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Edited Transcript of CR earnings conference call or presentation 28-Apr-20 2:00pm GMT

·46 mins read

Q1 2020 Crane Co Earnings Call STAMFORD Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Crane Co earnings conference call or presentation Tuesday, April 28, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jason D. Feldman Crane Co. - Director of IR * Max H. Mitchell Crane Co. - President, CEO & Director * Richard A. Maue Crane Co. - Senior VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Brett Logan Linzey Vertical Research Partners, LLC - VP & Analyst * Caitlin MacKenzie Dullanty BofA Merrill Lynch, Research Division - Research Analyst * Damian Karas UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry * Kenneth George Herbert Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst * Matt J. Summerville D.A. Davidson & Co., Research Division - MD & Senior Analyst * Nathan Hardie Jones Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Crane Co. First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jason Feldman. Please go ahead. -------------------------------------------------------------------------------- Jason D. Feldman, Crane Co. - Director of IR [2] -------------------------------------------------------------------------------- Thank you, operator, and good day, everyone. Welcome to our first 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 Maue, 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 will 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 H. Mitchell, Crane Co. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Jason, and good morning, everyone. As outlined in our press release last night, we reported first quarter adjusted EPS of $1.15. We estimate that impacts from COVID-19 had an approximate $0.15 to $0.20 impact on first quarter results driven by some supply chain disruptions, softer demand in certain end markets and minor operational challenges at some facilities related to government health directives and our efforts to ensure the safety of our associates. Until early March, we were solidly on track to exceed our original guidance for the year. Sales of $798 million declined 4% compared to the prior year with a 10% decline in core sales. Operating margin, excluding special items of 12% compared to 14.4% last year. Given the extremely broad-based and substantial impacts we're seeing related to the coronavirus pandemic, that's probably about as much attention as our first quarter results merit. I will spend most of this call discussing our outlook, provide you as much detail as I can about what we are seeing today and what we expect moving forward. First, however, let me start off with a few key messages I would like you all to take away from the call. First, we have a solid balance sheet at Crane, ample financial flexibility for the current environment, strong track record of free cash generation and consistently disciplined capital allocation. Second, we have a diverse portfolio of strong and resilient businesses that will recover nicely when the markets improve. Third, we have managed through downturns before. When I say we, I don't just mean Crane, I mean I have as well as Rich, the rest of Crane's senior leadership team. And lastly, you all know that we have an extremely strong track record when it comes to execution and cost management. Crane is an outstanding operator with differentiated CBS capabilities, along with a high-performance culture based on ethics and integrity. Those CBS capabilities, along with our performance-based culture, are even more valuable in challenging times like these as they enable us to make data-driven decisions quickly with flexibility to adapt as conditions change and with accountability. In a few minutes, I will discuss some of the cost actions we have already taken. However -- and this is at least as important as our cost actions, if not more so, we are continuing to invest in all key strategic growth initiatives and our people. We will be ready to emerge from this pandemic in a strong position and ready to gain share from competitors. Turning to our guidance. Obviously, in the current environment, forecasting is extraordinarily challenging and our ability to accurately project future financial results is lower than, at any point, I can recall. The guidance we will be providing today is based on actual March results, trends in sales and orders since the end of March, market research from a variety of sources, end market extrapolations, customer input and discussions and a thorough analysis of our entire supply chain and a comprehensive evaluation of numerous potential global scenarios, capturing different timing and phasing of business reopenings. We've been as thorough as we can to date. All that said, our current best estimate for full year 2020 is for adjusted EPS of $3 to $4.25, with total sales of $2.8 billion to $3 billion, reflecting a core sales decline of 17% to 22% driven by end market deterioration related to the COVID pandemic. That EPS forecast includes incremental cost savings of at least $100 million this year. We expect free cash flow of approximately $200 million to $250 million with capital spending of approximately $45 million, which is a targeted reduction of 40%. We expect the second quarter to be the low point for adjusted EPS this year in the range of $0.40 to $0.50 per share. Given the challenges inherent in forecasting today, confidence in our outlook is lower than usual, which is partly reflected in the unusually wide EPS guidance range. However, I think it is extremely important to give you our latest and best thinking about how we expect markets to perform, probably even more so than in more normal periods for several reasons. First, this outlook captures the various scenarios we believe to be the most likely to occur, and this is the range that we have used for internal planning. These are the assumptions guiding our cost and cash management actions. Second, while the investor community has historically been pretty good at identifying inflection points in various end markets, it has historically been very slow to calibrate estimates to rapidly changing conditions. We think our guidance reflects where the year will end up, and we would rather have concrete discussions with you about a realistic range rather than waiting for everyone to inch towards the outcomes which seem more likely to us. Third, I'm going to give more color than normal about the assumptions by business underlying our forecast. Feel free to have different views, but I expect that this information will help all of you better realistically adjust your estimates. At a high level, let me characterize the top and bottom end of our range as follows. Starting with the bottom end of our range, as I stated earlier, our forecast for the second quarter adjusted EPS is $0.40 to $0.50, which reflects a core