Crane Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to The Crane Company Second Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Jason Feldman, Senior Vice President of Investor Relations, Treasury and Tax.

Speaker 1

Thank you, operator, and good day, everyone. Welcome to our Q2 2024 earnings release conference call. I'm Jason Feldman, Senior Vice President of Investor Relations, Treasury and Tax. Before we get started, I'm delighted to introduce Allison Kwiniak as our new Vice President of Investor Relations. Many of you know her from her time as an analyst following the industrial technology and transportation sectors.

Speaker 1

She brings a wealth of experience into the role and we're happy to bring her on board. I will continue to oversee the Investor Relations function, but over the next few months as she assumes primary responsibility for Investor Communications, I'll be spending more of my time with tax, treasury and M A. Allison, let me pass it on to you.

Speaker 2

Great. Thank you, Jason. So good morning, everyone. I'm excited to be here and look forward to connecting with everybody in the next few weeks. As Jason mentioned, I spent the last 18 years as an analyst at Wells Fargo covering the industrial technology and transportation sectors.

Speaker 2

That gave me the opportunity to analyze and learn from a lot of great companies, their unique growth strategies, their approaches to drive productivity and sustainable profit improvement as well as their approach to M and A. A lot were successful, but some were not. All that gave me has given me great insights as I step into this role. I have been considering making this move to the corporate side for some time. However, there were 3 key qualities that the company needed to have for me to join.

Speaker 2

1, a strong strategic growth vision that I supported that would take the company to the next level. The second is a sound and achievable M and A strategy that would complement that vision. And third, the ability to have a voice as both the inorganic and inorganic strategies evolved. There were a few opportunities I did walk away from over the years because those companies did not have those qualities. Crain, however, did tick all those boxes for me.

Speaker 2

Add to that the respect I had for the management team and it was an easy decision for me to join. And with a little over a month into the role, I can tell you that I'm certainly not disappointed. What I have found is a strong culture focused on executing the team's strategic vision with significant opportunity both organic and inorganic to grow Crane and continue to move the earnings profile higher. So in that, let's get started. On our call this morning, we have Max Mitchell, our Chairman, President and Chief Executive Officer and Rich Mowley, our Executive Vice President and Chief Financial Officer.

Speaker 2

We will start off our call with a few prepared remarks, after which we will respond to questions. And just a reminder, the comments we make on this call will 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 ks 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. So now let me turn the call over to Max.

Speaker 3

Thank you, Allison. Welcome and thank you again for joining Crane and we look forward to much improved performance versus the last person in the role. I'm joking, Jason. Good morning, everyone. Thanks for joining the call today.

Speaker 3

We had another excellent quarter with results outperforming expectations. Adjusted EPS was $1.30 driven by an impressive 9% core sales growth, reflecting strength across both Aerospace and Electronics and Process Flow Technologies. That growth was paired with strong leading indicators with up 7% and core backlog up 10% compared to last year. And confidence in our outlook for 2024 remains high. Based on the strength in the first half, we are raising the midpoint of our full year guidance by $0.15 and narrowing our outlook to a range $4.95 to $5.15 which reflects 18% EPS growth at the midpoint.

Speaker 3

We have fairly strong direct line of sight to delivering that 18% earnings growth. Our revised guidance continues to assume somewhat muted industrial activity with Aerospace and Electronics commercial OE sales growth solid, but at slightly lower levels given the changes with OE build rates. We also assume that the aerospace electronics supply chain continues with similar issues with only very gradual further improvement as the year progresses. But this is also becoming more of the normal state of play honestly at this point in time. If those assumptions prove conservative, we are structured to be able to satisfy any unexpected upside demand.

Speaker 3

We've had a strong first half. Our strategy is working. The team is executing, driving improved earnings through its growth and commercial excellence initiatives. We successfully completed 3 acquisitions over the last year. With continued progress on our existing M and A funnel, we expect additional opportunities to become actionable over the next few quarters, primarily smaller and mid sized transactions.

