Crane Company (CR) Earnings Call Transcript & Summary

Our next presenter is Crane. Crane's diversified manufacturer of engineered products, including brake control systems, electronics pumps, valves and regulators. We are delighted to have Rich Maue, CFO of Crane; and John Higgs, President of Aerospace and Electronics with us today as well as Jason Feldman, Senior Vice President of IR Tax and Treasury; and also sitting upfront Allison Poliniak, new Vice President of Investor Relations. Rich is a 17-year veteran of Crane. John Higgs is a 35-year veteran of Crane if I got it correctly. Shares recently closed $151 for an $8.8 billion market value, an $8.9 billion enterprise value. I'll turn the floor over to Rich and Jay to get us going.

Good morning. Thank you, Justin. I appreciate everybody's interest today. Briefly, so I'll go through some prepared remarks here, and then we'll kick it over to Q&A. Jay and I'll actually come up as well and spend a little bit more time on aerospace. So we are specifically focused on aerospace and electronics today. I encourage you all to review our May 14 Investor Day materials. We really do put together a pretty detailed overview of the business for those of you who don't know Crane very well, but we're going to give you an overview here anyway, but strongly encourage you to take a look at the May 14 Investor Day materials, which also covers our process flow technologies business. What's that? We have a clicker? Or somebody can advance it for me? We can all wish it. So let's see. Here we go. So who is Crane? So we're a $2.3 billion global provider of highly engineered products and solutions, differentiated technology is how we think of ourselves, highly respected brands. The brands are super important, leadership positions in all the markets where we play. Mission critical products, another way we think of ourselves, high cost of failure. These are the areas and applications where we participate significant recurring sales, about 40% of total revenue coming from the aftermarket. Our 2 strategic growth platforms, as you can see on the pie graph are process flow technology is serving chemical, pharmaceutical, water wastewater, cryogenic, industrial end markets and aerospace, which provides proprietary sole-source components for aerospace, defense and space applications. And again, Jay is going to cover that in detail. We're well positioned for continued accelerating growth in large, attractive end markets, favorable secular trends, continued investment in new products as a means of getting there and driving commercial excellence. And we have upside absolutely from capital deployment with a pristine balance sheet today. Building on the organic growth theme, we are confident in the blended 4% to 6%, long-term core organic sales growth rate across the cycle. Higher at Aerospace & Electronics with visibility to 7% to 9% CAGR for at least the next decade and a solid 3% to 5% growth rate through the cycle at process flow technologies where the business continues to structurally shift its exposure to higher growth end markets. That growth paired with our consistent execution should deliver operating profit growth at about twice the rate of our sales growth. Another critical part of our value creation story is the Crane Business System or CBS differentiated and rigorous with now more than 2 decades of work to fully ingrain a culture of continuous improvement into all aspects of our business from back office to the floor, front end, you name it. Along with a history of cadence and disciplined execution across everything that we do. We think it's an increasingly important facet as well as it relates to our commercial initiatives on the front end. We have a goal to double the size of our business over the next 5 years through a combination of core growth and deploying our capital to M&A. Of course, we will remain disciplined and only complete deals that meet our strategic and financial criteria but we see a path to substantial top line growth period with significant margin improvement in the coming years. And that goal, twice our current size will give us even more strategic optionality in the future. This slide shows our capital structure today, which again, provides us that flexibility for capital deployment. We have a net debt today -- net debt-to-EBITDA today of 0.3x, well below our 2x to 3x targeted range. So a very strong and flexible balance sheet, which will support a capital allocation strategy that we believe will create substantial value. We believe that if you look out towards 2028, we'll have generated some place between $3 billion and $4 billion of capital available for acquisitions or share repurchases. Focus today is clearly on M&A. Given the fragmentation in our end markets, along with our M&A process that we feel is pretty rigorous, we are confident in our ability to add substantial value through capital deployment. So before I turn it over to Jay to discuss our Aerospace & Electronics business, I want to reiterate the basic investment thesis, which is fairly straightforward. We have a very global $2.3 billion business today, competing in attractive end markets. With proprietary and differentiated technology, and we are positioned to drive solid mid-single-digit core sales growth that with the operating leverage should generate double-digit EPS growth before upside from capital deployment related to the capacity that we have. Those metrics and goals are paired with an experienced management team that has substantial tenure at Crane as Justin mentioned and a long history of delivering consistently differentiated execution. So that's the thesis. I'll turn it over to Jay, who will give an aerospace and defense overview. Thanks, Jay.

