Crane Company (NYSE:CR) Q1 2024 Earnings Call Transcript

Crane Company (NYSE:CR) Q1 2024 Earnings Call Transcript April 23, 2024

Crane Company isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Crane Company First Quarter 2024 Earnings Conference Call. [Operator Instructions]. I'd now like to turn the call over to Jason Feldman, Senior Vice President of Investor Relations, Treasury and Tax. Please go ahead.

Jason Feldman: Thank you, operator, and good day, everyone. Welcome to our first quarter 2024 earnings release conference call. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer and Rich Maue, our Executive 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 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.

Max Mitchell: Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Yet another impressive quarter with results outperforming expectations. Adjusted EPS was $1.22, driven by 5% core sales growth, along with strong leading indicators, core orders and backlog both up 11% compared to last year. We are off to a great start in 2024. Based on that strength, we are raising our full-year guidance by $0.20 to a range of $4.75 to $5.05, which reflects 14% EPS growth at the midpoint. That's a high-confidence guidance that we have direct line of sight to delivering, assuming somewhat muted industrial activity and continued. but gradual improvement in the aerospace and electronics supply chain. While this is our best thinking today, we believe there may be upside as the year progresses if those two assumptions prove conservative.

If so, we are structured to meet any unexpected changes in upside demand. There's also a potential upside to guidance from capital deployment if we are successful with further M&A in the quarters ahead. On that front, in addition to our strong first quarter results, I'm pleased to announce that we signed an agreement to acquire CryoWorks as a strategic bolt-on in our process flow technology segment. Founded in 2009, based in Jurupa Valley, California, CryoWorks is a leading supplier of vacuum-insulated pipe systems for hydrogen and cryogenic applications, which is highly synergistic with the ongoing organic development of our CRYOFLO brand. CryoWorks has an annual sales of approximately $28 million with approximately $5 million of adjusted EBITDA.

With a purchase price of $61 million before tax step-up benefits with a net present value of approximately $11 million, we expect that transaction to close at the end of this month. CryoWorks significantly and immediately expands our portfolio of cryogenic products and solutions. It will help us access a number of high-growth markets, including complex insulated piping for space launch applications, insulated piping and valves for cryogenic applications, and a number of electronics, semiconductor and manufacturing testing applications, as well as transportation and transfer solutions for cryogenic alternative fuels. Moreover, we will utilize this team's design expertise to accelerate development of our CRYOFLO solutions, targeting traditional cryogenic applications and new mobility and transportation applications.

We expect this acquisition to exceed 10% ROIC with approximately 10% of EPS accretion, excluding intangible amortization by year five, another acquisition that is an excellent fit, strengthening our existing business, and fully aligned with our strategy. My personal thanks to Donna and Tim Mast and Tim Mast Jr. for their help and assistance throughout the diligence process and entrusting their outstanding organization to Crane moving forward and we look forward to working closely to further investing and driving growth with the entire CryoWorks team. Strong start to the year, both in terms of results and with two acquisitions in the first four months. With continued progress on our existing M&A funnel, we expect additional opportunities to become actionable over the next year, primarily smaller and mid-sized transactions.

While we are working on a number of transactions at the moment, we see more opportunities at the end of '24 than we do in the next several months, given the expected timeline for known processes. Our annual Investor Day event is scheduled for May 14th at 8:30 a.m. in New York City, and we look forward to updating you on our progress delivering on the strategy and vision we laid out at last year's Investor Day. Specifically, we remain firmly confident in a 4% to 6% long-term core sales growth rate from resilient and durable businesses with solid aftermarket, 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.

And without taking too much away from Investor Day, where both Alex and Jay will provide more insights on recent wins, I would like to call out a couple in the corner, starting with aerospace electronics. I'm particularly excited that one of our key defense customers has secured an initial contract for a large AESA radar program. Given our positioning in that program, assuming it moves to full rate production as expected, we estimate that our lifetime sales for this new program will exceed $100 million. This also continues our winning streak in the space, where our high-power converters have been selected for nearly every new ground-based AESA radar system developed in the last five years. To date, our awards in this application represent approximately $800 million in program lifetime sales, in an area where historically, prior to several years ago, we had no position.

In addition, we are also confident we will soon secure multiple unidirectional and bidirectional high-power conversion wins on leading military land vehicle demonstrators, with significant positions expected with all of the primes competing for major programs. We've talked previously about our product position for the XM30 optionally manned fighting vehicle, and we're now seeing progress with the common tactical truck program as well. There's another market where we've not historically had content, but given our technology investments, see a path and potential for roughly $700 million in program lifetime sales. In our modular power business, we just launched the first phase of our new family of DC-DC converters called xMOR. This new range of products has a wide input voltage range for high-reliability aerospace and military-grade applications, as well as radiation-tolerant and radiation-hardened versions for space applications.

This product family is being created on a single development platform. It can be configured to serve many different markets and end-user applications and voltage ranges. The full xMOR launch will be complete by the end of this year, and will be followed by the launch of both medium and low-power products called xMRT [ph] in late 2025. Moving to process flow technologies, a few highlights from the quarter include the great progress we've made with our high-efficiency motor platform in the U.S. municipal water business. As we continue to expand the range of our portfolio, we've had particular success with this motor platform, and most recently with the largest frame size in the 75 horsepower to 120 horsepower range used in wastewater treatment plants.

