Crane Company (CR) Earnings Call Transcript & Summary

Okay. We'll get started with our next presentation and company. We're pleased to have Crane with us today. Crane is based in Stamford, Connecticut that manufactures and sells engineered industrial products in 3 segments: Aerospace & Electronics, Process Flow Technologies and Payment & Merchandising technologies. We're delighted to have with us today, Alex Alcala and Jason Feldman. Alex joined Crane in 2013 as President of Crane Pumps & Systems. He's served in that capacity until 2014 when he was promoted to President of Crane ChemPharma and Energy. In March of 2020, Alex was promoted to Senior Vice President of Crane Co. Alex is responsible for overseeing Crane Co.'s Process Flow Technologies businesses as well as the regional presidents in China, India, Middle East and Africa. Jason joined Crane as Director of Investor Relations in 2014 and was promoted to Vice President in 2019. Prior to Crane, Jason was an analyst at UBS, covering electric equipment and multi-industry. Crane has 59 million shares, trades around $100 for a $6 billion market cap and $360 million of net debt. Alex, I'll invite you up here for a short presentation, then we'll follow that with Q&A. Thanks, Alex.

Thank you. Thank you, Tony. Good morning. Briefly, I'll direct your attention to the forward-looking statements disclaimer, our handouts and the related content on our 10-K and SEC filings. This morning, I'll provide you with a brief overview of Crane and then some additional details about our Process Flow Technology business before I take questions. Crane has a rich history and heritage, it's started 165 years ago, with a distinct culture that is best captured by the R.T. Crane resolution that you see on this slide. This resolution is as important today as it has ever been and is the essence of Crane's culture based on ethics and integrity, central to everything we do. Today, we have 3 global platforms following last year's announcement agreement to sell our Engineered Materials segment. Our longest-standing segment is Process Flow Technologies, which I'll be focused on today. We also have a very strong position in our Aerospace & Electronics segment with sophisticated solutions throughout the aircraft for commercial and defense applications and a Payment & Merchandising technologies were a major player in the unattended payment space, automating cash and cashless transactions and providing back notes and anti-counterfeit security products. Some of you may recall that this business used to be called Fluid Handling, which is a name that's from a legacy era. Last May, we changed the name to Process Flow Technologies, which better conveys the key strengths and core competence of our business, providing proprietary and highly engineered Process Flow Technology solutions. We remain focused on the chemical, petrochemical, pharmaceutical, water and wastewater and general industrial markets, which include many of the harshest and more sensitive environments. And our products are used in applications with extremely high cost of failure. Both organic and inorganic growth efforts continue to be concentrated in these areas. Consistent with that focus, my message today is about our growing momentum, driving growth and share gains through product innovation and commercial excellence as well as our strong execution in a difficult environment and our confidence in our path to consistent margin improvement. In the context of the significant market challenges we faced during both 2020 and 2021, our business performance was excellent. Last year, in 2021, we delivered 14% core sales growth, reflecting the market recovery following COVID related to the market pressure in 2020 as well as future share gains. We also delivered very strong margin performance, bringing margins back into the mid-teens. Looking forward to 2022, we expect roughly 3% core sales growth, largely offset by foreign exchange. We believe demand supports potentially higher growth, but the supply chain is likely to be constrained. Our view on demand is supported by our core backlog of 16% compared to last year and now at a record high level. All great leading indicators suggesting that we will see continued strong growth into 2022 and 2023, led by our process business, where overall order rates have already recovered to slightly above 2019 levels. This strength is being led by the chemical, pharmaceutical and general industrial end markets. Full year margin should increase to approximately 15.5%. Our power record margin for this segment was 15% in 2013 when our sales were approximately $80 million higher than our guidance for next year. This reflects our consistent focus on driving productivity and more importantly, the positive margin benefits from several years of new product development and commercialization. Our new product development sales does more than drive top line growth. Our new products have compelling value propositions that command very attractive margin profiles. I'm going to spend the next few minutes discussing our approach to growth and our goal of growing at twice the underlying market rate. And I look forward to providing additional details at our upcoming Investor Day event on March 30. Crane has a long and