Speaker 3

While we are working on a number of transactions at the moment, we see the opportunities weighted towards the end of 'twenty four and the first half of twenty twenty five given the expected timeline for known processes. Longer term, we are as we reiterated during our Annual Investor Day last quarter, we remain confident in a 4% to 6% long term core sales growth rate from resilient and durable businesses with solid aftermarket, substantial operating leverage on top of already solid margins today that should lead to double digit average annual core profit growth with upside with potential upside from capital deployment and with virtually no net debt, the capital deployment opportunity is significant. Let me highlight a few recent wins and continued success in the quarter, starting with Aerospace and Electronics. We previously highlighted our wins on NGAD 6th generation fighter aircraft and our strong position on prototype and demonstrator programs. In the quarter, we also saw significant progress on the CCA or Collaborative Combat Aircraft portion of this unmanned platform across a number of our solutions.

Speaker 3

On another significant UAV program unrelated to the CCA, we've also had early success with our landing solution. Other significant negotiations continue to further solidify our already strong position on the next generation demonstrator programs for military and tactical hybrid electric ground vehicle platforms, where our high power unidirectional and bidirectional power conversion capabilities are best in class. And we continue to receive significant orders supporting the known and expected ramp up of the multiple large ground based radar programs we've been awarded and that will be entering full rate production over the next 2 years. On the longer term technology development front, we continue to make great progress on our SmartStem long range wireless advances. We've already deployed this solution on a recent demonstrator program with a large commercial OE and our latest version of this solution has a new user friendly app interface that gathers critical tire pressure and temperature measurements quickly and accurately with simplified installation using wireless technology that has significant weight savings by eliminating wiring.

Speaker 3

In our landing solution, we continue to move away from bespoke architectures towards more standardized and modular solutions that are easier to adopt and customize quickly based on our customers' needs, significantly cutting development time and cost. The landing team has also made continued progress advancing our technology for electric brake control actuation, moving quickly towards technology readiness level 6 by 2025 and positioning us extremely well for the next narrow body platform that will eventually be developed. And on the acquisition integration front with Vian, we are already seeing sales synergy opportunities. We have a strong existing customer relationships in the Aerospace Fluid Solutions market with our vein pump technology that Vian did not have to the same level. And we are now leveraging Vayan's G Rotor pump technology capabilities to bid and win on opportunities we couldn't effectively address before the acquisition, stronger together, combined and winning already.

Speaker 3

Overall, another strong quarter for A and E, both in reported results as well as in our activities supporting current and future growth. And just last week, our outstanding A and E team had another very successful air show at Farmborough, UK, meeting with key customers and suppliers, solidifying alignment on a number of key growth initiatives. And next month, I look forward to spending a few days with the A and E team as we enter our annual strategy review process, looking at new strategic initiatives from the very near term to well into and beyond the next decade. Moving to Process Flow Technologies in the quarter. Great traction in our wastewater pump business with our new high efficiency NV motor platform and new higher horsepower offerings introduced late last year, on track to double sales for that overall product platform this year.

Speaker 3

We're also gaining share in the hydrogen sensing space with our newest pressure transducer technology. Our solution in this space has superior precision and reliability in hydrogen fuel cell applications where we're seeing significant growth opportunities. And again, on the acquisition integration front with Cryowars, we're seeing significant early successes working together in driving sales synergies, particularly in cryogenic space launch fueling applications. We've already booked $7,000,000 in orders this quarter with 4 different customers, primarily for new rocket launch facilities supporting new satellite constellations. With CryoWorks differentiated capabilities and large bore insulated piping, we are leveraging our combined sales and marketing capabilities to pull through our valve portfolio as well.

Speaker 3

As mentioned on previous calls, we continue to convert customers to our FK Tri X product from competitors due to its reliable zero leak capabilities and fugitive emissions compliance. We also continue to win share with pharmaceutical projects given the superior reliability and capabilities and higher operating temperatures with our diaphragm technology. Excellent progress on all fronts by the process flow technology team and here too I'm eager to visit many of our sites next month and review all our exciting strategic growth initiatives. Let me now turn the call over to our CFO, Rich Mowling for more specifics on the quarter and some more details on our guidance. Thank you, Max, and good morning, everyone.

Speaker 3

We drove 9% core sales growth in the quarter with strength across both primary businesses delivered with strong core operating leverage. Adjusted operating profit increased 22% driven by volume, productivity and strong net price and adjusted EPS also beat our expectations. Leading indicators were also strong with core FX neutral backlog up 10% and core orders up 7% compared to last year, notably better than expected particularly at Process Flow Technologies. Another strong quarter reflecting our focus on accelerating core growth along with our consistently differentiated execution. Hey, I shared my excitement over the last several quarters over how far we have come at Crane.

