Crane's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Crane Co. (CR)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

Richard Koch – Director, Investor Relations

Eric Fast – President and Chief Executive Officer

Andrew Krawitt – Vice President, Treasurer and Principal Financial Officer

Analysts

Matt McConnell – Citi

Robert Barry – UBS

Matt Summerville – KeyBanc Capital Markets

Ronald Epstein – America/Merrill Lynch

Presentation

Operator

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

Richard Koch

Thank you, operator. Good morning, everyone. Welcome to Crane’s second quarter 2012 earnings release conference call. I am Dick Koch, Director of Investor Relations. On our call this morning 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 a 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 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 comparable GAAP numbers in the table at the end of our 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 reported record earnings per share in the second quarter. On core sales growth of 6%, we delivered earnings per share of $0.96, up 13% versus last year excluding the divestiture gains and repositioning charges. Operating margin, excluding the repositioning charges, increased to 12.8% versus 12.5% a year ago. Taking into account the absence of earnings for the balance of 2012 related to the divestitures we have reduced the midpoint of our 2012 earnings per share guidance range by $0.05.

Reflecting our continued confidence in the business, we are increasing the quarterly dividend by 8%. As part of our strategy to trim smaller non-core assets, we divested Azonix business from the Controls group, as well as a valve service center within Fluid Handling. Although Azonix is a small, very successful company with impressive niche technology, we were unable to leverage the business with other parts of Crane.

The sale of the valve service center is the third of three service centers that we previously owned. We sold the other two in the 2007, 2008 timeframe. These divestitures represent modest trimming of small disparate parts of the company that did not fit into our strategic vision. We are comfortable with our current portfolio of businesses, and have no plans for further divestitures at this time.

The repositioning actions that we’re announcing relate to the transfer of certain manufacturing operations from higher cost to lower cost company facilities and other staff reduction actions, principally in response to weak European economic condition. It is important to understand that we are in various stages of implementing these changes as European employment rules and protocols are complex and time consuming.

Thoughtful interaction with workers counsels is required, as well as appropriate communications to our own people. The repositioning actions are primarily focused on expanding operating margins in our European Fluid Handling business, as leverage on incremental sales in the first half has not [read] through as expected, and economic concerns in Europe will likely continue.

We have targeted opportunities in our energy business, primarily in our manufacturing operations at Krombach, Germany, as well as other European sites within Fluid Handling. While we have consistently delivered fluid handling margins in the 13% range, executing on these important actions will accelerate continued improvement. We expect the benefit of these actions to impact our results beginning in 2013.

Krombach is a highly engineered provider of specialized double and triple offset butterfly valve, as well as metal and soft-seated ball valves. Our manufacturing operation at Krombach in Kreuztal, Germany, with a highly skilled workforce continues to be a segment strategic platform to drive profitable growth. As we previously discussed, the integration of the Krombach operations presented challenges typically associated with a long-standing privately run business in Germany.

While we have completed a number of actions, including upgrading the information systems, consolidating product lines from another German facility to improve plant utilization and various other operational improvements, all of which have taken longer than planned, we are taking targeted actions to drive significant cost improvements as we close 2012.

Specifically we are transferring certain Krombach product lines to lower cost Crane facilities, dedicating additional Crane resources to drive both commercial and operational improvement and reducing headcount at the primary manufacturing facility. In addition to the European repositioning actions, earlier in the year we initiated an internal merger between our ChemPharma and energy groups. This merger will further streamline the organization and provide better leverage of a wider pool of resources to help drive these important actions. It is also important to recognize that excluding our energy business, we are very pleased with the balance of the Fluid Handling segment, where operating margins exceeded 15% in the second quarter.

In April we said that we expected full-year Fluid Handling margins to be at 14%, although it would be tougher to achieve given first-quarter results. Excluding special items, we have revised our full year fluid handling operating margin guidance to 3.5% as the repositioning 12.6% margin in the second quarter was slightly below our expectations, and our repositioning programs while moving forward are taking longer than anticipated to work through principally due to German labor protocols.

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