Crane Company

Greetings. Welcome to Crane Co. Third Quarter 2020 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. 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 Maui, our Senior Vice President and Chief Financial Officer. We'll 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 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 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. As outlined in our press release last night, we reported third quarter adjusted EPS of $1.05. 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. Specifically, currency, recreational vehicle, and fluid handling demand were all better than we expected, reflecting better underlying market strength in 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 deleverage 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% to 19%. We continue to expect incremental gross cost savings of at least $100 million this year, We are 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&A 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 at 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 COVID and has substantial seasonality impacting the timing of its backlog and sales. For the fourth quarter, we expect fluid hailing 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 Cummins-Allison acquisition, the 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%. 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. 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're having a good year, better than even our pre-COVID expectations for the business. Both the U.S. and international businesses are growing in the double digits this year on easy comparisons. But the upside is primarily related to our U.S. business. At aerospace and electronics, core sales declined 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. And the OEs 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, at Engineering Materials, core sales declined 4%. with margins rebounding to an extremely strong 18.6%. After an extremely weak second quarter, with most RV manufacturers shut down 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, remain 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.