Speaker 3

But from the wise words of Jeff Daniels as Harry Dunn in the classic emotional drama Dumb and Dumber, according to the map, we've gone only 4 inches A lot of opportunity and excitement ahead for Crane as we head to Aspen. Getting into the details, I will start off with segment comments that will compare the Q2 of 2024 to 2023 excluding special items as outlined in our press release and slide presentation and then I will comment on our 2024 outlook for each segment and for our overall P and L. Starting with Aerospace and Electronics. Despite the headlines, no material change in the end market conditions relative to our expectations. Again, no material change relative to our expectations.

Speaker 3

On the commercial side of the business, aircraft retirements remain very low due to high demand and limitations on aircraft deliveries, resulting from an aging fleet that requires more aftermarket parts and service. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base given heightened global uncertainty today. Overall, just a continuing solid demand environment. That strong demand was reflected in our 2nd quarter growth rates with sales of $231,000,000 increasing 22 percent compared to last year with 16% core growth and a 6% benefit from the VION acquisition. Despite the continued high level of sales growth, our record backlog of $815,000,000 increased even further, up 21% year over year, including 12 percent core growth and a 9% contribution from the VION acquisition.

Speaker 3

Sequentially core FX neutral backlog increased 2%. In the quarter, total aftermarket sales increased 33% with commercial aftermarket sales up 28% and military aftermarket up 47 OEM sales increased 17% in the quarter with 27% growth in commercial and up 6% in military. Adjusted segment margins of 23.8 percent increased 360 basis points from 20.2% last year, primarily reflecting higher volumes and productivity. Looking ahead to the remainder of 2024, we are maintaining our sales guidance with core sales growth 12% for the full year in addition to a 4.5% favorable benefit from the VION acquisition. That guidance assumes continued strong sales levels consistent with Q2, albeit at a decelerating year over year growth rate as the comparisons are more challenging in the second half.

Speaker 3

While comparisons can create some noise on quarterly growth rates, as we outlined at our May Investor Day event, we expect this year's 12% core sales growth rate to be followed by continued strong core growth in 2025 and for the remainder of this decade. We are however raising our full year margin guidance slightly to 22.2%, up 20 basis points from our prior view. That does assume a moderation in margin rates in the second half driven primarily by mix, which we don't expect will be quite as favorable as it was in the first half as OE deliveries continue to increase. Margin guidance reflects core leverage excluding VION of just about 40%, a little higher than prior guidance and overall on track for another outstanding year. At Process Flow Technologies, we remain well positioned to continue to outgrow our markets and our market outlook is now a little more positive than it has been over the last several quarters.

Speaker 3

While we continue to see some softness in the European Chemical and General Industrial markets, we see continued strength in North America and China projects, particularly in chemical and we expect this trend to continue. Given the improved performance, we are raising our sales and margin guidance for the year to reflect better than expected strength in our orders and backlog year to date. In the quarter itself, we delivered sales of $298,000,000 up 13% driven by strong core sales growth of 7% in the quarter along with a 7% benefit from the Baum and Cryoworx acquisitions with a slight offset from the unfavorable foreign exchange we saw. Compared to the prior year, core FX neutral backlog increased 9% and core FX neutral orders increased 10%, both driven primarily by North American markets followed by China. Sequentially, core FX neutral backlog decreased 1% with FX neutral orders down 4%, reflecting the strong project orders booked in the Q1.

Speaker 3

Adjusted operating margins of 20.5 percent expanded 50 basis points better than we expected with strong core operating leverage in the quarter driven by productivity, strong net price and higher volumes offset mainly by the expected dilutive impact of our recent acquisitions. Turning to full year guidance for Process Flow Technologies. We now expect 2024 sales growth of approximately 10%, up from our prior expectation of 7% with the increase in our growth view coming from our core operations, which are now expected to be up 4% versus our prior 1% view reflecting year to date results and again continued order strength. As we discussed last quarter, 6%, up 20 basis 6%, up 20 basis points from prior guidance considering our revised sales outlook. For context, remember that in 2019 just before COVID, margins at Process Flow Technologies were 13.6%.

