Crane Company

Greetings and welcome to the CraneCo 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 Mowley, 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 and tables at the end of our press release, and the accompanying slide presentation, both of which are available on our website at www.cranco.com in the Investment Relations section. Please also mark your calendars for our February 25th Investor Day event, as well as our May 26th Aerospace and Electronics Investor Day. We expect that both will be virtual events, and additional logistical information will be forthcoming. Now let me turn the call over to Max.

Thank you, Jason. Wow, what a year. Just an advance warning to our investors listening today. I'm going to take a little more time today. Rich and I are going to cover a lot of ground, so we'll take some time to have 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 6.02 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 in the fourth quarter of last year. Fourth quarter adjusted EPS was about six cents 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 infection rates in all countries. It 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 impact was entirely timing-related, we believe transient, and shifted to the first quarter of 2021. Before I turn to our outlook, There are a few key messages I want to convey about our performance in 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 and 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 of 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 also part of our longer-term trend. Over the last five years, we have averaged 100% free cash conversions, a structural and step function increase from the high 70% range we had delivered historically. Again, further evidence of our differentiated execution capabilities. Those differentiated execution capabilities driven by our crane business system management approach are even more critical during challenging times. Discipline, cadence, and execution remains at the core of CVS. It's this discipline, cadence, and understanding of our businesses that gave us the confidence to to provide very detailed and granular financial guidance last April when most industrial companies declined to provide any type of outlook. I'm 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 of strong, resilient, durable businesses. This portfolio and balance sheet strength combined with our leadership experience and our confidence in our long-term prospects drove two key decisions early on in the pandemic. First, we knew we needed 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 was that we would pursue those cost actions while continuing all key strategic growth investments at pre-COVID 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 made choices about where to reduce costs, and many cost reductions proposed by our businesses were rejected by Rich and I because of the impact 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 have proven over time that we have differentiated execution capabilities. 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 11,000 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 well-being 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 situation. above and beyond normal vacation and sick pay. The UPE program provided substantial flexibility for our associates, which could be used to cover paid time off for associates diagnosed with COVID-19 or required to quarantine for those who had to 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 progressed, we took difficult measures to adjust our cost base to lower demand levels, including a substantial reduction in force in 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 do not implement any salary reductions except for corporate officers and the board of directors. We maintained all benefits, including our 401K match in the United States, and we continued 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 at 50% of their target, even though most schemes calculated at zero. We follow this approach because we believe it was a fair and appropriate way to thank and recognize our associates for their extraordinary efforts in 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 490 to 510. This outlook reflects order rates that accelerated throughout the fourth quarter across most of our businesses and visibility to a recovery in most of our major end markets. That optimism is tempered somewhat in the near term by COVID infection rates that remain stubbornly high in many regions, additional lockdowns in several key European markets, and the potential for some additional near-term restrictions and disruptions. If those concerns prove unwarranted, 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 recovery. improvement throughout 2021 and beyond. Specifically, markets strengthened towards the end of 2020, and order rates accelerated sequentially through the fourth quarter. Orders were higher in December than in any other month of 2020, with broad-based core year-over-year growth of 11%, led by Crane Currency, our defense electronics business, and engineering materials. December 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. We look forward to sharing more about this at next month's Investor Day event. Payment and merchandising technologies. I'm 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 offering starts with our long history of providing best-in-class critical components and technology for bill and coin validation. 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 a recent Cummins Allison acquisition, a strong service network to provide greater capabilities to our customers and and high margin recurring revenue stream for the segment, as well as new service growth opportunities well underway. And the currency demand for cash remains extremely high, both in the U.S. and abroad. This has been one of the businesses that has actually benefited from COVID. We expect another very strong year 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 1.7 to 3.8 billion notes, or a 31% to 66% increase, with particular strength in the demand for $100 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 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, this is temporary. It should not obscure the quality of this business and its prospects. There are too many exciting opportunities in this segment for me to possibly cover today. In fact, there are too many to effectively discuss at our annual February Investor Day event. So we have scheduled a dedicated investor event on May 26th to focus exclusively on aerospace electronics, our growth initiatives, and our growth expectations for the next decade. I have complete confidence that as 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. Second, the 737 MAX recertification paged the way for Boeing to resume shipments, which will start clearing Boeing's inventory of finished planes 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 prefer the growth over the next 10 plus years. And lastly, engineered materials is poised for an extremely strong recovery. Recreational vehicle demand has soared over the last several months, driven largely by new entrants attracted to the wholesome and safe option of RV outdoor vacations. The fact that this occurred immediately after the industry went through an inventory destocking process is helping fuel OEM build rates ahead of even strong retail sales. We expect strong, sustainable demand from RVs with our transportation markets, including trailers, not far behind. Building products markets should begin to recover in 2021, and the building products business has increasing exposure to a number of high-growth emerging industries, including ghost kitchens for takeout and delivery service only, and cold storage to support grocery facilities. Overall, it looks like engineering materials is at the very start of a strong emerging new cycle, with growing opportunities for share gains. Across our businesses, as our end markets recover, we are very well positioned. We are executing on the day-to-day activities needed to run our business while also continuing to execute on our strategic growth plans, enabling above-market growth as we emerge from this downturn. I'm extremely excited about our prospects for this year and beyond, and at this point, let me turn it over to Rich for some additional financial commentary.