Crane's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Crane Co. (CR)

Q1 2012 Earnings Call

April 24, 2012 10:00 AM ET

Executives

Richard Koch – Director, IR

Eric Fast – President and CEO

Andrew Krawitt – CFO

Analysts

James Banks – Citigroup

Robert Barry – UBS

Matt Summerville – KeyBanc

Presentation

Operator

Good afternoon, and welcome to Crane’s First Quarter Earning Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Director of Investor Relations, Mr. Richard Koch. Please go ahead, sir.

Richard Koch

Thank you, operator. Good morning, everyone. Welcome to Crane’s first quarter 2012 earnings release conference call. I am Dick Koch, Director of Investor Relations. On our call we have Eric Fast, our President and CEO; and Andrew Krawitt, our Principal Financial Officer. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just as reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of the 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 in the table at the end of your press release, which is available on our website at www.craneco.com in the Investor Relations section.

Now, let me turn the call over to Eric.

Eric Fast

Thank you, Dick. Crane is off to a good start in 2012 with improved first quarter results driven by our Aerospace & Electronics and Fluid Handling segment. Sales grew 8% in the quarter with core sales also up 8%. Operating margin rose slightly to 12.1% from 11.9% a year ago, and earnings per share increased 8% to $0.88, a first quarter record.

Excluding a $0.05 gain in the first quarter of 2011 related to the sale of a building and divestiture of a small product lines, EPS increased approximately 15%. Demand is robust and our late long cycle businesses with Aerospace and Fluid Handling and our backlog has increased accordingly.

Notwithstanding, a relatively minor patent litigation settlement and merchandising systems and some efficiencies in certain Fluid Handling European operations, we remain optimistic about our 2012 prospects and are on track to deliver results consistent with the full year guidance that we provided in February. As you know, we don’t provide quarterly guidance.

Our Aerospace Group is benefiting from increased OEM build rates and continued growth in passenger miles flown. Fluid Handling is positioned to benefit from its exposure to late cycle end markets, particularly in Energy and ChemPharma as evidenced by strong orders in growing backlog during the first quarter. As we indicated in February, our outlook is relatively stable for Electronics, Engineer Materials, and Merchandising Systems businesses.

We continue to make investments to drive profitable growth. Our initiative is to increase sales on marketing sophistication and formalize sales processes progressing well. We remain focused on international opportunities across the company, in part by leveraging our expanded Fluid Handling infrastructure. We have implemented a rigorous approach for new product development to facilitate successful product launches.

Importantly, we are focused on driving sales to our existing facilities, so that we can leverage our fixed cost base. In order to fund these initiatives, Crane has a productivity framework that is designed to make room before we invest. There has long been a cost conscious culture at Crane, and we are effectively transforming this into a productivity culture in order to drive cost reduction every year while improving operating efficiencies. This enables us to make investments we need to drive growth while at the same time allowing for margin expansion.

Andrew will now take you through the businesses and provide some additional financial information.

Andrew Krawitt

Thank you, Eric. I’ll turn now to segment comments, which compare the first quarter of 2012 to 2011.

Aerospace and electronics sales increased 8% to $175 million, while operating profit increased 12% to $38 million. Operating margins improved to 21.7% from 21% in the prior year. Sales in the aerospace group increased $10 million or 10% to $109 million. OEM revenue grew 14% with increases to both commercial and military customers. We saw strong sales growth to business jet OEMs and large aircraft manufacturers while sales to regional aircraft manufacturers grew only slightly.

After-market sales increased 6%, primarily driven by higher commercial repair and overhaul business. The OEM after-market mix was 61% to 39% in the first quarter of 2012 compared to a 59% to 41% mix in the first quarter of 2011.

Operating profit in the aerospace group increased by approximately $5 million reflecting good leverage of the higher sales. Market conditions in the aerospace industry remain positive despite high fuel prices. The international air transport association recently projected that global passenger demand will grow 4% in 2012, while cargo demand is expected to turn up slightly in the second half. We expect to benefit from higher OEM build rates, increased sales from new products as outlined on investor day, and an expanded global sales force.

The electronics group sales increased $3 million or 5% to $66 million. Electronics operating profit decreased approximately $1 million as operating margin returned to a more normal mid-teens level from a higher margin in the prior year due to product mix. In 2012, we continued to forecast reasonably stable results from the electronics group with growth in our commercial business expected to offset a slight decline in defense-related sales.

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