Speaker 3

As we noted before, this is a significant step function change in margins, which is reflective of our efforts to structurally shift the business to higher growth and higher margin end markets. We continue to see opportunity on this journey through the contribution from accretive new product introductions, pricing that is both disciplined and appropriately assertive given the inflationary environment, our continued investments in technology driven product differentiation and continued productivity. From a cadence perspective, we still expect Q3 to be the strongest of the year for sales with Q4 seasonally a little softer, margins in the second half should be very similar to the first half of the year. At Engineered Materials, sales of $53,000,000 decreased 8% compared to last year. As expected, operating profit margin decreased 2 70 basis points to 13.9 percent on the lower volumes.

Speaker 3

For the full year, we continue to expect both sales and margins to be flat compared to 2023. Moving on to total company results. In the 2nd quarter, adjusted free cash flow was $57,000,000 roughly in line with last year. For the full year, we now expect free cash flow in a range of $255,000,000 to $275,000,000 up $5,000,000 at the low end compared to our prior range. We continue to expect free cash conversion of greater than 90%.

Speaker 3

Total debt at the end of the Q1 was approximately $377,000,000 with $229,000,000 of cash on hand, we continue to have substantial financial flexibility with more than $1,000,000,000 in M and A capacity today and reaching as much as $4,000,000,000 by 2028. While this is more financial flexibility than we have historically had, our capital allocation strategy is unchanged. We will deploy our capital with the same strict financial and strategic discipline that we always have employed, prioritizing internal investments for growth followed by M and A and returns to shareholders. Now turning to our 2024 guidance. As Max mentioned, we are raising the midpoint of our full year guidance by $0.15 and narrowed our outlook to a range of $4.95 to $5.15 which reflects 18% EPS growth at the midpoint.

Speaker 3

Guidance assumes total core growth of 5 to 7%, up a point from our prior guidance due to the outperformance of Process Flow Technologies and a 5% benefit from acquisitions. That 5% to 7% core growth will drive approximately 18% growth in adjusted segment operating profit about 3 times the core sales growth. Turning to the other elements of our full year guidance, we did raise guidance for corporate expense by $5,000,000 to $80,000,000 primarily reflecting higher compensation expense given our performance to date and outlook, but this impact was roughly offset by lower net non operating expense now at 20,000,000 dollars 3000000 lower than prior guidance and expectation for a slightly lower tax rate and 23% compared to our prior guidance of 23.5%. Overall, a very strong first half with excellent momentum as we enter the second half. Operator, we are now ready to take our first question.

Operator

Our first question will come from Damian Karas with UBS. Please go ahead.

Speaker 4

Hi, good morning everyone and welcome Allison.

Speaker 3

Thanks. Good morning. Yes, I got to say those

Speaker 4

are some pretty big shoes to fill

Speaker 3

with Mr. Feldman in there.

Speaker 2

I'll do my best.

Speaker 4

Wanted to ask you guys about PST. That's a pretty notable increase in your sales outlook for the year. Could you just maybe talk about that a little bit more? What's really changed in the business versus a few months ago? Do you feel like it's got pretty good visibility or is there maybe still some choppiness on the short cycle side of the business?

Speaker 3

Yes, Damian. I think we've been consistent in this too and we tried to explain it even in giving the guidance for the full year. We've looked at historic trends in the cycle coming out of post COVID. We predicted a little softer market dynamics than what really has played out and particularly in the Americas. So as the quarters have moved on, the I wouldn't say it's been a great growth or any specific momentum.

Speaker 3

It's just the market overall has been much stronger than we had anticipated where we planned for, where we guided for, particularly in the U. S. Projects seem to be from our assumptions now, from our original assumptions, projects coming back a little stronger than we had anticipated, particularly in the chemical space. So it's been more of an alignment to what we're really seeing play out versus our assumptions based on the historical view of the forecast. Do you have anything different with that?

Speaker 3

Yes. The only thing I would add just in terms of the last 3 months, again, I would just reiterate not so much changing, just that continued momentum. So that one more quarter under our belt coming out of the Q1 really just allowed us to say, hey, there's no reason why we shouldn't be able to hit these revised guides. So we feel pretty confident here, Damian, as we close out the year and as we think about 2025, frankly.

