensure proper care and communication in businesses where it was clear that the volume impact would be sustained. And during my visits, even in the face of COVID challenges, I've been incredibly impressed with the pace of continuous improvement, execution, innovation across our locations in every business, from technology roadmap execution to selling initiatives, facility transformations, and new product introductions. Our teams continue to execute at a very high level, and this will absolutely pay off as end markets recover. I will highlight some of these successes as I move forward. Let me move now to our recent performance and forward guidance by business segment. Fluid handling core sales declined 21 percent in the quarter, in line with our expectations. Margins of 11.2 percent were modestly above our expectations, largely as a result of mix, with a total deleverage rate of 26 percent, and with a 20 percent deleverage rate excluding the impact of the INS acquisition. Overall, fluid handling is trending in line with our expectations, and there is no change to our top-line guidance for any part of this business. Margins are likely to dip a little in the third quarter, reflecting the likely mix, with the full-year margin similar to the second quarter. On an FX-neutral basis, core orders declined 17% compared to last year and 14% sequentially. FX-neutral core backlog, however, increased 7% compared to last year and 2% sequentially. The change in orders is more representative of underlying demand conditions, and the backlog increase was driven by our nuclear services business, which has largely been unaffected by COVID and has substantial seasonality impact in the timing of its backlog in sales. Food handling is executed extremely well, both on continuing to serve our customers, on cost reduction measures, and managing a challenging supply chain. In addition to those priorities, fluid handling has continued to drive substantial success with key growth initiatives, including further commercialization of new products, including our new line of triple offset valves, or TOV. With our triple offset product line, remember that this was a range of products we first introduced in 2018. We've gotten substantial traction and gained share towards the target we shared with you at Investor Day at 50 million in sales by 2023. This was an entirely new product line for Crane that is differentiated from competing products with its inline seal design, ability to limit fugitive emissions, and its pressure seal bearing that extends the product's life. We've had great success with this product in severe service chemical and petrochemical applications, particularly in Europe and China, and it is already margin accretive to our process-style business. We are well ahead of our expectations for the year, tracking at 40% 40% year-over-year order growth through the first half. While we expect that rate to soften somewhat, we still expect to end the year with orders up more than 30% in markets down in the 20% range. Without question, we are gaining share. Following on the success of the TOV, the team is introducing a complete metal-seated ball valve platform for 2021 for critical applications in corrosive and erosive environments. Also differentiated by reduced emissions, sealing technology, and longer product life. This is a non-traditional space that Crane has not served historically. We expect this to grow into a 20 million product within five years. Our large diameter polypropylene lined pipe launch is seeing similar success as we described at Investor Day. New product line that has substantial benefits over the incumbent legacy solutions in the chemical, petrochemical power and refinery markets. While power and refinery markets are challenged today, We have pushed into other adjacent areas, including chemicals and other applications, which require high volumes of flow paired with extreme resistance to corrosion and erosion. Despite the challenging markets, year-to-date orders are flat to last year, and we expect to end the year up approximately 30 percent. Our funnel has been flat, reflecting difficult markets, but we have been able to grow by doubling our win rate over the last several months. We expect this to be a $25 million product within a few years. In our pumps business, we continue to see robust quoting activity for our new line of chopper pumps across a wide variety of applications, from traditional municipal lift stations to new markets such as poultry processing plants. Within this business, we also continue to make substantial progress with testing of our new razor grinder pump, which is scheduled to formally launch this fall. Our new INS acquisition is already seeing progress within Crane, leveraging our global sales team in China. And in our Zomox brand of sleeve plug valves for the chemical market, we're introducing a breakthrough improvement in 2021 that materially reduces required torque, reducing the size of the required actuator, and lowers the total cost of an automation package by as much as 20%. We expect this to generate $10 million in sales by 2024. With the benefit from these wins, while the benefit from these wins is being overwhelmed by end markets under substantial COVID-related pressure, The traction we are gaining with initiatives gives us comfort that we will exit this downturn in an excellent position to rebound and outgrow during the eventual recovery. Payment and merchandising technologies, core sales declined 25%, with margins of 8.1%, both very