All right. Good morning, everyone. Thank you so much for having us here again today. Again, I'm the President for Crane Aerospace & Electronics. I've been with Crane 35 years, 3 years now in the President role, and I'm going to spend the next few minutes here just kind of reviewing what's going on with our business. So within our business, we provide market link solutions, which will deliver $920 million in sales this year, with approximately 22% adjusted operating margin. Looking forward, we see opportunity for substantial upside to these numbers. And given the ramp-up of the numerous existing platform positions and the new program wins we have secured over the past few years. This is bolstered by strong aftermarket performance given the recent rate increase channels in the engine and airframe OEMs, which serves to elongate the aftermarket cycle on existing aircraft. Over 90% of this business is sole sourced. 100% of our products are based on proprietary technology. We have virtually no build to print this. Our sales split is roughly 60% commercial, 40% military, with 30% of our sales coming from the aftermarket. Our brands have a reputation and technology built over decades. And in many cases, we invented the core technology that is now the industry standard. These are our 5 primary solution sets, each of which focuses on critical components sold to either Tier 1 suppliers or direct to OEMs. We are extremely strong in electrical power management over a wide spectrum of power conversion requirements. The growth outlook for these businesses is exceptional given secular trends towards electrification across both commercial and military applications. Our sensing and control business provides enhanced wired and wireless sensing, which is being used in increasing quantities in the newer applications with a focus on proximity, pressure and fluid flow sensing. Fluid Management has the most sophisticated and capable lubrication pumps and fuel flow transmitters in the industry as well as a growing thermal management business that can be tightly integrated with our power conversion solutions to manage the increasingly complex cooling needs of high-power electrical requirements. In brake control, we invented anti-skid for aircraft and there has never been a single Boeing commercial aircraft without our antiskid brake control system on it, along with numerous other platforms from other OEMs. In Signal Processing, which is our microwave business, we provide unique solutions for the most complex missile, radar and satellite applications. We are highly confident in the 7% to 9% sales CAGR for the next decade given our position on virtually all current commercial and military aircraft platforms as well as new content wins, which will ramp up over the next several years and our positioning on next-gen demonstrator programs. This year and next, growth will be driven largely by continued post-COVID commercial OEM recovery and rebounding aftermarket sales. In the middle of the decade, we have numerous defense programs reaching full rate production, where historically, we've not had any content such as power systems for numerous AESA radar programs, each of which has a lifetime value in hundreds of millions of dollars. And as we get to the latter part of the decade, we have a large portfolio of prototypes and demonstrator programs that we're working on with our customers. A great long-term growth outlook in a business with strong operating leverage approaching 40% providing significant margin upside in the years ahead. Our base commercial business is built around strong positions on high-volume programs. We have a strong content position on virtually every major aircraft platform from Boeing to Airbus, COMAC and Embraer. We have a particularly heavy level of content on single-aisle aircraft that represent over 70% of aircraft produced on an annual basis. Our position ensures that our commercial business will benefit as aircraft production continues to increase with each new plane generating revenue today and growing our installed base for a long tail of aftermarket activity over the next few decades. Our backlog is equally robust in the defense and space markets. The aircraft here by volume is currently dominated by the F-35 Joint Strike Fighter. We also provide products on several legacy military programs, which are experiencing a resurgence in recent years. In the space market, we're extremely excited to provide power conversion on the SDA Tranche 1 as well as both passive and active integrated microwave assemblies for low earth orbit satellites and telecommunication. In short, like the commercial aircraft market, we have substantial content on virtually every single major military platform and a growing presence on new space programs. With this large installed base on key military and commercial platforms comes a growing aftermarket revenue stream. This is both spares and repairs, which support high-use narrow-body and [indiscernible] commercial platforms as well as the continued need to keep legacy military platforms in service longer through spares, repairs, modernization and upgrade. Importantly, our long-term growth strategies are clearly aligned to key market trends, including carbon neutral aviation with the next generation of commercial aircraft either using sustainable aviation fuel, have electric propulsion or pure electric propulsion. Advanced military capabilities, which rely more and more on electrification and the continued commercialization of space and advanced air mobility platforms. So in summary, Crane has outstanding and differentiated technology, aligned to key market trends and customer needs now and well into the future. We see continued growth from selling similar technology within our core markets to new and emerging customers. We have a long history of success, and we'll continue to grow with new customers and new platforms as our industry evolves. The Aerospace & Electronics business development team is relentless and we'll continue to win in the market. Our R&D teams are also hard at work developing technology that will be required to win in the future. Our industry will see innovation as future commercial aircraft engines, defense systems, move forward, evolve, and we'll also see the unique opportunity to see transformative growth with the proliferation of more electric aircraft and military ground vehicles. We'll be ready with the desired systems be it high power conversion, more capable heat dissipation or advanced sensing. Finally, the entire Crane A&E team practices the Crane Business System every single day to reduce our cost basis and drive reliable, repeatable results. This combination of technology and execution positions Aerospace & Electronics for a long-term 7% to 9% sales growth paired with substantial margin expansion as the volume continues to grow, also leads to a clear path for sustainable long-term profitable growth. Thank you all, and now I'll open it up for questions.