sales decline of approximately 27% to 30%. The bottom end of our full year range basically assumes that this level of sales decline persists for the remainder of the year. No improvement from second quarter levels in the second half. In that scenario, we would expect sequential improvement in EPS in the third and fourth quarter, but entirely related to the cost actions that we have taken. In this scenario, we also envision some incremental cost actions beyond those we are currently implementing. At the high end of the range, we expect a gradual improvement in underlying demand starting midyear, with a core sales decline for the second half in the mid to high teens. Based on what we know today, we think our range is balanced, and the range is wide enough that we think both the top and bottom ends of our range are relatively unlikely outcomes. From a leverage perspective, remember that our original guidance for 2020 had low leverage related to unfavorable mix at Crane Currency, the impact of the 737 MAX production pause and the impacts of the 2 acquisitions. Compared to our original guidance for 2020, our revised guidance reflects total deleverage rates in the 30% to 35% range, inclusive of our expected cost actions. That will be an impressive performance, particularly considering the mix involved here. We expect our most profitable and one of our highest leverage businesses, commercial and Aerospace & Electronics to suffer the steepest sales declines for the next few quarters with our commercial aftermarket business hit particularly hard. Compared to 2019, that total deleverage is closer to 40% to 45% due to the mix and acquisition factors I mentioned earlier. Let me now move to guidance assumptions by business segment. At Fluid Handling, a little over 60% of the segment's revenue is in our process valve business. Because our process valve business is one of our longer cycle businesses, we are seeing the impact of the current environment more heavily on our order rates than in sales, at least for now. Through the end of the first quarter, MRO activity has remained fairly stable, with MRO orders up 1% in January and February and then down 1% in March. However, to give you a sense of the severity and speed of the change in our project business, project orders were down in the high single-digit range in January and February and then down 26% in March. We are already seeing project pushouts and customer requests for delays. We have also seen at least one case of a major project already halted in mid construction. Through the 2014, '15 industrial recession, we saw projects delayed and some that hadn't started or canceled, but I can't recall the last time we saw a project shut down completely after construction began. By vertical market, our general industrial business, where we rely most heavily on distribution, experienced a substantial change over the course of the quarter. January and February global orders were down in the mid-single-digit range and then declined 17% in March. China was down the most. And in China, the decline started earlier in the year. But even in the U.S., general industrial orders were down more than 30% in March. Refining orders increased approximately 13% in the first 2 months of the year and then declined more than 30% in March. These trends have continued over the last few weeks. In contrast, chemical has held up fairly well with March order rates relatively unchanged from earlier in the quarter. While the overall process valve business is clearly being impacted by the current COVID environment, our nuclear valve services business, about $60 million of annual sales is holding up very well given that it provides service and replacement valves for nuclear power generation, which is nondiscretionary. In the first quarter, process valve core sales declined approximately 11%. For the full year, we expect our process valve business to see core sales down somewhere in the high teens range with total reported sales this year somewhat better given I&S acquisition sales contribution of approximately $55 million to $60 million. Our commercial valve business is close to 40% of Fluid Handling segment sales, and it includes nonresidential construction exposure primarily in Canada, the U.K., the Middle East and U.S., with some additional municipal exposure in the U.S. This is a very short-cycle business. Core sales were down in the mid-single-digit range in the first quarter. But more recently, since the start of April, the rate of sales decline is in the 30% range. For the full year, we expect core sales down in the 20% range, with the U.K. and Middle East markets faring the worst. Across Fluid Handling, we've also had a number of supply chain disruptions over the last 2 months, most notably related to castings from India and China. Fortunately, most supply chain-related delays will just push out revenue rather than result in a loss of business, and we already had some shipments planned for the first quarter shift to the second quarter. At Payment & Merchandising Technologies, we have 3 different businesses in this segment, which are being impacted in disparate ways. Our vending business was just under $200 million in sales last year. To date, this is one of the most impacted businesses at Crane. You may have seen Coca-Cola's recent earnings report with total April month-to-date volumes down 25% attributed almost entirely to its away-from-home category, which includes restaurants and vending, among other channels. That away-from-home part of their business was down approximately 50%. We are seeing the same thing. Vending machines are typically located in settings such as office building, schools, manufacturing facilities. Given that many, if not most of those locations are currently closed, demand has dropped sharply, down in the 50% range so far in April. And this is a short-cycle business with limited backlog. For the full year, we expect this portion of the business to see sales decline in the 30% to 40% range. In our payment business, this is another short-cycle business seeing substantially lower demand across all verticals, including retail, casino, vending, financial services and transportation. We do believe that there may be some benefit, at least for the retail and financial services verticals in the medium term as banks in 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, we don't expect to see that benefit for some time. On a full year basis, we expect this business to see a core sales decline in the 20% to 35% range, with a contribution of approximately $150 million to $170 million in sales from the Cummins Allison acquisition. At Crane Currency, we've seen no impact on demand. We're dealing with some manageable supply chain issues related to transportation and logistics of finished product. We've seen some minor disruption in our raw materials market. However, we expect this business to finish the year on