Speaker 4

Understood. That's helpful. And I think it was Slide 9, there's a comment in there that you're well positioned to ramp if macro environment for mix. Could you just elaborate a little bit on your thinking there?

Speaker 3

I think we've got in general balanced in terms of capacity from a facility standpoint, our ability to leverage our existing resources from an efficiency standpoint as well as being able to ramp up if required. Some of the supply chain dynamics that we see as we see continued improvement, we feel well positioned to leverage any demand.

Speaker 4

Okay, terrific. Thanks guys. Pass it along. Best of luck.

Speaker 3

Thanks, Damian. Thank

Operator

you. Thank you. Our next question will come from Scott Gussle with Deutsche Bank. Please go ahead.

Speaker 3

Good morning, Scott.

Speaker 5

Hi, good morning. This is Megan on for Scott. Sorry. Hi, Megan.

Speaker 3

How are you? Yes. Good.

Speaker 5

My question is for Matt. Can you characterize where you're seeing the most growth in commercial aftermarket right now? Is it mostly on the engine side, like on the ETF? Or is it more well balanced across platforms or is it more balanced across airframe versus engines? Any color there would be helpful.

Speaker 3

Yes, we're seeing it it's broad. It's not necessarily just engine. So from our point of view and how we our solutions, right, our fluid management is seeing a nice uptick given what's happening with engines certainly. But it's pretty equally spread across our freight control solutions as well as sensing. So it's fairly widespread is the way to the way we're thinking about it and the way we're seeing if that helps.

Speaker 5

I appreciate it. And then one more question if I can. Rich, can you characterize the price utilizations at both segments?

Speaker 3

Sure. So in the quarter, not too much different from what we were experiencing in the Q1 for Aerospace and Defense. A little bit more than a third of the growth in the quarter came from price. And on the Process Flow Technology side, it's about mid single digit in the quarter. Against fairly consistent with the Q1 and I would say even consistent with how we're thinking about things moving through the balance of the year.

Speaker 5

Got it. Very helpful. Okay. I can pass it on. Thank you.

Speaker 3

Thank you. Thank you.

Operator

Thank you. Our next question will come from Matt Summerville with D. A. Davidson. Please go ahead.

Operator

Thanks.

Speaker 6

A couple of questions. First, maybe just to piggyback off of that last one. The price capture you're seeing in PFT and putting that in the context of where you're at with deploying eightytwenty in that business, I guess I'm trying to understand maybe using a baseball analogy, what inning are we in, in terms of Crane realizing at least relative to historical standards this above trend level of price capture and can that same level of price capture continue down the road? Help me understand that a little bit more.

Speaker 3

Well, to try to answer it in that using that context, Matt, in terms of innings. From our CVS standpoint, I think it's just important to start off with what do we drive. We drive a balance of Crane Business System, which starts with strategy, execution, technology, commercial excellence. We drive I think we're pretty darn good from a lean deployment standpoint on so many fronts. And so eightytwenty is just one of many approaches and tools that we use across the business to drive outstanding customer satisfaction, growth holistically within eightytwenty, within deploying a more focused approach at analyzing the product lines, analyzing customer segmentation with a view towards over serving customers as well as making conscious decisions about pricing for value, so forth.

Speaker 3

I think we're very good. I think we continue to get better. I would probably say the game is never over. So probably baseball is not the best analogy. It's a game that continues.

Speaker 3

But let's say we're in the 3rd, 4th inning kind of a framing, which is going to play and we've been at it for a good 3 to 4 years now. So there's significant contribution as I think about it moving forward in balance, in concert with everything else that we drive where others may just myopically drive a very, very laser focus on only eightytwenty. So hopefully that puts things in context a little bit.

Speaker 6

Yes, no, that's very helpful. And then as a follow-up, I think Max you mentioned maybe the commercial OEM outlook is a little bit lower. I was hoping you could put a little bit of a finer point on the comment you made in your prepared remarks, while also maybe providing inventory standpoint in the channel and just overall, what your view is go forward on supply chain and where OE build rates go from here? Thank you.

Speaker 3

I think we're moving to when you start talking about supply chain related issues year after year, we reach a point where I believe we're at a new normal, if you will. Post COVID, it's now 2024. There's been some dynamics that have changed that we're all dealing with that I think we're all dealing with well. We're meeting demand. We're adjusting lead times as necessary.