Thank you, Jay. Thank you, Rich. And I guess just to get started at a high level, it's been about 18 months since Crane's payment business was spun off. Any major changes or kind of renewed focus that has been brought about in the organization because of that? And as you look forward over the next few years, how do you see the company evolving the portfolio mix across front business units?

So yes, so just to reiterate, we separated as a company. We had a payment business and the existing Crane Company business that we are today. That was back in April of 2023. It was a hugely successful separation. A ton of value creation for shareholders, which we're really excited to have delivered. In terms of the focus or are you managing things differently as a result, I would say not really. I think we were managing the business quite well when we were together. There wasn't a lack of resource or organizational structure that was prohibiting us from driving the business forward on all cylinders, frankly, if you look at the performance of that payment business, it's been exceptional. When we acquired Crane Currency several years, we took the margins from 10% OP margins to 30% at one point. So really solid execution. So now post separation, I would say it's been more of the same, executing on technology road maps, executing on everything CBS that Jay just mentioned in terms of driving efficiencies and continuous improvement through the business. Moving forward in terms of the portfolio. To the second part of your question, look, we always are continuously looking at the portfolio. It's just -- it's our job. We, at times, get questions. So you separated payment from the 2 -- the businesses that we are today. Are you going to ever separate aerospace from process flow technology? So that is a question we get from time to time. Right now, there's no plans to do that. But when you look at the slide that I presented in terms of getting the business to double in size over the next several years or 5 years or so, it certainly does give us that optionality, and that's the way I would think about the future portfolio at the highest level. And certainly, we look at pieces of the portfolio within to see, does it make sense to still stay? Is it accretive to the growth profile and margins and so forth. Was that what you were referring to when you said nearly doubling our size over the next few years, gives you more strategic alternatives? Math has to work, certainly.

Jay, from your perspective, looking out for aerospace and electronics over the next few years, today, you're about 60-40 commercial military, 70-30 OE aftermarket. You have a mix of products. Are you comfortable with that mix of the aerospace and electronics portfolio? Are there areas you'd like to see get bigger in the context of organic and organic growth over the next few years?

Yes. So on your mix question, I think that mix is pretty much where we see ourselves here for the next several years. I think OEM rates should -- Boeing and Airbus be able to pick up there, it might shift that a little bit in terms of our mix to commercial aftermarket. When we think about growing the business, we have some platforms that we really believe are a catalyst to the growth moving forward. We think about our power conversion business as one of those whether through organic growth or acquisition, certainly with the electrification of aircraft and military land vehicles, really important significant growth area for us. Thermal management, anything that has electrical power, you got to take heat out of it. So we're really focused on thermal management in terms of a growth platform as well to build off of. And then our advanced sensing capability, moving away from wireless, moving into fiber optics, moving into wireless communication, growing upon that, combining sensors on aircraft and making them wireless is going to take a lot of weight out of the aircraft. So those are the kind of areas that we're really focused on in terms of our organic growth and then any sort of acquisitions we would be looking at.