Based on our success in the quarter, we are on track to doubling our sales from last year in this product segment. You may recall that last quarter I discussed a $5 million pharmaceutical order we won with a new customer due to advances with our EX diaphragm technology that supports a higher temperature range and longer product life than the entrenched incumbent provider was able to meet. Our value proposition continues to resonate with our customers, and we want another significant pharmaceutical project for a next-generation cancer drug where the production process requires temperature ranges where our products are differentiated and well-suited. We also continue to gain traction with commercialization of many new key products that we've discussed over the last few years.

One example is the success we've had with the FK-TrieX, a proprietary, innovative, triple offset valve with a breakthrough design that eliminates the traditional trade-off between flow rate and sealing capabilities. Since introduction, this valve has gained increasing acceptance, particularly in chloralkali, organics, olefin and fertilizer applications. Introduced just two years ago in 2022, we're on track for significant order growth this year, with orders on track to exceed $20 million annually by 2026. Very proud of our team and globally as we continue to drive our strategic vision with excellent execution. Now let me turn the call over to one of the most dynamic and exciting CFOs in the industry with a passion for profitable growth and who puts the fine back into finance, Mr. Richard A.

Maue, for more specifics on the quarter and some more details on his guidance.

A close-up of a large industrial compressor in the oil and gas industry.

Richard Maue: Thank you, Max, but I must say that I think you undersold my excitement and passion. In the words of Ron Burgundy in the movie Anchorman, don't act like you're not impressed. I'm kind of a big deal. People know me. I have many leather-bound books and my apartment smells of rich mahogany. For those who do not know me, I am kidding, but I am embarrassed to say that I do enjoy that movie and good morning, everybody. Another strong quarter demonstrating accelerating core growth results with continued excellent performance across all businesses, despite some persistent supply chain challenges that continue to impact the broader aerospace and defense industry. Core sales growth of 5% reflects continued strong demand and great execution in aerospace and electronics.

Adjusted operating profit increased 6%. While that reflects leverage more muted than we typically see in our businesses, it was known and due to expected factors that we previously discussed. First, acquired sales always leverage mathematically at their operating profit margin level in the first year. Second, we have a very challenging comparison at process flow technologies to last year's record 23.4% adjusted operating margins, which I'll discuss more in a minute. Adjusted EPS also beat our expectations and remember that comparing EPS to the prior year is challenging as our capital structure and related interest expense changed materially after last year's separation transaction. From a quarterly perspective, as I just mentioned, there are also a number of timing differences comparing 2024 to 2023 that flattered the first quarter of last year and created difficult comparisons.

Looking at our results another way, our first quarter EPS run rate compared to full year 2023 reflects 14% adjusted EPS growth. Importantly, leading indicators were also strong with core FX neutral backlog in orders both up 11% compared to last year and as Max explained, notably better than expected at process flow technologies. Getting into the details, I'll start off with segment comments that will compare the first quarter of 2024 to 2023, excluding special items as outlined in our press release and slide presentation and then I will comment on our 2024 outlook for each segment and for our overall P&L. Starting with aerospace and electronics, no change in end market conditions, which remain very strong. On the commercial side of the business, aircraft retirements remain very low due to high demand and limitations on aircraft deliveries.

This results in an aging fleet that requires more aftermarket parts and service and air traffic activity also remains strong. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base given the heightened global uncertainty today. Overall, just a solid demand environment with no signs of slowing anytime soon. That strong demand was reflected in our first quarter growth rates with sales of $226 million, increasing 25% compared to last year, with 20% core growth and a 5% benefit from the Vian acquisition. Despite continued high levels of sales growth, our record backlog of $792 million increased 23% year-over-year, including 15% core growth and an 8% contribution from the Vian acquisition.

Sequentially, core FX neutral backlog increased 5%. By category and excluding the Vian acquisition, in the quarter, total aftermarket sales increased 39%, with commercial aftermarket sales up 34% and military aftermarket up 53%. OE sales increased 14% in the quarter, with 16% growth in commercial and up 11% in military. While the demand environment remains very strong, we continue to remain somewhat supply chain constrained, with steady but gradual improvement over the last few quarters. As we have discussed previously, this is not just related to on-time deliveries from suppliers, but the broader supply infrastructure spanning from raw materials, components, and labor, both availability and supplier employee turnover and employee experience levels.

Areas of specific shortages continue to shift and evolve, although overall component availability has modestly improved, consistent with our commentary over the last few quarters. We do continue to make investments related to expediting shipments, as well as projects to qualify new suppliers and add second sources where it makes strategic sense. Adjusted segment margins of 22.4% increased 150 basis points from 20.9% last year, primarily reflecting higher volumes, productivity and favorable mix, partially offset by the supply chain related investments I just mentioned. Looking ahead to the remainder of 2024, we are raising our guidance to reflect the strong first quarter and our expectations for continued strength. We now expect core sales growth of 12% for the full year, up from prior guidance of 10% core growth, and we still expect a full year, 4.5% favourable benefit from the Vian acquisition.

