Crane (CR) Q3 2024 earnings call transcript

Thank you, operator, and good day, everyone. Welcome to our third quarter 2024 earnings release conference call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our Chairman, President, and Chief Executive Officer, And Rich Maui, our Executive Vice President and Chief Financial Officer, along with Jason Feldman, CEO and your Vice President, Treasury, Tax, and Investor Relations, who's on for Q&A.

We will start up our call with a few prepared remarks from Max and Rich, after which we'll respond to your questions. And just a reminder, the comments we make on this call will 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, 10K and subsequent filings pertaining to forward-looking statements.

Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and a company side 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, Allison. Thanks, everyone, for joining the call today. Crane had another excellent quarter with results outperforming expectations. Adjusted EPS was $1.38. We have had a very solid year to date, driven by an impressive 6% core sales growth, reflecting strength across both aerospace electronics and process flow technologies. We also had strong leading indicators with core orders up 6% and core backlog up 10% compared to last year.

And confidence in our outlook for 2024 remains high. We've had a very solid year to date as we continue to successfully execute on our strategy. I want to take a moment to acknowledge those that have been impacted by the recent hurricanes, which have caused widespread devastation with impact for many of our associates and customers located in the southeast.

Crane's Marion, North Carolina site was directly affected by flooding from Hurricane Helene, as was the region. And we are in the process of recovery and bringing operations back online. While we are making great progress to date, the safety of our employees, their families, and the communities in which we operate remains our primary concern. And the Crane Foundation is proud to support numerous organizations providing relief and help locally in the aftermath of Hurricanes Helene and Milton. In addition to the Marion facility in the quarter, we also saw numerous days of downtime from power outages at a site in South Carolina due to Helene, and we lost a week of output from our aerospace electronics site in Taiwan due to Typhoon Craython.

The latter two were less disruptive, and those locations will fully recover lost third quarter sales in the fourth quarter. At Marion, however, it will take a little longer to restart operations, but we expect insurance to cover all business interruption, although we may not receive the insurance recovery until early next year. Despite these recent challenges, I remain highly confident in the strength and resilience of Crane's team and portfolio, and we are once again raising and narrowing our full-year earnings outlook, We are now looking at the Crane Co, expecting adjusted earnings per share to be in the range of $5.05 to $5.20, up from our prior view of $4.95 to $5.15.

We have direct line of sight to delivering this expected 19% earnings growth. At Process Flow Technologies, guidance continues to assume somewhat muted industrial activity, as well as lower shipments from our Marion facility due to Hurricane Helene.

Within aerospace electronics, demand remains strong across all categories of our defense and commercial business, with some shipment reductions related to the Boeing strike and to a lesser degree continued supply chain constraints. Related to the Boeing strike and the situation at Boeing generally, I would say that for the sake of the aerospace industry, we need this critically important and iconic manufacturer to continue to recover and regain its position globally. Personally, I feel that the recent leadership changes will be a very positive inflection point for the organization and through its next chapter of recovery and resurgence, and Crane is doing all that we can to support. Along those lines, we have made unilateral strategic decisions to support our customer with improved inventory buffers for outstanding continued service and delivery performance as Boeing eventually ends and recovers from the impacts of the strike and other operational challenges.

A key tenet and strength of the Crane business system, and we have highlighted and proven time after time over years, is the flexibility and speed to react to issues outside our control. Our third quarter performance and fourth quarter guidance are further great examples of our exceptional performance even in the face of adversity. And our teams continue to execute and win in the third quarter. With an aerospace electronics, we were selected by Deutsche aircraft to supply the proximity sensing system for its D328 Eco platform, following the prior award for the anti-skid brake control system on this aircraft.

This is a great platform with the lowest fuel consumption and CO2 emissions for its size category in the market today. And we are well positioned to support all of our OE customers as they continue to develop more fuel-efficient and environmentally friendly solutions. We are also awarded a Lubin's Gavage Pump contract for Zero Avia, and other significant negotiations continuing for additional collaborative combat aircraft programs.

Within process flow technologies, one of the largest gas majors has approved crane valves for use in their cryogenics applications, opening up 35% of the liquid hydrogen valve market for our growing cryogenics business. We also received a $5 million order for a major chemical facility, upgrading to newer cell membrane technology for chloralkali production. Our resistiflex line pipes and Zomox valves have successfully been selected to be installed on this new upgrade due to their excellent corrosion-resistant properties.

This project consolidates our position as the main solution provider for this customer on line products due to superior life.

Overall, another strong quarter for both aerospace and electronics and process photo technologies, both in reported results as well as in our execution supporting current and future growth.