rich history of innovation. However, the pace of innovation is accelerating, and this is having a growing positive momentum on the business. The percentage of sales from new products launched over the last 3 years has more than doubled over the last few years, and it's expected to increase further in the years ahead. But it's not just a number of product introductions that is increasing, we continue to make substantial improvements in our speed to launch. What is the key to our success? First, it's having a deep understanding of the customers' toughest problems and then developing an innovative and winning solution. Second, it's having the right culture to invest and make the bets even during the tough market conditions. And lastly, it's about executing with a disciplined cadence and accountability. We call this thinking big, being bold and acting fast at Crane. Our innovation and new product development is very valuable to our customer, but it's also transforming our business as our new product development is focused on the markets with the highest long-term growth rates and secular trends. As we continue to win with new product, it will drive higher organic growth rates for us as well as higher margins. This slide highlights just a few of our recent product innovations. On the left, our new tough seat metal seated ball valve launched last year and gives us access to $400 million market, a new market for us. Our seating technology extends to season life by 50% compared to the competition, another breakthrough innovation that adds value to our customers. In the middle of the slide, you'll see our next generation sleeved plug valve, the L-torque series. Our new solution reduces the torque requirement by more than 50% compared to the competition, creating substantial value for our customers who can then use smaller and cheaper actuation packages. This is a true game changer in this space. Finally, on this slide, in the pharmaceutical high-purity space, we're expanding our leading sensing and automation portfolio, which is designed to substantially reduce maintenance and installation costs. These new products expand our pharmaceutical addressable market by $100 million. These are just a few examples among the numerous new product innovations in our pipeline that we expect to collectively deliver $150 million of incremental sales by 2025. Moving to wastewater processing. The demand for our products is driven by the ongoing challenges municipality see from the increasing use of solids flushed into the waste stream. We are focused on the $400 million market for centrifugal pumps used in North American wastewater applications. Our chopper pump introduced in 2018 reduces clogging and therefore, maintenance calls by 75%. This product is off to a great start and with a strong growth trajectory. You also see on the right side of the slide, our new high-efficiency non-clog pump. This product also launched last year, and we believe that will be the most efficient pump in the market. The key technology breakthrough is a patent-pending cooling system that allows the motor to operate far less resistance thus improving efficiency. These innovative pumping solutions -- platforms will deliver $30 million of incremental sales by 2025. To complement our strong product innovation, we continue to drive commercial excellence by leveraging our Crane business system, improving fund and innovation and arming our sales teams with the new generation of digital sales tools to improve the efficiency and effectiveness. We also continue to pursue localization, ensuring we have the right footprint to best serve our customers in every geography. These are just a few examples that we are driving across the business, truly excellent enablers for growth -- we have a very long history of successful acquisitions in Process Flow Technologies. And inorganic growth continues to be a strong priority for us. We are focused both on bolt-on consolidation opportunities as well as new platforms or adjacencies in the fluid-handling markets. We'll remain disciplined, but I'm optimistic about our ability to find additional inorganic opportunities across our targeted areas in the years ahead. On profitability and margins, our track record speaks for itself. Our strong momentum on share gains and operational improvements as well as our recent repositioning actions make us confident in our ability to deliver further margin expansion in the years ahead. That margin growth will be driven by volume leverage from share gains as well as market growth, mix benefits from our new product introductions and, of course, continued operational improvement from our Crane business system approach. Although the last 2 years have been challenging from COVID to supply chain challenges and inflation, we continue to invest in product innovation and other initiatives. We are winning in the marketplace, and we have increasing momentum with share gains. We have a strong focus on inorganic growth opportunities and see Process Flow Technologies as a strong platform for acquisitions. Lastly, given our share gain momentum and margin expansion actions, we are confident in our path to continued margin improvement in the years ahead. Thank you for your time. Look forward to your questions.