Speaker 3

We're satisfying our demand. Is there still a bit of an unmet demand?

Speaker 7

Is there

Speaker 3

ideal? Yes, but I think it means less today. I think there's a new normal about meeting demand expectations. I don't believe that there's a concern for us related to inventory in the channel. We've always triangulated the best we can on a multitude of factors, not just OEM build rates, but all of our customers and forecast it effectively in terms of what that means for us and being able to deliver.

Speaker 3

So it gives us high confidence as we're thinking about this moving forward in our growth rates also. Would you? Yes. No, I would reiterate that or agree with that. I think part of the comment was geared towards Matt, one of the OEs taking down their build rate slightly.

Speaker 3

And so that was the source of the comment. I would just say that it's not going to have an impact on us here in the year. And frankly, our view is that it will not next year or the years after in a material way when you think about the growth profile coming from Crane. So as you I think know, a much of our growth in the, I don't know, 2020 into next year, year after is coming through military as well. So there's a nice mix benefit, if you could call it that, with respect to any challenges that folks might have as a result of the supply chain in commercial.

Speaker 6

Thank you, guys.

Speaker 3

Thanks, Matt.

Operator

Thank you. Our next question will come from Jeff Sprague with Vertical Research. Please go ahead.

Speaker 3

Hey, good morning. This is Nick on for Jeff. I just wanted to ask about the deal pipeline. It sounds like some things may be actionable later in the year. But are you guys seeing any competition sort of heating up, maybe putting pressure on multiples or how are you thinking about that?

Speaker 3

Yes. Thanks, Nick. Very active, a lot of opportunities, both things that we've been cultivating for years as well as what's coming out from PE, got some conglomerates that are looking at what no longer makes strategic sense. Some are highly competitive, some are more cultivated relationships. So we're seeing all the above.

Speaker 3

It's very balanced. I'm very encouraged, very encouraged as we're moving forward. In terms of multiples, there's still some upward pressure, some things are competitive, but we're going to stay disciplined. We're going to make sure that return on invested capital meets our goals. We have a good line of sight to the synergies that we can bring if the deal makes sense and we're not afraid to walk away if it doesn't make sense.

Speaker 3

So I think we feel pretty good overall. Great. Thanks for that. And maybe just one more on flow. Can you provide any more additional color on individual end markets relative to your expectations and how they're trending projects versus MRO?

Speaker 3

Sure. So, yes, we some of this in the prepared remarks, but I'll give a little bit more color here. Certainly doing a little bit better than we had anticipated as we move through the year. This is I think now the Q4 in a row of positive order activity for us, primarily in the project business, largely confined to North America and China and mainly in chemicals and pharmaceuticals, just to give you a little geography and end market. Sets us up nicely for the second half and as we think about 2025 in particular.

Speaker 3

European Chemicals still quite slow. I would say both projects and MRO, but we think also largely stabilized, right? So we don't think there is further momentum downward. It's stabilized at a level where we see it today. A handful of project push outs here and there in North America and China, but we've seen other projects accelerate faster and that's been a source of some of our confidence overall.

Speaker 3

So stronger than expected on the project side. And again, largely in the pharmaceutical area, Asia, China for localization and LNG. And then in North America, we think some of that activity that's been stronger has been related to reshoring and bringing some manufacturing activities back to the U. S, some of that in semiconductor related to data centers and so forth. So some nice strength there.

Speaker 3

So hopefully that gives you some context. I mean we do have outside of process our wastewater business remains solid and then non residential construction in the UK remains soft, but we are starting to see that lift up a little bit as we move through the year here. Appreciate the color. Thanks very much. You're welcome.

Operator

Thank you. Our next question will come from Justin Aches with CJS Securities. Please go ahead.

Speaker 7

Good morning, Justin. Good morning, how are you doing?

Speaker 3

Good morning.

Speaker 7

Just on PFT, I was hoping you could give us an update on those kind of 5 focus areas that you've called out before. How much of the sales, how much of margin is related to those?

Speaker 1

5 focus areas being chemical, water, wastewater, pharma,

Speaker 7

industrial and hydrogen.

Speaker 1

And then hydrogen. And then hydrogen. Yes, exactly. From a revenue perspective, it's ballpark

Speaker 7

a little bit above 60%.