Great. And Rich, I meant to add congrats on all the value creation from the separation, tremendous job there for the whole organization. On the aerospace front, you guys have talked a lot about supply chain challenges and sort of getting into the steady-state dynamic where supply chain challenges remain, but they're mostly controlled. Where are you still experiencing supply chain challenges? How do you kind of manage them in this perpetual supply chain dynamic that we're perhaps settling in?

Yes, I think this is the new norm, right? It's not perfect. I mean what we've seen improvement in over the last year is really electronic component availability and CCA, which is circuit card assemblies, which largely for us is a supply chain challenge, but significant improvement in that over the past year has really helped us to deliver to our customers. These areas were still challenged. It's machine parts. It's raw materials, it's special processing of those machine parts and raw materials. That's been more of a challenge in the past year. Although I think Crane to its credit, probably compared to a lot of our competitors doing similar things as we're very vertically integrated, especially in those areas. And we're looking to continue that vertical integration. So we recently purchased Vian Enterprises, which is an amazing pump company, bolt-on to fluid management, also had tremendous precision machining capability that we're now leveraging to in-source more and more to our business to be able to control our own destiny. So like I said, it's kind of like -- it's not going to be perfect. It's never going to be pre-COVID again, we don't think, but we're doing a really good job of making the decisions internal to the business in terms of where we're having challenges in-sourcing, consolidating. Some cases, you just need to have safety stock in place, especially on things like castings, which is a business that we don't really see improving here in the near future. But it's a combination of doing all those things that's really allowed us to kind of like stabilize the business from a supply chain standpoint to deliver to our customers.

With respect to your growth rates, very solid double-digit growth in the first half in Aerospace & Electronics implied mid-single-digit growth in the second half before returning to, I guess, double-digit growth rates that you've spoken about after 2024. Just help us understand the dynamics of that growth and the confidence in the double-digit growth beyond 2024 in Aerospace & Electronics.

Yes. Well, again, I mean, we certainly plan to deliver a double-digit growth for this year. I think the compares when you look quarter-over-quarter, '23 to '24, probably a large portion to what you're talking about there. Certainly, we had very strong first quarter performance, especially in comparison to the year prior, a very strong Q2 with a lot of commercial spares we were able to deliver to customers who, quite frankly, needed that product and we're able to deliver. More of a steady state here, I'd say, in the second half of the year, but still seeing significant growth in commercial spares and really not slowing down, nice steady rate going into next year. We certainly see probably around 10%, at least growth for next year overall in our business and just consistently delivering to the high side of the 7% to 9%, if not in the low double digits here for the next 3 to 4 years. That's kind of what we're seeing in the business.

I'll look into the audience and see if there are any questions.

We said some interesting buzzwords in terms of the knowledge of electrical and heat and thermal. Everyone is talking about data centers and what they need. Any thoughts about taking that technology and looking at applications to reduce heat dynamics in the data centers?

We've actually looked at that as a potential corollary to what we're doing in thermal management. I think that the -- the products and systems are there -- are, yes, they need it. They're a little lower tech than what you're going to need on a multi or [indiscernible] vehicle or an aircraft or things of that nature. So we really didn't see comparable levels of the technology itself being necessary to do those. There's a lot of need for that. It's just not a market space that we determined that was important for us to move in.

Thank you, Jay. And then obviously, I can't let Rich out of this. If you've got to sign 10 NDAs over the next 3 years, what NDAs, nondisclosure agreements, obviously. You've signed some recently. I'm just speculating on that. I have no clue. What would you look at in terms of the segments of the business and geographically, start geographically and then segments of the business, all right? You've just -- because you're going to have a lot of cash as you to deploy.