Thank you, Alex. That was a great overview. And again, Jason, thanks for being here today. We appreciate it. You're talking about backlog a little bit. Maybe you could tell us what you're seeing in terms of longer lead time project activity, namely in chemical, refining, pet chem end markets? And could you remind us of what your backlog is in that segment for '22?

Yes. Thank you, Tony. Yes, you may recall that our oil and gas refinery exposure is quite small. So I'll comment more on the chemical, petrochemical. Reminder, we also have a lot of exposure on wastewater industrial, but chemical is a long cycle. So our backlog is very strong at record levels higher than 2019, up 16% versus last year. We saw project activity increase in the chemical, petrochemical space through the balance of last year progressively as underlying demand for our chemical customers is very strong, right? This is driven by durable goods, construction activity packaging. So customers are working to debottleneck to have capacity improvements. So we expect that to continue through this year. So our backlog will finish somewhat modestly higher than our current record levels position us strongly for 2023.

That sounds pretty good. What would you look to in terms of acquisitions potentially in the process flow business, either as bolt-ons or adjacencies or maybe something more transformational?

Yes. So -- and Process Flow Technologies is an important segment for inorganic growth for Crane. We're quite active primarily in the bolt-on and adjacencies, focused on the chemical, petrochemical, pharma, septic wastewater spaces, that's where we'd like to see more activity. There's certainly a lot of targets. We don't see a transformational deal necessarily in the very short term, but always open for that. I can tell you that we were quite active last year. We were quite aggressive with some valuation maintaining our discipline, still making sure we cover with synergies. We're not successful with that, but I am optimistic that some opportunities will come up in 2022.

You've done a great job improving the process flow segment margins. What's your long-term margin target? And when would you expect to achieve that? And are there any other levers that you may be able to pull to improve those margins in the near term?

Yes. Thank you. So as you saw, we're back to mid-teen margins. We're going to break our record this year on margins. This is driven through our growth through new accretive new products that give us the tailwind, all the share gains that we're driving. Some of the repositioning that we pulled ahead into next year, we'll see some benefits, small benefits in 2022 and also our continued operational improvements to CBS. So we're focused on driving that average of 100 basis points per year of margin, which we've done over the last several years. And then as you know, our process valve -- long process cycle business has not fully recovered. So considering we still see ourselves as mid-cycle, we expect to work our way up to the high teens and margins here over the next several years.

What product lines across your process valves, commercial valves and other products are most favorably exposed to increased infrastructure spending in the U.S., including more pipeline construction activities as well as water and wastewater system improvements.

Yes. So on the infrastructure investments, it's quite early to tell, usually take more time to roll out than people anticipate. But for us, I think there's expected investment in water, wastewater, where we have a very strong position in North America, especially on the wastewater side. So we'll see some benefits there indirectly. But currently, we're not thinking it as a big, big windfall or influx in demand in general for our businesses. But in that area, we expect to see some benefits for sure.

Your process flow business has a very well diversified geographic profile with over 50% of your sales coming from outside of North America. What's your outlook for emerging markets? And maybe we can talk a little bit about the dynamics going on currently in Europe that you operate? And what proportion of total segment sales might you look for in these areas become over time?

Yes. Yes, quite interesting question right now with what's happening. But the way we think about it is North America is an important market, and it's growing in chemical, petrochemical, certainly wastewater. So long term, it will continue to have a very strong position for us. When you think about emerging regions like China, Middle East, India, in some cases, some areas of Asia Pac. That's less than 20% today of our product portfolio is certainly growing, definitely in the chemical, petrochemical side, but with Americas continuing to be advantageous for feedstock and potentially even more with what's going on in Europe right now. We don't expect major geographical mix shifts long term with all these key markets moving in the right direction.