And with continued progress on our existing M&A funnel, we expect additional opportunities to become actionable over the next few quarters. While we are working on a number of transactions at the moment, we see the opportunities weighted towards 2025, given the expected timeline for known processes, with the smaller transactions still on track for year-end. And as we reiterated during our annual investor day earlier in the year, we remain confident in a 4% to 6% long-term core sales growth rate from resilient and durable businesses with solid aftermarket. And substantial operating leverage on top of already solid margins today that should lead to double-digit average annual core profit growth with potential upside from capital deployment. And with virtually no net debt, the capital deployment opportunity is significant.

Hey, with the future in mind, we're excited to announce that we will be hosting an investor meeting at our aerospace and electronics site in Fort Walton Beach, Florida, on March 6, 2025.

We will be sharing more information about the details of the event over the next few weeks, but please save the date on your calendars. Our Fort Walton Beach site is the production site for our defense power business, which houses production of our wide range of power conversion devices for use in next-gen military radars. That's an example of growing capability and high power for emerging ground vehicles.

Now let me turn the call over to our CFO, Rich Maui, for more specifics on the quarter and some more details on our guidance.

Thank you, Max, and good morning, everyone. Starting with total company results, we drove 6% core sales growth in the quarter with strength across both primary businesses. An adjusted operating profit increased 35%, driven by strong net price and productivity. Leading indicators were also strong with core FX neutral backlog up 10% and core orders up 6% compared to last year, notably better than expected, particularly at aerospace and electronics. Another strong quarter reflecting our focus on accelerating core growth along with our consistently differentiated execution.

In the third quarter, adjusted free cash flow was $75 million, roughly in line with last year. For the full year, we now expect free cash flow to fall at the lower end of our $255 to $275 million range, given ongoing working capital headwinds in aerospace and electronics and the timing of insurance recoveries in Marion related to Hurricane Helene. Total debt at the end of the first quarter was approximately $332 million, with $258 million of cash on hand. We continue to have substantial financial flexibility, with roughly $1 billion in M&A capacity today and reaching as much as $4 billion by 2028.

As a reminder, we will deploy our capital with the same strict financial and strategic discipline that we always have employed, I will now turn the calendar to 2025 Now turning to our 2024 guidance, we are once again raising our full year adjusted EPS guidance by 7.5 cents at the midpoint and narrowing the range for EPS to be within $5.05 to $5.20, reflecting 19% year-over-year growth at the midpoint. Guidance assumes total core growth of 5% to 7%, but now towards the higher end of that range, due primarily to the outperformance of aerospace and electronics, that 5% to 7% core growth will drive approximately 19% growth in adjusted segment operating profit.

We also continue to expect a 5% benefit from acquisitions. Overall, another very strong quarter with excellent momentum. Now for more details on the segments. I'm starting with aerospace and electronics. Despite the headlines, no material change in end market conditions relative to our expectations. On the commercial side of the business, aircraft retirements remain very low due to high demand and limitations on aircraft deliveries, resulting from an aging fleet that requires more aftermarket parts and service. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base, given heightened global uncertainty today.

Overall, it just continues to be a very strong demand environment. And that demand was reflected in our third quarter growth rates with sales of $239 million, increasing 15% compared to last year, with 10% core growth and a 5% benefit from the Vion acquisition. Despite the continued high level of sales growth, our record backlog of $833 million increased even further, up 23% year-over-year, including 14% core growth and a 9% contribution from the Vion acquisition.

In the quarter, total aftermarket sales increased 17%, with commercial aftermarket sales up 12%, and military aftermarket up 31%. OEM sales increased 15% in the quarter with 19% growth in commercial and up 9% in military.

Adjusted segment margin of 23.5% increased 410 basis points from 19.4% last year, primarily reflecting higher volumes, price net of inflation, and productivity. As we close 2024, we anticipate core sales growth for the year to be slightly better than our prior 12% expectation. We are also tracking ahead of the 4.5% revenue contribution from the Vion acquisition we previously cited.

This guidance assumes continued strong sales and consistent with prior commentary with decelerating year-over-year growth rates as the comparisons continue to be more challenging and with some impact from the Boeing strike. While comparisons can create some noise on quarterly growth rates, as we have outlined previously, we expect this year's core sales growth rate to be followed by continued strong core growth in 2025 and for the remainder of this decade.

Additionally, we anticipate full-year margins to be above our prior 22.2% guide and represent more than 250 basis points of expansion compared to last year, all in on track for yet another outstanding year.