Speaker 1

From a margin perspective, I don't know that we had exact numbers, but it's higher than that because the profitability of those businesses is above the segment average. I don't know, Max or Rich,

Speaker 7

do you want to comment specifically about?

Speaker 3

No, I mean, I think that's why I think of those if you think about what the component of that 60%, most of it, most of it, a large portion of it is in the chemical space. I think a lot of the momentum that we've been seeing through this year has been in chemical. So that would be the largest contributor. I would say from a margin point of view, I wouldn't differentiate so much across any of them. I think all the profiles are around the margin across themselves, right.

Speaker 3

There's not one that is an outlier. Pharmaceutical also a key driver for us from a growth point of view as well as margin. And we are seeing nice project orders in cryo frankly as Max mentioned in his prepared remarks. So it's a little bit widespread across that 2 thirds of the portfolio that's driving both the growth and the margin profile, if that helps? That's a good question, Justin.

Speaker 3

We're going to sharpen the pencil on that specifically. We haven't done that. So it's an excellent question. But I agree with the comments that we just mentioned. It is in all of those five segments.

Speaker 3

When we think of to further clarify, when we think of hydrogen, the investments in the long term, we continue to march on that technology development. At the same time, if you it's more around cryogenics more broadly that we're winning with immediately outside of just hydrogen, but also other liquefied natural gases. So that's been very successful. Water, wastewater, continuing to see phenomenal success from the team in the space there through some of the things that I've just highlighted even in terms of the NV product line and others that were satisfying. Pharma, the diaphragm that's continuing to win on new projects.

Speaker 3

Chemical, we're continuing to get some nice share gains as well with some specific actions we're taking and winning within the channel that I feel really good about. So continue to see momentum in all of the focused areas. I'll allow you an answer on the specifics of the breakdown.

Speaker 7

No, that's helpful. Thanks. And then one more if I could. Just on the prepared remarks on the M and A pipeline back later 2024 and right into be into 2025. So just on capital allocation, are you thinking about any changes in priorities given kind of the amount of capacity you have and maybe the lack of deals this year?

Speaker 3

There's so much the funnel is so large and so rich that it would take another 12 months to 18 months, honestly, before I would dramatically change. At this point in time, that's the view. I think we have significant line of sight to some really interesting opportunities that are either in play now or coming soon that we're going to hold back on that firepower. Now if for some reason we have a lazy balance sheet and no opportunities exist, believe me, we're going to be looking at other options. We continue to as we have proven in the past.

Speaker 7

All right. That's great. Thanks for taking the questions.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Jordan Lianney with Bank of America. Please go ahead.

Speaker 3

Hey, good morning. Good morning, Jordan. You talked about NGAD. At the Investor Day, you put a $300,000,000 electric program tag to it. With the down select delayed for the actual fighter, but CCA continuing, does it change your view on what that program could be for incremental for Crane?

Speaker 3

Well, I think in the short term, meaning in the next few years, nothing. I think we're minimal impact. I think we feel pretty solid about our position. Longer term, if there's significant changes in the platform, of course, it could have an impact. Yes, I would say if I was just to add, yes, in the near term, as Max mentioned, right, any work we're doing here is funded.

Speaker 3

So there's not going to be a gap in the P and L. And then on that long term, we're on most, if not all of the major fighter platforms. So to the extent that there's a reallocation or whatever however else they try to address any potential shift away and we feel like we're really well positioned regardless. So we feel that if that were to be canceled, other things would increase. Yes.

Speaker 3

And we would see that benefit as well.

Speaker 1

Yes. Whether that's aftermarket and monetization upgrade programs in the existing fleet will be at great position or whether it's incremental sales of whether it's the F-thirty 5 or the F-fifteen EX or whatnot.

Speaker 3

Got it. And then also to for the work that you're doing with CCA, do you see the opportunity for technology transfer for EUVs? We're seeing a lot of that market starting to actually come forward now. Definitely. And we are our teams are chasing those opportunities today.

Speaker 3

Okay. Thanks. Thank you. Thank

Operator

you. Thank you. Our next question comes from Nathan Jones with Stifel. Please go ahead.

Speaker 8

Good morning. This is Adam Harley on for Nathan. Good morning, Adam. Hi, good morning. I wanted to follow-up on PFT.