Could you maybe discuss the seasonality of your business? And what are you -- are you seeing any differences in seasonality this year due to order rates?

Yes. So typically, and I suppose we'd see an uptick in the second quarter, third quarter historically, see that uptick is now mainly due to the construction activity. But that last year changed a little bit, and we expect that to change this year also as there's constraints, right? So they're strong backlogs and strong demand. But I think some of that seasonality will be muted this year given it's more driven by the constraints and ability to move projects forward.

Maybe just close in the next couple of questions, but what are you seeing with input costs? And how is that affecting your pricing and margins?

So everybody knows what happened last year, our expectation is for inflation and supply chain constraints to continue this year. So our guidance doesn't assume anything substantially changing. As you know, we saw it early, we acted early, and we were able to get ahead of it on pricing and offset these input costs successfully. We expect to continue to be doing that in 2022. And you can see it hasn't had really a significant impact to our margins. So we're quite pleased to overhang on that so far.

Maybe you talk a little bit about your supply chain and your sub-suppliers. And how is that holding up overall? And how do you see that playing out over the next few years?

So we continue to see supply chain constraints just like everybody else. I think it started with suppliers impacted and now it's been converted to logistics really as a primary constraint. Of course, it changes from day to day and there could be cast steel, some of there could be resins and so forth. But we expect this to continue. We think we've managed it reasonably well, primarily because we expect the issues not to be resolved and we plan for them and our teams to take that into account in their execution. And that's why you haven't seen from Crane really us calling out that as a reason for any misses, right? Because I think we're planning very well.

Maybe back to M&A, Max has made comments in the past that strategics might want to get rid of some noncore assets. Could you maybe give us some examples of those? Are there large business that I know you commented earlier, but are there any large businesses that look interesting? And what are current sellers' expectations that you're seeing?

Jason?

Yes. So that comment applies to both process flow, but also the aerospace business. And particularly in aerospace, we've been seeing both primarily defense assets, but some pure commercial aerospace assets as well from the larger players in that space who have been streamlining their portfolios, getting rid of what for them are unwanted product lines. We've seen that to a degree in the process flow space as well, maybe not quite as much as in Aerospace & Electronics. I'm not going to comment on specific targets. There certainly are some that we're monitoring. But there's always a question when a strategic wants to get rid of an asset? Is it a bad asset or just bad fit? And we don't think we've seen both, right? But there are some cases where there actually are pretty good assets where we might be a substantially more advantaged buyer, given overlapping and complementary geographic footprint, opportunities for consolidation, technology might be able to be leveraged more easily by us. And sometimes, it's changing exposure, right? Some companies have been trying to get more out of certain types of defense or in some cases, out of certain parts of fluid, we're reviewing the businesses somewhat differently. So we continue to monitor and in trip to sell, our expectation is very high, right? And so while we've been about as active in M&A work over the past 2 years at any point since I've been at Crane in terms of deal flow, a number of things that we're looking at. We haven't gotten anything done over the past 18, 24 months and no regrets, frankly, because when we see where some of these assets are trading, after the due diligence that we've done, they were the right to sit in painful, right? But it was -- they were the right decisions. The last 2 deals we did have been phenomenal, Cummins Allison and -- I&S and Allison business, both on immediately pre-COVID and both -- I mean, Cummins Allison has blown through all of our projections despite COVID. And I&S has performed very, very solidly as well. So we're very careful, disciplined, going to try to get things done, but we're not going to do anything that doesn't make sense financially.

Maybe on that line, Jason, in the past, Max has talked about prioritization of where focusing your capital allocation, could you sort of remind us going forward, is process flow the priority? Or is it one of the priorities? Or maybe you could stratify that?