Moving to process flow technologies, we remain well positioned to continue outgrowing our markets. As Max noted, we had two sites impacted by Hurricane Helene. Of the two sites, one was fully operational by the end of the first week in October as power was restored. Our second site in Marion, North Carolina, was impacted more significantly, but was expected to be fully operational by the end of the year. For the quarter, our results included about $0.03 of EPS impact for both those sites, and our raised outlook includes an estimated $0.05 to $0.10 impact from production downtime in Q4.

Overall, the financial impact from the hurricane will be fully offset by insurance recoveries. However, the timing of receiving all insurance proceeds will extend into 2025. Demand trends and order rates remain in line with our expectations discussed last quarter. Given the strong performance of the business, offset by the hurricane impacts, we expect our sales and margin in the segment to be relatively consistent with our prior guidance for the year. In the quarter itself, we delivered sales of $309 million, up 16%, driven by strong core sales growth of 7% in the quarter, along with a 9% benefit from the Baume and CryoWorks acquisitions.

Compared to the prior year, core FX neutral backlog increased 3%, and core FX neutral orders were relatively flat. Now, adjusted operating margin of 21.8% expanded 260 basis points, better than we expected with strong core operating leverage in the quarter, driven by productivity, strong net price, and higher volumes.

For context, remember that in 2019, just before COVID, margins were 13.6%. As we noted before, this is a significant step function change in margins, which is reflective of our efforts to structurally shift the business towards higher growth and higher margin and markets.

We continue to see opportunity on this journey through the contribution from accretive new product introductions, pricing that is both disciplined and appropriately assertive, our continued investments in technology-driven product differentiation, and continued productivity. At engineered materials, sales of $49 million decreased 13% compared to the prior year. Adjusted operating profit decreased 80 basis points to 12.9% on the lower volumes.

For the full year, we expect both sales and margins to fall below our prior view for flat, but with recent and projected cuts in interest rates, we believe we are at bottom today. Before moving to questions, overall, again, an outstanding performance in Q3 and outlook for the balance of the year. We raised guidance for the third consecutive quarter, full-year sales growth up 11%, with segment margins expanding 140 basis points to 21%, and EPS growth of 19%. Our teams continue to execute operationally and commercially better than ever, even in the face of unique, unexpected challenges. Special thanks to our Marion North Carolina associates, as well as to those assisting in recovery efforts to bring that site back even stronger than before.

As Rocky Balboa so passionately coached his son in the sixth installment of the legendary Academy Award winning Rocky franchise, it's not how hard you can hit. It's how hard you can get hit and keep moving forward. How much you can take and keep moving forward. That's how winning is done. Operator, we are now ready to take our first question.

Yeah, so in Q3, I would say not material, Matt. The more material impact, as we quantified, was the hurricane at three cents, roughly. In Q4, I would say that we're continuing to make sure that we're protecting Boeing. So our estimate there, perhaps a little bit muted from a volume perspective, but there is some impact. But I would, again, say not material and not affecting our overall guide for the quarter.

Matt, ballpark, it's $5 million of sales a month for the effective programs at below-segment average margins. I don't think we're going to be more specific about what typically is in the fourth quarter assumption, but that's kind of the way to think about it. And keep in mind, too, Matt, you know, commercial league were actually 19% for us in the quarter. So pretty strong, despite what was going on.

Yeah, sure. I'll give a little bit of color, Matt. You know, overall, the message would be that very consistent with what we discussed and shared in July following the second quarter earnings call, fairly consistent on a year-to-date basis compared to coming into the year doing better, with the positive surprises being largely around projects as we were entering the quarter, you know, primarily in the Americas, but also in the Middle East, Asia, and primarily in chemicals and pharmaceuticals.

We do think the backlog as it currently stands is setting us up, I think, well as we're looking to the fourth quarter and to 2025.

European chemical is still slow. No real change there, both projects and MRO. If anything, MRO stabilizing is the way to think about it, but not expecting a big recovery at all here as we exit Q3 and finish up Q4. However, China and Europe, I would say just overall the most challenged in markets there. A handful of project push-outs not inconsistent with what we were seeing coming into the year and through the first nine months.

So that's a very similar trend as well. And again the strength coming from a project point of view in pharmaceuticals and in chemical Outside of the process side of the business on the more commercial areas of what we have in PFT North American water wastewater just continues to win frankly and taking shares So excited about what we continue to see there And then UK non I would say a decent double quarter rate that we saw here in the quarter so also recovering Got it.

No, I think no matter what, we are ready to react to any administration, any occurrence, flexibility, and being able to respond is a hallmark of Crane. And what we've executed over any administration historically and how I view it as we move forward.