closely in line with our expectations. Excluding the Cummins-Allison acquisition, the deleverage rate was 47%, reflecting negative mix of crane currency, which, as expected, had lower sales to the U.S. government as well as a sharp drop in our very high margin payment business. There were some incrementally positive developments in our currency business, but the recovery in our payment innovations and merchandising businesses is somewhat slower than we originally expected. Overall for this segment, however, there is no change to our expectation that total sales, including the Cummins-Allison acquisition benefit, will be in a range of up to low single digits to a decline of as much as approximately 10%. Starting with currency, the biggest change is that the U.S. Treasury issued an upward revised yearly currency order, or WICO. Last October, we explained to you that the U.S. government had excess inventory of printed banknotes as well as currency substrate. As a result, the 2020 WICO for 5.2 billion notes was substantially lower than the prior years as the Treasury and Bureau of Engraving and Printing intended to destock back to more normal inventory levels. Stocking has progressed more quickly than expected, as COVID has increased demand for most denominations of cash. The revised currency order for the government's fiscal 2020 was increased from 5.2 billion to 6.2 billion notes, still lower than fiscal 2019, but about 20% above the original order that was issued last summer. Production has already increased to meet this added demand. While we will not receive the official 2021 order for another month or so, As previously communicated, my personal expectation from our data analytics is that orders will revert to historic norms, banding approximately 6.5 to 7 billion notes. We are incrementally positive on the outlook for crane currency this year, with full-year sales growth likely in the teens. This business has had incredible CBS success with improved process control, variation reduction, and the improvement is reading through in our results across all sites. Our micro optic technology team is second to none with algorithmic geometric encryption that continues to develop new breakthrough anti-counterfeiting products with a growing portfolio of products suitable for all of our customers needs across all denominations of nuts. We now offer a full suite of micro optic solutions at various price points and levels of sophistication. I'll also invest in a rich pipeline of continued breakthrough technology. And we're also continuing to work closely with the U.S. government on the plans for an eventual new series of notes, which will be a really exciting opportunity for our security business and for core substrate demand. At our vending business second quarter, core sales were down more than 40 percent. This is a short-cycle business with limited backlog and visibility. But we expect continued pressure as primary vending locations are in office buildings, schools, manufacturing facilities, many of which are currently closed or operating with substantially fewer people. We do expect some improvement later this year, probably in the fourth quarter. In April, we told you we expected vending sales to decline 30 to 40 percent for the full year. We're still comfortable with that range, but probably closer to the down 40 percent end of the range. While COVID has had a substantial impact on demand here, this business has driven continued improvement in their primary facility, manufacturing facility, with breakthrough improvements on both flow and productivity. Our payment business is another short cycle business, seeing substantially lower demand across all verticals, including retail, casino, vending, financial services, and transportation. We continue to believe that there will be benefit to the retail and financial services verticals in the medium term, as banks and 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, while we are seeing little actual movement on new projects, interest level remains very high with increased outreach, discussion, and RFQ activity. On a full-year basis, we still expect this business to see a core sales decline in the 20 to 35 percent range, but probably closer to the 35 percent end of that range. We also still expect a contribution of approximately 150 to 170 million in sales from the Cummins Allison acquisition. Across this segment, we have a lot of exciting initiatives, particularly in the retail, gaming, and financial services segment of payments. We're continuing to see a steady incremental interest in our PayPod solutions in the current COVID environment, as more businesses are exploring options to automate transactions and minimize direct human contact and interaction. In Europe, we're seeing growing interest from a wide range of customers, such as bakeries, butcher shops, convenience stores, pharmacies, in addition to continued deployment of installed units we have a number of trials underway with smaller chains of stores. In the United States, we are now leveraging the Cummins Allison sales organization to aggressively market the PayPod solution to our existing customer base. We use Cummins Allison in the back office, and now we are generating numerous sales leads with these same customers in the front end of their locations. And in Japan, we are gaining traction with PayPod and PayStation solutions in numerous settings, particularly convenience stores. We're also seeing more discussions and interest in jointly developing