target and well above last year's sales, albeit with negative mix we have mentioned over the last few quarters with lower U.S. government and higher international sales compared to last year. Overall for this segment, we expect total sales, including the Cummins Allison acquisition benefit, up slightly to down as much as approximately 10%. At Aerospace & Electronics, on the commercial side, we have already talked on previous calls about the headwinds we expected from the 737 MAX production pause. Now we are seeing OEMs cut build rates for most other major aircraft models as well. And as I'm sure you read about, some OEM facilities have been temporarily closed related to COVID-19 or weaker demand and order cancellations. Based on our current view of build rates, we expect a full year 40% to 45% decline in our commercial OE sales. On the aftermarket portion of the business, airlines have reduced flight schedule substantially. And this is already having a material impact on our spares and repair and overhaul businesses. We expect recent commercial aftermarket run rates to remain at April levels, down in the 60% to 65% range for the remainder of this year. Remember that the overall profitability and leverage rates on commercial aftermarket are generally very high, actually among the highest across our entire portfolio. Overall, we expect the commercial portion of our business down approximately 45% on a full year basis. In contrast, the defense business, which was about 35% of last year's sales is performing slightly ahead of our original expectations for 2020. We expect that business to grow in the low double-digit range this year. For the segment overall, we expect full year core sales down approximately 20% to 25%. Engineered Materials is another of our shorter cycle businesses. Most of the RV manufacturers shut down production completely for most of April. We don't expect production to resume until early May. In the medium term, RVs may be incrementally attractive to families looking for a domestic and isolated safe vacation alternative. For now, however, high unemployment rates, weak consumer confidence will reduce demand heavily for some time. You may have seen the April 19 Wall Street Journal article that even discussed the challenges that pandemic is causing for RVers who are dealing with campground closings or restricting access. Fortunately, the RV industry has spent more than a year reducing inventories at the dealer level. So we are at least entering this weak period without much excess channel inventory. We are also seeing weaker conditions across building products. There are a number of near-term opportunities related to temporary COVID health facilities where our products may be used, but our core markets include retail and restaurant settings, which have cut back on construction and renovation activity heavily. Transportation is also weak driven by substantially lower trailer build rates. Overall, we expect segment sales down in the low 30% range for the full year. Overall, it's a difficult and challenging set of market conditions. As a broad-based global, diversified industrial, we have visibility to a large cross-section of different vertical and geographic end markets. And what we are witnessing is hitting a wider range of markets more severely than what we have seen in any prior downturn. We are all still absorbing the first-stage direct impacts, but the secondary impacts will continue to spread as supply chain challenges move around due to closures, as virus hotspots emerge and then possibly reemerge in different locations and as various government responses helps in some places and has unintended consequences elsewhere. We applaud the efforts of local and national government leaders around the globe who are dealing with the pandemic to the best of their abilities as well as the health care professionals everywhere who are working tirelessly on the front lines and all those workers in the food supply chain and other essential industries. However, it is clear to us that a phased reopening of the global economy, which is the best and most likely path forward will constrain the pace of the recovery. While our current best case, consistent with the midpoint of our guidance, assumes sequential sales improvement in the second half of this year, that improvement will be measured. The high end of our guidance range implies mid- to high single-digit sequential sales growth in the third and fourth quarters, off an extreme low point in the second quarter. That also implies a second half year-over-year core sales decline in the mid to high teens. If we're wrong and growth rebounds faster than we expect, we will clearly over-deliver to these expectations. But we think it's important for us to set appropriate expectations internally and externally. Regardless in these challenging and highly uncertain times, the value of our consistent management cadence and disciplined execution will differentiate us from peers. As we have discussed at Investor Day events for years, we have a rigorous data-driven management cadence, a constant focus on continuous improvement, extreme accountability in all aspects of our businesses. These disciplines help us manage every aspect of our operations, but I'll spend the next few minutes talking about our cost actions and supply chain conditions. I mentioned earlier that our guidance assumes $100 million of gross realized cost savings in 2020. Rich and I, along with our senior -- other senior vice presidents have conducted thorough reviews with each of the businesses to discuss these cost actions. And we have direct line of sight to the $100 million with specifically identified actions. A few takeaways, I want you all to be aware of related to these actions. $100 million gross cost savings in 2020 is our current expectation based on our most recent forecast in thinking about the demand environment. And we will adjust from that baseline as the year progresses. We've been restructuring consistently across our businesses for nearly 20 years. You may recall that we already had several additional facility consolidations in progress well before COVID came to all of our attention, which we announced with our earnings in January 2018 and January 2020. At this time, we do not see the need or opportunity for future facility closures beyond those we have already identified. Throughout the reviews over the last few weeks, our teams have been aggressive in cutting costs. However, there have also been quite a few proposed cost actions which we rejected. We will cut costs as aggressively as appropriate, but I will not take actions that will jeopardize the long-term prospects or positioning of any of our businesses. All strategic growth initiatives are still funded, and we've reviewed all proposed reductions in force in great detail to ensure that we are protecting as many associates critical to our long-term success as