Thanks, Justin.

Yeah, commercial OE was up 17, military OE up 13, commercial aftermarket up 39, military aftermarket. Sorry, I'm reading the wrong column. I apologize. Forget all of those.

On a core basis, excluding the acquisition, commercial OE was up 7, military OE up 7, commercial aftermarket up 12, military aftermarket up 30.

Yeah, we haven't disclosed the ship set content on, you know, a couple million. It's not that significant where we're positioned with the valves, Scott.

But we are chasing, you know, we are specified. As the AP1000 gets built, we will have that content. Our team is actively bidding and working with all the small modular nuclear reactor builders, our new design getting specified in.

So it's clearly a strategic focus for us. That's our smaller $70 million nuclear services business that does turnaround work, wonderfully positioned test equipment on turnarounds, I will now turn the call over to management for the Crane Co. how can we not perform like this in these circumstances?

Well, thanks, Scott. I appreciate that question, the brag about the team and our processes. Well, we've always described this. Look at it. Some investors' eyes glaze over. Everybody speaks to their own business system. Everybody speaks the same mantra and language. I would argue that very few differentiate themselves in terms of truly being able to execute I would argue that we do for those investors that have visited our facilities. I think we've shown that in practice, what that means, what the Crane business system means. It starts with our strategy and execution, a very disciplined process around that cadence and execution. It's not easy pace for Crane associates. I mean, that's something that is regularly talked about, but also with some pride in terms of what it means to be part of Crane and driving that cadence and execution.

Focused on growth and our approach at driving customer satisfaction, I think we've got an operational prowess around Lean and Six Sigma that is, again, we can always improve, We always make it ugly and be very transparent with ourselves, but we're really quite good at just maniacal focus on waste variation over burden on our associates and how we strip out that waste year after year, month after month, day after day.

Everything from strategic sourcing to, you know, newer holistic tools and processes and focus that we just execute really well. So, yeah, I think it's a phenomenal culture. It starts with ethics and integrity, and that puts this Crane business system at its forefront, and I think we differentiate, and I think hopefully investors see that reading through the results. But thank you for the question.

Power overall, I think it's stable. We haven't seen nothing I can see in the data, any major shifts from that standpoint. Right. And the nuclear, hey, look, it's exciting news. The nuclear resurgence is certainly exciting. We're excited about those announcements as well. There's going to be a lot of money and investment in there. I think it's going to be a longer term cycle for sure. But, you know, on a smaller scale, our nuclear team is investing for growth. One of our strategic initiatives is a brand-new testing capability that allows for remote testing for the annual process of certifying the valves, and so we're excited about that, investing for growth. But it's a positive place to be and something that we'll be, you know, certainly looking at also from an M&A strategy also if and when it makes sense on assets that come up.

Well, on the contract question first, I mean, we're always in negotiations on various contracts when they come up, when they're due. That's just ongoing. I would say that the pace and scope of contract discussions continue, nothing unusual. So that's all positive. I would say that, look, I mean, anything outside of our control, we've always said what worries me the most is those things that are outside of our control. It's some economic shock. It's war. It's another virus. It's those types of things. Could that happen? Sure. I guess so. Based on what we have clear line of sight to, based on everything we're triangulating on, we have high confidence as we exit the year and head into 2025.

D. : Hi, Ron. Good morning.

For us, look, I think you have to look specifically for Crane. And we're not interiors. We're not some of the others that might have some clear greater challenges with the delay. Right now with the aftermarket, if the strike continues, I mean, unfortunately, new aircraft are not being delivered. Older aircraft continue to fly. Our aftermarket continues to remain strong. So we feel that even in any worst-case scenario with the strike, we're going to be okay.

We protecting some of the volumes I mean we adjusting some of the forecast rates of course but in terms of making sure that we have the appropriate inventory for a startup not excessive but the appropriate level of inventory managing our supply chain no knee reactions into our supply chain So I think we're managing it really, really well, and I don't see a red line. I really don't.

Thanks, Ron.

No, it's all of the above, honestly. I mean, we had a very solid performance price cost. Productivity continues to be really strong. The team executes extraordinarily well. I'd reiterate that the results in the quarter also include that impact from Marion. So on a gross basis, we did even better. I think the way to think about it is nothing unusual, and as we think about next year and moving forward, you know, that 35% leverage rate that we've been speaking to is a way to think about our comfort and ongoing performance.

And also keep in mind, Adam, that, you know, the focus shift in that PFT business that we've done in terms of the higher growth, higher margin end markets has certainly been beneficial as well.