Process flow is absolutely a priority, right. I mean the statement -- not the only priority, Aerospace & Electronics, I would put on an equal footing, right? I mean I think that when we think about those 2, we would be for the right deal, equally happy to deploy capital into either of them. Payment & Merchandising Technologies, Max has said publicly, M&A there is on hold. And it's partly a portfolio balance question, but just as important, they've got a lot going on and a huge number of organic growth initiatives. Definitely other businesses has done too, but in particular, the opportunities that came from Cummins Allison, which gave us kind of back office equipment as well as front office with a service arm being able to take that service arm and extend it across -- so Cummins Allison sold equipment into the back office businesses, the same exact customers in most cases where we had legacy equipment or original equipment in the front office. They were only servicing their equipment in the back. So for us to be able to reconfigure and take this underutilized service network and be a one-stop service provider for all of our customers, also enables us to do things for connectivity, remote diagnostics, things like that, it is just potentially really exciting transformational change, right? And so that's kind of where the focus has been. And we don't want them getting distracted, right? It is so many opportunities. And then on the currency side, authentication has been our primary area where we're trying to organically -- and again, there may be deals at some point. But for now, we see organic runway to build this into a $100-plus million business from a couple of million dollars today. And so when we talk about prioritization, it's for inorganic capital, but I don't want to make it in any way seem that we're not driving growth and focus from a prioritization perspective across the entirety of the portfolio. Last comment. I'm sorry, I've not stopped, is -- and don't forget, we did announce a $300 million share repurchase. And there was a lot of debate and whatnot, but the reality is that the M&A market where it is and where our stock is trading where it was as much as we would have liked to have gotten those deals done, the math and the economics just told us it was the right thing to do given the valuations.

Let me hear slightly on it. Jason and Alex, first, Alex, can you just look at your suppliers coming data of goods from China and the notion of reshoring, onshoring and any particular chips that go into your product? And then from Jason, or your point of view, can you just echo the comments that you made on your earnings press release that you're going to reinforce on the March 30 Analyst Day, is it just about the envelope of which Crane is working. In other words, $300 million buyback. So the 59 million shares are being reduced at the current level by several million and so on. And any estimates that will be provided at that time.

Yes. So first one on supply chain. So one of the primary sources from suppliers are steel, cast steel and stainless steel for our pumps for valves and so forth. So that's the primary supply chain out of China, I think, is well balanced with India as well, some in Mexico, less so in Europe and the U.S. So it's more about balancing from the various regions more than bringing into the United States or something similar just from an availability of suppliers to deliver. So we think we're well balanced and we continue to optimize that. On the chip side, for my segment, in particular, there is very little impact. So we're fortunate from that standpoint to not have that constraint. On the envelope, I'll let you...

Yes. And so yes, we'll have an update on March 30. The repurchases, we announced it in October, we did about $100 million of the $300 million in the fourth quarter before the end of the year, give or take $1 million or so. And I think we said that we expect to be completed no later than the second quarter of this year with the $300 million. I wish I could answer more directly, but we continue to evaluate what's the appropriate step after that. And today's events maybe could impact how we think about that from a macro perspective. We have to see what's going on in the M&A environment. But what I'd say is as excited as we are about the potential to do acquisitions from a valuation perspective, if our stock continues to trade where it is relative to even synergized multiples a couple of years out, it's going to be challenging to think about getting those deals done. And Rich and Max are both very focused on making sure that we don't have a lazy balance sheet, right? And we're in a very strong capital position. And we don't want leverage to come down to an inefficient level. And so we'll continue to assess and do the right thing based on the math and the returns.

You gave an estimate for the year range at...

For shares?

Not shares, just on overall EPS.

Yes. It was $7 to $7.20, I believe. No, I'm sorry, $7 to $7.40. It was a $7.20 mid, I apologize. $7.20 midpoint, it was $7, $7.40.

Well, gentlemen, thank you for being here today. We at Gabelli appreciate it very much and look forward to having you back next year. Thank you, guys.

Thank you. It's great to be here live. Thank you. That is why I came here.