That guidance assumes continued modest sequential growth over the next three quarters, albeit at a decelerating year-over-year growth rate as the comparisons become more challenging. We are also raising our full year margin guidance to 22% up from prior guidance of 21.5%. That does assume a slight moderation in margin rates, primarily because we don't expect the mix for the remainder of this year to be quite as favourable as the first quarter. Margin guidance reflects core leverage, excluding Vian of approximately 37%, a little higher than prior guidance overall on track for another outstanding year. From a cadence perspective, sales will increase slightly sequentially across the full year, with margins fairly steady over the next three quarters.

At Process Flow Technologies, we remain very well positioned to continue outgrowing our markets, and our market outlook is now a little bit more positive than it was over the last several quarters. While we continue to see softness in the European chemical, non-residential construction and general industrial markets, North America and China projects have now been stronger than we expected for the last few quarters, and we now expect this trend to continue. We believe part of this may be related to reshoring in the U.S. and localization projects in China, both directly and indirectly, success from our share gain initiatives and a somewhat unique cyclical recovery in the post-COVID global macro environment. While we are still a little cautious in our outlook, we are raising our sales and margin guidance for the year to reflect better-than-expected strength in our orders and backlog year-to-date.

In the quarter itself, we delivered sales of $284 million, up 5%, driven by a 6% benefit from the Vian acquisition, and favourable foreign exchange, with core sales down 2% as expected. Compared to the prior year, core FX neutral backlog increased 7% and core FX neutral orders increased 9%, both driven primarily by North American markets, followed by China and Asia Pacific. Sequentially, compared to the fourth quarter, core FX neutral backlog increased 6%, with core FX neutral orders up 9%. Adjusted operating margins of 20.8% decreased 260 basis points better than we expected, compared to our all-time record margins in the first quarter of last year. Remember that the first quarter of 2023 benefited from an inventory revaluation as well as timing of deferred growth investment spending.

For our current volume run rates, we are very pleased with first quarter margins. Turning to our full-year guidance, we now expect 2024 sales growth of approximately 7%, up from our prior expectation of 4.5%. Acquisitions now including both Vian and CryoWorks, will add about six points to our full-year growth rate. When excluding acquisitions, we now expect core sales growth of approximately 1%, up from prior guidance of flat, and reflecting a modest acceleration in sales growth over the course of the year. We are also raising our margin guidance for the full year to 20.4%, up 40 basis points from prior guidance. That implies slightly lower margins that we delivered in the first quarter, reflecting modest temporary dilution from the CryoWorks acquisition, and slightly less favourable mix.

For context, remember that in 2019, just before COVID, margins were 13.6%. The significant step-function change in margins reflects deep structural shifts in the business to higher growth in higher margin end markets. The contribution from accretive new product introduction, pricing that is both disciplined and appropriately assertive, given the inflationary environment, our continued investments in technology-driven product differentiation and continued cost repositioning and productivity. From a cadence or timing perspective as a reminder, we expect 2024 to be far more level-loaded than 2023. At Engineered Materials, sales of $55 million decreased 12% compared to the prior year as expected. Adjusted operating profit margins decreased 360 basis points to 14.7% on the lower volumes.

For the full year, 2024, we continue to expect both sales and margins to be flat compared to 2023, as the RV market stabilizes with a normal quarterly cadence with the fourth quarter seasonally slowest. Moving on to total company results, in the first quarter, adjusted free cash flow was negative $86 million, consistent with normal seasonality, and better than last year's negative $101 million. For the full year, we are raising our adjusted free cash flow guidance to a range of $250 million to $275 million, up $10 million from prior guidance, and still reflecting better than 90% free cash flow conversion. Total debt at the end of the first quarter was approximately $357 million with $219 million of cash on hand. At the end of this month, we do expect to draw on our revolver to help finance the $61 million purchase price for the CryoWorks acquisition.

We continue to have substantial financial flexibility with more than $1 billion in M&A capacity today in reaching as much as $4 billion by 2028. Now, this is more financial flexibility than we've had historically. Our capital allocation strategy is unchanged. We will deploy our capital with the same strict financial and strategic discipline that we always have employed, prioritizing internal investments for growth, followed by M&A, and returns to shareholders. Turning to our 2024 guidance, as Max mentioned, we raised our adjusted EPS range to $4.75 to $5.05, from our prior range of $4.55 to $4.85 reflecting 14% EPS growth at the midpoint. Guidance assumes total core growth of 4% to 6% up a point from our prior guidance, and a 5% benefit from acquisitions also up approximately a point from prior guidance.

That 4% to 6% core growth will drive approximately 16% growth in adjusted segment operating profit about three times core sales growth. Most other elements of our full year guidance are unchanged, but we did raise net operating expense by $3 million to $23 million to reflect incremental interest expense associated with the CryoWorks acquisition. Overall, just a great start to the year with incredible momentum. Operator, we are now ready to take our first question.

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