Sure. So I -- as we look at the funnel of opportunities that we have, we don't necessarily say what location am I going to acquire in. It's more about the strategic benefits that a particular target would bring to the company. So certainly, it's going to be way more challenging. If you find something that's exciting and it's located in Singapore, some area or China, obviously, but it's part of the process, but it's not like -- it's not the beginning of the process. Most of what we're looking at, frankly, is either in the United States or in Europe. In terms of sort of the spaces where we would we would look, and Jay can comment as well on this. But in the aerospace, for example, the Vian acquisition was a perfect fit with thermal management and pump technology for engines and APUs that really benefit in our core to the -- core of the business, but it's going to be around thermal management, actuation, sensing and power primarily, I would say, in aerospace and defense. In the process flow technologies side, it's going to be where we could bolt on kind of like we did with the Baum acquisition. So we completed 3 acquisitions since separation already. They were smaller, more bolt-on in nature. So in the process flow technologies area, it's going to be around chemical pharmaceutical, cryogenic, which we also completed an acquisition in that space since separating and water wastewater. Those would be the primary areas within each of the 2 segments. But yes, we have signed NDAs. Jason and myself and Jay are traveling tonight to a management meeting tomorrow. So we'll see. And that's true. I'm not joking. We are doing that. Yes.

The M&A environment, I think you mentioned on our recent earnings call that it sort of runs the gamut of public companies selling assets, private equity, selling assets. Is this just you sort of having had the opportunity to fill your pipeline? Or do you feel that the deal environment is improving for you to be able to execute one or more deals -- larger deals than you've done recently?

So yes, I would say it's a mix of both. We do feel like the environment is more healthy. We are seeing more opportunities. We'd rather not be responsive to over-the-transom opportunities. We really would like to be doing acquisitions that have been relationships that we've been cultivating over a number of years. We feel like the best value creation comes from those. The integrations are better, easier. Vian is a great example. Jay had known Chris Vian for, I don't know, over 20 years. 20 years. We have other targets where actually Jay and I are developing other relationships. So it's a combination of the buildup of a funnel over many, many, many years. This is not just since separation, but it's also -- yes, and then from a larger point of view, it does also run on a gamut. We have one that we're looking at now that's on a smaller side, one that's, I would say, on the medium size, 5 -- call it, $500 million in purchase price, another one that maybe in the lower side, similar to the ones we recently did. Is that helpful to your question?

Yes, I think so. I'll look to the audience if there's any more questions or otherwise, I'll throw one last one in. So as commercial build rates continue to get pushed to the right, you've basically held your outlook for aerospace and electronics over the next few years. To some extent, is the stronger aftermarket backfilling for some of the delays on the OE side? And is that also helping the margins for your Aerospace & Electronics business?

Yes, I'll take that one. So yes, it's not just the fact that the commercial has been incredibly strong to support the aircraft that are necessary for the volume increases you see out there. It's been the military too. I mean the legacy platforms, we need to extend those platforms. Unfortunately, global conflict has all led to kind of a bit of resurgence in our military aftermarket business as well. So I think it's those combination of things that is really tempering some of the volume decrease we've seen from the commercial the commercial OEM business. But all told, I mean, we are so diversified across every single platform, every single part of this AD&S market that -- it always seems like where one is a little down, we're up a little bit else and we're really able to balance it. So that's why we feel so strongly about this commitment we have to the growth rate because we're on so many of those platforms especially mid this decade, our F-16 MNU upgrade program. That's a step change in sales for us. That's a big $30 million a year program that we're going to execute on for many years in a row to retrofit every F-16 with a new brake control. Our AESA radar program, as you recall, we've won every single power conversion opportunity for AESA radars in the last 10 years, all that's starting to go into rate production right now. That's hundreds of millions of dollars over the next decade or so in terms of execution, really starting to ramp up here next year and beyond. And so it's those types of franchise programs, on top of this really strong commercial aftermarket and military aftermarket growth rate that we have that give us confidence in our growth rates that we're projecting.

Great. Well, thanks, Rich. Thanks, Jay. Thanks, Jason. Look forward to seeing where you guys are a year from now.

Thank you very much for your interest.