Speaker 8

It sounds really good, continued momentum, end markets look good. So maybe if you look at orders, would you expect higher orders in the second half relative to the first half?

Speaker 3

Yes. So I think it's you got to be careful about how you look at orders in PSC just given the project nature of a good portion of that business. So in the first quarter, if you go back, one of the things that we did talk about, we had an outstanding this quarter was outstanding as well. But in Q1, it was particularly strong because of some pretty large projects that we booked. So that was the highest quarter we've had in several quarters.

Speaker 3

But the shipments related to a lot of those orders are going to be for the benefit of future periods, right, not necessarily in the current year. So if you normalize for that and you look at our order rate here in the Q2, it was fairly consistent. And then as you look out into Q3 and Q4, I would say Q3 will be similar. And then Q4, we always have a little bit of a seasonal decline. So nothing really to call out specifically other than sort of that maybe abnormal very strong Q1 that we had.

Speaker 8

I appreciate the color. And then on margins, for both segments, looking at the second half, I mean, should we expect incremental margins in that 35% to 40% range? And if not, what are the variances and what's driving them?

Speaker 3

Yes, we will definitely hit that range.

Speaker 8

Thank you for taking my questions. You got it, Tim.

Operator

Thank you. Our next question will come from Tony Bancroft with Gabelli Funds. Please go ahead.

Speaker 9

Hey, thanks for taking my question. And I remember a lot of people had changed their garage codes after that movie came out. So, Scott, regarding Farnborough, it's great seeing you there. Just maybe could you give me a quick overview of your feedback from Farmboro, just speaking with customers and obviously investors and just anything different than you were expecting? Obviously, there's probably a lot of dynamics going on with international fence demand, reaction to the commercial orders rate versus on a year over year basis.

Speaker 9

And particularly Paris last year, I know there's a lot of stuff going on with the production rates. But maybe just give me overall view and what you saw like differently than you're expecting?

Speaker 3

I would say it met our and the opportunity at Farm Bureau is not just top to top relationships, but also meeting with the teams that are working on technology roadmaps today as well as moving forward, longer term discussions, getting insights of continuing to highlight our full portfolio of solutions. So it's we had I forget how many, 100 and 50 or so. Yes, 150 or so. Meetings that we've had top bottom down, top to top, some supply chain related, many looking at future opportunities, understanding customers' needs, helping us develop our strategy and strategic roadmaps, technology development. So I would say that it was very positive and met and exceeded expectations from that standpoint.

Speaker 3

But no significant surprises, Tony, and no dramatic other insights other than that, I would say.

Speaker 9

All right. Well, you've done a fabulous job. Great work, team, and thanks so much.

Speaker 3

Thanks,

Operator

Tony. Thank you. This concludes the quick Q and A portion of today's call. I would now like to turn the floor over to Max Mitchell for closing remarks.

Speaker 3

Thank you, operator. Again, yet another very solid quarter with results outperforming expectations. Our strategy is working. The team is executing, driving improved earnings through its growth and commercial excellence initiatives. Our M and A pipeline is full.

Speaker 3

We have the balance sheet capacity to execute. During the Olympics right now and the athleticism that's on display, I want to leave you with this thought from the late, great San Francisco Giants baseball star Willie Mays. One of the hardest parts of practice is the criticism a player takes from his coaches. Some players think a coach has it in for them when a flaw in style is pointed out. I know that when things start going wrong, for 1, I get the coach to keep his eye on me to see what I'm suddenly doing wrong.

Speaker 3

I can't see it or I wouldn't be doing it in the 1st place. At Crane, our leadership constantly practices with detailed hands on coaching. Our culture thrives on raising the bar of excellence and driving improved customer satisfaction through the solutions we provide. We practice repetition every day with cadence and discipline, always with an eye towards driving profitable growth for our customers first, our associates, our communities and our shareholders. On to the second half of twenty twenty four, we look forward to seeing many of you in Q3 at conferences and on the road and look forward to updating you again in October.

Speaker 3

Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

Operator

Thank you. This does conclude Crane Company's 2nd quarter 2024 earnings conference call. Please disconnect your line at this time and have a wonderful day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Crane Q2 2024
00:00 / 00:00
Remove Ads