possible, even if we are not able to fully utilize them in the near term. I am determined to exit this pandemic in a stronger position than our competitors and positioned to gain share as markets improve. From an operations perspective, all of our manufacturing facilities worldwide remain open as most of our manufacturing sites are deemed essential infrastructure-related businesses, and none are currently closed because of shelter in place or similar government directives. Operationally, in addition to demand adjustments and scheduling challenges related to COVID-19, we are addressing and planning for certain challenges related to our global supply chain that we expect to continue. We are tracking our supply chain situation at the individual purchase order level as well as by supplier, by country, by business and managing extremely effectively. To give you a sense of what we're seeing over the course of the last 2 weeks in our process valve business, the biggest source of delay is shifted to India, where a majority of purchase orders have some form of delay. In terms of dollar value, China is the region with the next largest amount of delays, but China has improved significantly, whereas we don't expect any relief in India until at least early May when the shutdowns may begin to abate. While we don't source a substantial amount of materials or components from Italy, it is a region where the greatest percentage of our outstanding purchase orders, while over 95%, are experiencing major delays. Mexico isn't bad yet with only a modest number of minor delays, but it does appear to be worsening as well. On the other extreme, we have no current supply chain issues at all from Korea, Australia and only minor delays in the U.S. That picture does vary from business-to-business, but the general trends are similar. Well, with that overview of our recent business performance and outlook, let me turn it over to Rich for some additional commentary on our financial strength and some further guidance details. -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Max, and good morning, everyone. First off, I'd like to make a few general comments related to our preparedness and the general compliance work environment. While everyone in the world is having to learn new ways of working, I feel we are ahead of others in what we saw coming in our preparation. Not just the numerous proactive steps we have taken to address the safety and well-being of our associates, but also the many actions required to ensure our systems and controls support remote office work, enabling the continued high-quality execution of all critical activities. To date, everything has run quite smoothly. We are maintaining our cadence of deliverables on all fronts and on time. Our global leaders have acted with compassion and decisiveness, and I am proud of our strong associate morale across the organization in the face of uncertainty. In addition, I want to thank our associates globally for their teamwork and camaraderie as well as -- as we continue to partner with our customers and their needs and challenges to work together from mutual solutions to what lies ahead. Crane will continue to be a strong and trusted partner that our customers can always rely on for critical engineered solutions. Our balance sheet strength and cash flow generation allow us to remain confident in managing through this downturn, continuing to drive our long-term strategic growth initiatives. We are managing all aspects of our cash flow carefully. Capital expenditures in the first quarter of 2020 were $8 million compared with $20 million last year. First quarter 2020 free cash flow was negative $43 million, consistent with our normal seasonality and compared to negative $120 million last year. Going forward, our revised expectation for capital expenditures in 2020 is approximately $45 million as most discretionary CapEx will be deferred. We are prioritizing spend toward investments that ensure we come out of this period stronger. As you probably saw from our recent 8-K filed on April 16, we closed on a new $343 million term loan. Proceeds from that term loan will be used to repay commercial paper, repay a $40 million euro portion of our revolving credit facility and for general corporate purposes. While it wasn't necessary, this action provides us with more financial flexibility in this time of uncertainty, improving our liquidity position considerably. As of April 16, 2020, we have approximately $811 million of liquidity, comprised of $549 million in cash and $262 million available under our revolving credit facility. As a reminder, we do not have any bond maturities before 2023. We believe that we have ample liquidity for the current environment, and we have no need or plans to draw on our revolving credit facility at this time. We expect that we will reduce leverage naturally over the course of 2020, leaving the year stronger, in a stronger financial position than we entered it. While this is certainly a difficult and unprecedented period, our key messages are the same as they have been for many years. We have a diverse portfolio of strong and resilient businesses. We have a solid balance sheet and a strong track record of free cash generation. We have a deep and experienced management team that has dealt with downturns before. And while we always focus on productivity and cost management, we will continue to invest for growth for the long term. With that said, let's get to your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today is coming from Nathan Jones from Stifel. -------------------------------------------------------------------------------- Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2] -------------------------------------------------------------------------------- I'd like to start just on the balance sheet leverage and what your plans for this cash are. I mean you're sitting with a large chunk of cash here. It looks very likely that you are going to produce positive net cash during the year. Maybe you can talk a little bit about the plans for potentially deploying that -- the cash that's sitting on the balance sheet, whether further repurchases are possible, whether you would look at M&A in the back half of the year, probably not over the next few months, I guess, unlikely sellers are going to be in the market. But just the way you're thinking about actually deploying that cash off the balance sheet over the next few quarters? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [3] -------------------------------------------------------------------------------- Yes, Nathan, so this is Rich. The decision to move ahead with that term loan was designed essentially as an insurance policy. Frankly, a very cheap insurance policy. So with the uncertainty that I saw in the business exiting March into April, I felt it was important to make sure that we had this increased liquidity available to us. From a planning perspective in terms of how we deploy it right now, it is to just maintain the liquidity over the coming, call it, quarter or 2, for sure. And certainly, we'll look at the pace of any recovery that we might see and then make decisions from that point forward. But at this point, it's meant as an insurance policy for us to move through this process of pretty significant uncertainty. -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [4] -------------------------------------------------------------------------------- And right now, in terms of the capital -- yes, I don't -- we don't see any M&A activity, most likely for the balance of the year. And until things -- we get more clarity on the future. -------------------------------------------------------------------------------- Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [5] -------------------------------------------------------------------------------- Okay. Fair enough. In terms of your own working capital, did you guys end with inventory at the end of the first quarter that was higher than you'd expected given the late drop off? Have you seen any change in receivables, collections, customer behavior there that gives you any concern about customers being able to pay their bills? Any color you can give us on what you think around working capital for the balance of the year? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [6] -------------------------------------------------------------------------------- Sure, Nathan. On the inventory side, definitely a little bit of growth there coming out of March. You can see that our backlog actually grew in a few of our businesses, notwithstanding some order degradation. And that's essentially a function of some supply chain constraints that we saw for product coming in that we needed to see in order to make shipments and so forth. So I would say it was on the edges, mainly in Aerospace and a couple of our Fluid Handling businesses. But honestly, really around the edges more than anything. From a receivables perspective, the teams are doing a phenomenal job. We haven't had any bad debt write-offs to date. We're tracking. And some of our businesses ahead of last year on a 3-month DSO basis, a couple of them were trailing a little bit. We are seeing some customers slow in payments. Frankly, we've had some customers ask us to change terms. And strategically, we're looking at those opportunities to potentially foster additional business and looking to leverage best we can while we help our customers. So no significant issues and -- to report so far, but it will be something clearly that with our cadence, we'll be managing closely moving forward. -------------------------------------------------------------------------------- Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7] -------------------------------------------------------------------------------- Do you think that's possibly -- I mean I guess it’s using your balance sheet a little bit to fund some customers here is an opportunity to gain market share? How do you think about the risk of doing that versus the potential to gain market share? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [8] -------------------------------------------------------------------------------- Yes, it's -- I would say, balanced assessment across the businesses. Some customers were going to be certainly those that are more strategic or very strategic to us, making a certain level of decisions and others perhaps not. We have to weigh everything in relation to whether or not this incremental risk on collection. And I think the key takeaway here is that we're evaluating every opportunity across the business to make sure that we're making the best decision. And we do have that balance sheet strength that you point out that enables us to do that. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question is coming from Matt Summerville from D.A. Davidson. -------------------------------------------------------------------------------- Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [10] -------------------------------------------------------------------------------- I wanted to ask just a question on the military side of Aerospace & Electronics, still looking for that business to grow. It sounds organically double digit. What are you seeing in the business that sort of underpins that outlook? And then also with respect to the currency, the physical currency business inside of payments, whether or not we could see some upside if either the U.S. government or international central banks start literally turning on the pre and prep? -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [11] -------------------------------------------------------------------------------- I'll start off, and Rich will chime in a bit. On the second question first on currency. We're executing well and slightly above plan. We see no major moves yet from both U.S. government or international. As we know, we have the -- annual [ICO] orders will be up again in September. We expect that to increase. I've given some -- we've given some previous expectations around that new range. We're still on track with that. Inventory is being burned down. So we think everything is to plan right now. I think it's a little too early to determine the impact of COVID-19 on currency. So stay tuned, and we'll hopefully give you some more color in the second quarter to see if there's any new opportunities. Military, we -- our teams have continued to execute on our product development road maps on power conversion, high power, microwave, and we're winning a number of those opportunities. So we're seeing some nice program wins on a wide range of programs. I don't know, Rich, if you'd add anything else as well. -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [12] -------------------------------------------------------------------------------- What I would say, Matt, is we have a pretty marquee set of customers in the defense area. The Lockheeds, the Raytheons, the Northrops of the world, and they're continuing to make some pretty significant investments. And as Max points out, our strategic growth initiatives, aligning with those types of customers, we're continuing to invest. We've been very successful over the last couple of years, and it's really the momentum of what we started to see or have been seeing over the last couple of years just carrying forward, continued radar application, great -- ground-based radar application, high-power applications and so forth. So it's really the momentum of what we started seeing over the last couple of years built on the investments strategically that we've been making in that business. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question is coming from Ken Herbert from Canaccord. (Operator Instructions) Our next question today is coming from Damian Harris (sic) [Damian Karas] from UBS. -------------------------------------------------------------------------------- Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [14] -------------------------------------------------------------------------------- Really appreciate all the color in kind of getting the fine details on the various segments and portions of the business. I wanted to first ask you quickly about the cost actions. If you could give us a little bit additional color. It seems like you basically are expecting to realize more or less all of that starting the second quarter. Just wondering how much of the cost actions you'd characterize as more permanent structural-type changes you're making versus more variable cost that would probably come back when we get into recovery mode. And I guess just thinking about the $100 million up to $115 million you've laid out, just what are you thinking in terms of future actions, what those could look like and when you might act -- take incremental actions? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [15] -------------------------------------------------------------------------------- So Damian, on the nature of the cost actions, what I would say is we started pretty quickly on all the easier things, cutting back on everything discretionary immediately. And have cascaded now into some decision making that's more difficult and where we're embarking on those actions now. In terms of how to characterize that $100 million, as I would look at this, a good third of it is maybe a little bit more, call it, 40% is fairly fixed over the next couple of years is the way I would think about that. And the balance being discretionary that we hope would come back, things like travel, as an example, trade show, sort of type of -- trade show participation, things like that. So that would be how I would characterize the $100 million. The teams have plans in place to the extent things worsen from where we sit today at, call it, the midpoint of our guidance or towards the higher end of that guidance range. So additional actions that are being planned across the business as, call it, plan B. And it would range from incremental more difficult decisions related to headcount, for example, as well as further discretionary. What I would say from a structure perspective, that we don't have significant -- any significant facility-related decisions that we're making at this time. We don't see that as in the cards today. -------------------------------------------------------------------------------- Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [16] -------------------------------------------------------------------------------- Okay. That's helpful. And then in the CPI business, and I guess with Cummins Allison in there as well now, would you maybe be able to give us a little bit additional perspective on the key end markets there, thinking about gaming and casinos. Obviously, in retail, you guys have been strategically focused on the self-checkout. And you alluded to in financial services, that's obviously not alluding the near-term headwinds, but maybe some opportunity there. Could you maybe just kind of walk through sort of the risks and the opportunities you're seeing right now in those key end markets for CPI? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [17] -------------------------------------------------------------------------------- Sure. So from a risk perspective or where we see things more challenging, clearly in gaming, casino end markets are, without question, significantly challenged. I'm sure you've read about all those challenges in that end space, that market space, that's being hit, I would say, the hardest in our business. We see actually retail as, call it, in the midterm and providing ample opportunity for us in this space. But right now, the level of CapEx and spending in that space has been curtailed pretty significantly. So we're seeing a pretty good hit there as well. But again, I think moving forward, we see that one presenting some good opportunities for us moving forward. Transportation end markets also investments being curtailed pretty significantly here in the short term, hoping that we would see that improve in the latter half of the year. And then if I move to financial services, as Max mentioned in his prepared remarks, an area that I think in the near term hit a little bit here, but I think probably one of the ones that will come out maybe a little bit faster towards the end of the year or in the fourth quarter. -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [18] -------------------------------------------------------------------------------- Damian, from -- in terms of the end markets, what we've been driving from a productivity standpoint to our customers as well as connected solutions has been winning across all solutions, honestly. So for retail gaming, financial services, transportation vending. In addition, keep in mind, we were driving new solutions, OEM solutions in Paypod, PayTower, safe -- smart safes, so we've been very, very aggressive, assertive. This is absolutely just a dislocation with all -- most of these end markets shut down for this quarter. And there's going to be a bit of a reset until things can come back. But we still feel very, very positive about our solutions, the solutions that we drive, our position in each end market. And when it comes back, we'll be leveraging it appropriately. I think it's going to be interesting even to see, as I mentioned, in terms of opportunities, look, it's very, very early. I think everyone is seeing new opportunities that may not have existed in the past of new ways of working or new implications. We were driving productivity. I think hygiene takes on a different plus here of cashiers not having to handle the cash directly. In vending, there's been a trend over the years of micro markets that in office -- more secure office settings have food products exposed out and you simply select and pay and grab what you want and go. In this environment now, each one of those are where people can grab and touch food and then potentially put it back. It's going to be interesting to see how the marketplace reacts. And is the security of a vending machine where people can't touch the food, does that become actually more attractive. So all these things, it's still early, early days in terms of the solutions and opportunities and how things play out. Again, this dramatic decline in CPI's end markets driven solely by COVID-19 as the economy opens, as people begin to get back to a more normalized level in a measured way as we have described, we're positioned to win, and we've got the solutions to do that, not only cash but also cashless, which is a major initiative for us, managed services, the new solutions I talked about, driving next-generation note recycling, coin recycling. So I hope that helps. -------------------------------------------------------------------------------- Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [19] -------------------------------------------------------------------------------- It does. It certainly will be interesting to see how things play out. Good luck guys. -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [20] -------------------------------------------------------------------------------- Thanks, Damian. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is coming from Brett Linzey from Vertical Research Partners. -------------------------------------------------------------------------------- Brett Logan Linzey, Vertical Research Partners, LLC - VP & Analyst [22] -------------------------------------------------------------------------------- Just wanted to come back to the deleverage rates on Slide 8 and 9. If I'm understanding it correctly, those are the incremental pre-cost takeout deleverage rates, which are in that 50% range, which does imply that the uncontrolled deleveraging is about 65% for the full year. I guess I would expect that for a few quarters, but those decrementals do seem very sharp for a full year basis. Maybe just a little color on what's volume decrementals versus mix versus some M&A impacts that might be in there? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [23] -------------------------------------------------------------------------------- You're referring to our new guidance versus our original guidance. So there wouldn't be relative M&A impacts. If you look at our gross margin profile across the business, we're going to be generally a pretty -- it will be a pretty high deleverage rate, Brett. So this is that 48%, 49%, now moving down to 30%, 34% post cost takeout. From our perspective, a deleverage rate of that magnitude, 30%, 34% with those -- with the 17% to 22% sales decline is noteworthy in particular, and maybe this is where you're headed to, as it relates to the mix impacts, for example, with commercial aerospace being hit pretty significantly here in 2020. So in addition, our Crane Payment Innovations business also being hit, which is a pretty significant profit contributor relative to, say, for example, Fluid Handling or Engineered Materials. So mix clearly a big factor. But even -- so if you digest that and still see a 30% to 34% deleverage rate, I would say that, that's actually pretty substantial, a very good performance. -------------------------------------------------------------------------------- Brett Logan Linzey, Vertical Research Partners, LLC - VP & Analyst [24] -------------------------------------------------------------------------------- Yes. And then just a second question on price, are you seeing any deflationary pressures show up in the business in April? And I guess, what are your expectations for gross price and price/cost in 2020 here? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [25] -------------------------------------------------------------------------------- Yes. During our forecast reviews, our expectations right now are to hold most of the price that we had planned coming into the year. We'll certainly balance that as we move through. But we're sticking to price best we can here moving through the forecast period. We might, of course, see some of the pressures on the material side where we get requests to make some changes. But net-net, I think we're going to hold our price cost profile as we plan coming into the year. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is coming from Caitlin Dullanty from Bank of America. -------------------------------------------------------------------------------- Caitlin MacKenzie Dullanty, BofA Merrill Lynch, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Maybe a quick -- maybe a broad one for me. Max, you mentioned at the beginning of the call that both you and Rich have seen and managed through downturns before. What lessons have you learned in the past that you are applying to the way you're managing the downturn today? -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [28] -------------------------------------------------------------------------------- Probably the number one is that this is unlike any other downturn, in addition to the actions that are needed to take is being extremely thoughtful and careful as we move forward. This is going to come back. I was hoping it was going to come back in more of a V-shape. As you've heard in our estimates for the second half, I think, it's going to be, unfortunately, a little more measured. We are not going to cut to levels that historically in another economic-driven downturn which has a longer period of recovery to quite the same levels. And so we're taking our time. We're being very thoughtful. We're being very methodical with our business units to review before we pull the trigger on any cost actions. So that's a very important one because I'm very much in tune with setting us up for success as we enter into the back half and into 2021. Rich, if you'd offer anything lessons learned. -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [29] -------------------------------------------------------------------------------- Yes. Having gone through this a few times here at Crane, lessons just around cadence and our capability to do what we do well. We executed very well under the '14, '15 Industrial Recession and then in The Global Recession in '08, '09. And you take away a number of different learnings, whether that's the nature of the types of costs that you're taking out and how significant you can actually see success in the -- what I would refer to as the nice but not necessary costs. And then again, just the cadence and measuring month-to-month on whether or not we're seeing what we should be seeing. So basic lessons, I would say, in addition to what Max said. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our next question is coming from Ken Herbert from Canaccord. -------------------------------------------------------------------------------- Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [31] -------------------------------------------------------------------------------- I just wanted to follow up on the mix question regarding the cost savings and the decremental margins. I mean it sounds like Aerospace, if you assume aftermarket is down sort of 65% for the remainder of the year, would be obviously pretty significant to margins. When you talk about that, call it, 15% to 20% sort of gap that the savings helps you on the decrementals relatively if you didn't do the cost savings, how much worse is Aerospace & Electronics in that? Or can you just provide any more detail around the mix relative to sort of the margin hits and the cost savings? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [32] -------------------------------------------------------------------------------- Yes. Ken, just so I'm clear, in terms of -- look, the mix element that's impacting the 48% and 49% without we would probably -- because of the significance of Aerospace & Electronics, we would probably see something like maybe 4 or 5 percentage points less than that, maybe. If that's getting to your question. Is that answering your question? -------------------------------------------------------------------------------- Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [33] -------------------------------------------------------------------------------- Yes. No, that's very helpful. I'm just trying to better understand the magnitude or the mix impact by some of the different segments. And I would imagine Aerospace & Electronics is probably from a decremental standpoint maybe one of the most impacted segments. Obviously, you mentioned -- you called out a few other business lines as well, but... -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [34] -------------------------------------------------------------------------------- That's correct. It's by far the most significant by far. -------------------------------------------------------------------------------- Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [35] -------------------------------------------------------------------------------- Okay. That's helpful. And to maybe turn the other way, what -- it's obviously very early, but when you think about on the Aerospace & Electronics business, as you look at the aftermarket and sort of -- it looks like down 65% and it's probably embedded in sort of the low end of your guidance range, what would you expect the first thing you would see that would maybe start to point to a turnaround there? I mean besides the obvious of just people flying a little bit more, but is there anything else that you would start to see in that business that might help to give you a little more confidence? Or what do you want to see that gives you a little more confidence that the back half could be a little better than the scenarios you've outlined? -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [36] -------------------------------------------------------------------------------- You know what, Ken, I think you -- your analytics on this are spot on. I just throw you a compliment because I read your research, and I think you're appropriately insightful on what's happening here. The planes that are being parked, the cycle we're going to go through on used serviceable equipment, I mean, there's just too many unknowns. There's too many unknowns. I've lived through this cycle a couple of times now on aftermarket. And I think we're in for a longer period for our product line to be significantly impacted. So it's not just the rates, it's not just recovery, I think it's going to be retirements, it's going to be watching the broader indicators, it's going to be what are they doing with those parked planes. But these are the things that are impacting our decision and guidance right now. Long term, everything is positive. I mean it's just predicting when and how and how fast. -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [37] -------------------------------------------------------------------------------- Just the other thing I'm trying to get to your question on a leading indicator. I mean to the extent that we start to see discretionary spending on behalf of corporates increase that travel, all these things that would impact passenger travel can. I mean I don't know what else the thoughts and views on vaccines and timing. It's going to be those kinds of things. Beyond that, the airlines need to make sure we have -- that they have the liquidity that's needed to continue. So I think to Max' point, you have all the right data, frankly, from our perspective and enjoy everything that you put out there. -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [38] -------------------------------------------------------------------------------- Feel free to share some leading indicators you'd like us to make sure we're looking at. -------------------------------------------------------------------------------- Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [39] -------------------------------------------------------------------------------- No, I appreciate the comment. I guess just one final question. As you look at your spares business within the aftermarket, what percentage of that business could be at risk or would potentially be at risk if we do see a lot of retirements like we expect? I mean I know obviously, service raw material doesn't displace everything, but how do you think about the piece of your business that would be impacted by that? -------------------------------------------------------------------------------- Richard A. Maue, Crane Co. - Senior VP & CFO [40] -------------------------------------------------------------------------------- Yes. I mean it would be the spares in relation to total commercial aftermarket. So that's maybe 40% would be the spares element, the unconditioned spares element. If you peel out R&O and M&U, that would be the most significant. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. -------------------------------------------------------------------------------- Max H. Mitchell, Crane Co. - President, CEO & Director [42] -------------------------------------------------------------------------------- Thank you. Thank you all for joining the call today. As I mentioned at Investor Day, Crane is now celebrating its 165th year anniversary in 2020. Over that time, Crane has seen 6 pandemics, a civil war, Great Depression, 2 World Wars and a myriad of other global challenges over the years. We will manage successfully through this most recent challenge as well. As the late Kobe Bryant said, "If I panic, everyone else panics." There's no panic at Crane. We are transparently and openly dealing with the challenge ahead as a united team. As I mentioned to our associates in my last video message, I hope that all listeners today and your extended families remain safe and healthy. May we all continue to work to be supportive of one another and our governments during this time. Let's continue to show thanks and appreciation to health care and emergency workers tirelessly assisting those in need as well as our essential services workers. And may you all continue to have patience, peace and strength as we weather this together and may bring us closer together as family members of the human race across this world. And to close in the words of R.T. Crane Resolution penned in 1855 that guides us to this day, "I'm resolved to conduct my business in the strictest honesty and fairness to avoid all deception and trickery, to deal fairly with both customers and competitors, to be liberal and just towards employees and to put my whole mind on the business." Thank you for your interest in Crane. Have a great day. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.