kiosk-based solutions with a number of partners for various applications. Some of these applications have been relatively traditional, such as bill payment kiosks for cell phone providers. In other cases, we're working with kiosk manufacturers to integrate our PayPod cash models into full kiosk solutions, particularly for the fast food industry. We've also made substantial progress focused on the gaming market, working with one of our partners to offer an e-ticket solution integrated with our EZTracks Connect software, providing a cashless option for slot machines, expanding our presence, not only in cash, but cashless solutions. In addition to the successes we have had commercializing new products, we are also continuing to invest in next-generation note and coin validation technology, consistent with our technology roadmaps. This is a business where, given the short cycle nature of the business, we've seen a very sharp reduction in sales. However, the level of activity and customer interest is very high. We're pursuing numerous exciting opportunities. The real question is timing, as we still have lower visibility than normal. And in aerospace and electronics, core sales declined 23%, with margins of 15.4%. Both sales and margins were modestly 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 percent range. While near-term and market demand challenges in commercial aerospace will drive reduced customer spending, we continue investing and are making excellent progress on many customer program opportunities. Except for final spending to support completion of major single-hour program wins from years ago, most of our engineering investments today are largely aimed at differentiated solutions for increased electrification requirements spanning both commercial and military end markets. For example, in our microwave business, we have over 20 funded new products in development for 10 different defense radar applications that we are working on today, which on a relative basis is significantly more than our historic four to five programs that we typically are working on at any point in time. This is directly a result of driving specific technology-enhancing investments around low-noise solutions, stack filters, and hybrid converters that we started several years ago. Long-term investments benefiting results today as we move to winning higher value-added integrated microwave assemblies rather than only components. On the military side, we're making significant gains with our high-power electrical conversion business with continued investments and development serving the increasing customer demands for various high-power radar applications. You may recall we announced a major program win with Raytheon last fall for their missile defense radar platform, a program with a value comparable to a mid-sized aircraft platform and which will ultimately replace the Patriot missile system. I'm pleased to report that during the quarter, we delivered on our first key milestone for this program. And equally important, we won two more high-profile programs with another major defense contractor, leveraging the same strategic investments for similar high-power radar applications. Well-known multi-year programs. Again, excellent progress by the team. In our brake control business, while most large program work is substantially behind us, we've secured and are working nine development programs today. While smaller in size, these programs include unique brake control algorithms tailored to our customers' applications while also advancing our core underlying technology including increased sensing capabilities, and a good mix between commercial and military programs, and a unique multi-year military M&U opportunity that we are pursuing on a platform having a significant installed base of aircraft. In our sensing solution, we are investing in increased power conversion efficiency and driving wireless sensing solutions, among other things, and in fluid management, moving into near adjacencies, such as coolant pumps, to enable delivery of more complete fluid solutions to our customers. Again, in both these solutions, improving our capabilities for increased electrification and technology requirements moving forward. And operationally, I couldn't be more pleased as we won our fifth Airbus Supplier of the Year award within the last six years with improved ratings year-over-year in 11 of 12 categories. And engineering materials, core sales declined 40% with margins of 7.1%, reflecting a deleverage rate of 23%. Most of the RV manufacturers shut down production completely through April and early May, but production has been restarted in most parts of the industry. The building products market also slowed, with sales through retail home improvement channels performing well, but more than offset by weakness sales for commercial applications where we have a particular strength with quick-serve restaurants. You've probably all seen a lot of positive press about the opportunity for the RV industry. In the medium term, RVs will be incrementally attractive to families looking for a domestic and isolated safe vacation alternative. We are just now starting to see increased demand flow through to us, but we are optimistic at a renewed demand rebirth of the RV lifestyle for U.S. consumers and are seeing early signals of a meaningful uptick. Overall, we continue to expect segment sales down in the low 30 percent range for the full year. Let me now turn it over to Rich Maui, who will give a little more cover.