Adam, what I'd highlight again is our approach is a much more balanced approach. We don't follow the herd. We don't just run with some new shiny thing. 80-20 truly is a holistic improvement philosophy and approach that is not just about price. It's pricing for value. It's about really good product management, too, and simplifying the portfolio for those things that you really should not be continuing to try to produce. It bears the brunt of your cost, and you're really not making the kind of margins that you think.

So you simplify the business over time. You're taking cost out. So it's not just a price up. It's a cost out. And then it's a focus on over-serving your core customers and redirecting your assets and making sure that those core customers are getting super served. So it's about a growth strategy. So when you put it in that context, I think it's a wonderful fit with our overall CBS philosophy approach tools. It's been a phenomenal addition. I would say that it's still, when we talk about early innings of the approach, it's really around the simplification, continuing to see opportunities. Now, we've always been aggressive at stripping out costs, closing facilities. So this is, again, just a natural extension for us from a Crane business system standpoint.

But this extension of simplification, cost out, over-serving customers, still early innings in its purity of the approach, which I'm really, really excited about. A reminder for investors, you know, coming out of COVID in an inflationary environment, we were maniacal of making sure early and fast that we stood up for our value prop and passed on inflation very fast, very quickly. I would not say that was 80-20. That was just, in many cases, a brute force driving it through the business. Since then, of course, it's become much more sophisticated, strategic. We continue with the momentum. But, you know, I still think it's early innings for us, and we're really approaching this the right way and in a balanced way that we'll have longevity for, I mean, many, many years ahead.

No, I think that's right. You know, in the near term, to answer your question on, you know, which side is well, I mean, I think PFT is naturally just given the lack of the long-term contract environment that's there relative to A&E.

But, yeah, I would just echo everything Mac said.

Adam, was Nathan, would he rather listen to Scott versus me? My feelings are hurt.

All right. Tell them I gave them that message.

On the Honeywell delays, we're just – we're still not seeing any major significant shifts in push-outs or cancellations, anything along those lines.

On the storm impacts, you want to – Yeah, I mean, on the storm impacts, Jeff, it was three cents in the quarter, in the third quarter in PFT. And then for the fourth quarter on PFT, we gave an estimate of five to ten cents of impact.

On the Boeing rate question, Jeff, we don't feel that we have risk here with Boeing on any kind of adjustment moving forward. We've always been prudent in our internal planning and execution, and as a matter of fact, we're taking some proactive measures to continue to protect Boeing as we're moving forward. So I think we've planned this really, really well, executing well, and we're not concerned over how this plays out.

Yeah, just on the storm impacts, with those impacts holding the prior guidance that we issued for PFT in July.

Okay. Yeah. Thanks, Jeff.

Morning, Tony.

Yeah, I would say no change on the long-term targets, you know, three to five in process, seven to nine in aerospace and electronics, leveraging at 30 to 35 percent in PFT and 35 to 40 in aerospace and electronics. So I would say that that equation is still something that we're marching forward on and continuing to look for the right opportunities to employ capital to continue to support the inorganic side of things. On the inorganic side, I would say that the activity has never been higher. I mean, our funnel is very full. We're very, very active. So I think from that standpoint, it plays well to our goal of scaling up in both A&E and PFT strategically.

We like the assets. We like where they're positioned. We'll see what we can continue to get across the goal line here, but a lot of activity. So that's all incredibly positive. And on engineered materials, as we've stated before, we love the business. Great team. Great business. Great end markets. It's not strategic for crane. We tried to sell it once. And the DOJ had some issues with the acquirer that, unfortunately, we missed that cycle. We will not miss the next cycle. So that will – it's just a matter of time.

Thanks, Tony. Thanks, Tony.

Thanks, operator. Appreciate it. Again, yet another very solid quarter with results outperforming expectations, even with surprises outside our control that our teams reacted to incredibly well. As the late, great Wally Amos, founder of famous Amos Cookies, once said, nothing is an obstacle unless you say it is. As I highlighted previously, a key tenet and strength of the Crane business system is the flexibility and speed to react to issues outside our control.

Third quarter performance and fourth quarter guidance is another great example of exceptional performance, even in the face of adversity. Our strategy is working, the team is executing, driving its earnings through its growth and commercial excellence initiatives. Our M&A pipeline is full, and we have the balance sheet capacity to execute. We look forward to closing out 2024 on a strong note and are well positioned for continued growth and delivering on expectations in 2025.

Thank you all for your interest in Crane and your time and attention this morning. Have a great day.