Crane Company (NYSE:CR) Q4 2023 Earnings Call Transcript

Crane Company (NYSE:CR) Q4 2023 Earnings Call Transcript January 30, 2024

Crane Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Crane Company Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jason Feldman, Vice President of Treasury and Investor Relations. Thank you. You may begin.

Jason Feldman: Thank you, operator, and good day, everyone. Welcome to our fourth quarter 2023 earnings release conference call. I’m Jason Feldman, Vice President of Treasury and Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Executive Vice President and Chief Financial Officer. We’ll start off our call with a few prepared remarks, after which we will respond to questions. Just a reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we’ll 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.

Now let me turn the call over to Max.

Max Mitchell: Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Well, we delivered another impressive quarter, with results again outperforming expectations with adjusted EPS of $0.90 in the fourth quarter, finishing and historic and very successful 2023. And after a truly outstanding year, we started off 2024 on a positive note with another acquisition announced January 3, this time in Aerospace & Electronics, founded in 1968 and based in Auburn, California. Vian is a global designer and manufacturer of multistage lubrication pumps and lubrication system components technology for critical aerospace and defense applications, with sole sourced and proprietary content on the highest volume commercial and military aircraft platforms.

Through August 2023, we estimate that Vian had trailing 12-month sales of approximately $33 million, and adjusted EBITDA of approximately $8 million with a solid order backlog. The purchase price was $103 million, which is approximately 13 times trailing EBITDA. Vian is highly complementary to the fluid solution in our Aerospace & Electronics segment, significantly expanding our portfolio of mission-critical aerospace flow control products. Vian has strong positions on the most attractive commercial and military aircraft platforms today with significant content on the F-35 and the 737 and the A320 families of aircraft. Combined with our existing fluid and thermal management capabilities, Vian further strengthens our positioning for future content opportunities on auxiliary power units, gearboxes and engines.

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Q&A Session

We expect this acquisition to achieve 10% ROIC with approximately $0.20 of EPS accretion, excluding intangible amortization by year 5. But as with most of our acquisitions, there are also several opportunities we see to deliver in excess of that return. In the case of Vian, that will include broadening their marketing efforts to additional customers where Crane has had long-term relationships for decades. We also see opportunities to leverage Vian’s highly sophisticated machining capabilities to in-source components we currently acquire externally across the broader aerospace business. My personal thanks to Chris and Elizabeth Vian, and the rest of the Vian family, in trusting Crane as the stewards of this outstanding second-generation family business to our care and the outstanding Vian team that is now part of Crane.

We continue to progress on our existing M&A funnel, where we expect additional opportunities to become actionable over the next several quarters’ primarily smaller and midsized transactions. Continuing to execute just as we committed to in terms of seeing accelerated M&A and our strategy as we move forward. Let me repeat a few highlights from our full year performance in 2023. Remember, we started the year with the April separation, which was completed on schedule, executed flawlessly and based on investor interest levels in our stock’s performance, clearly a transaction that was well received by our shareholders. Overall, 7% core sales growth drove a 28% increase in adjusted operating profit from continuing operations, reflecting very strong operating leverage and disciplined pricing.

At Aerospace & Electronics, we delivered 18% core sales growth. And even after that increase in sales, we closed the year with an all-time record backlog, reflecting how well positioned we are to drive continued growth through the rest of this decade and beyond. And at Process Flow Technologies, adjusted segment margins reached a record 19.9%, more than 350 basis points better than our prior year record.

Richard Maue: 50, 50 basis points.

Max Mitchell: And a great new base for our margin growth from here as the business continues to structurally shift to higher growth and higher-margin end markets and products. And we have made significant progress with capital deployment, demonstrating we can complete high return and attractive acquisitions in both Aerospace & Electronics as well as Process Flow Technologies, to strengthen our businesses and further accelerate growth. Building off that strong 2023 performance, we are introducing adjusted EPS guidance for 2024, in a range of $4.55 to $4.85, reflecting 10% EPS growth at the midpoint. That growth is driven by expectations of another strong year at Aerospace & Electronics, tempered by known, understood and previously communicated end market conditions at Process Flow Technologies, along with a slightly higher tax rate and interest expense.

Remember that M&A accretion is also limited in year one for both transactions based on current interest rates. This is a high confidence guidance that we have direct line of sight to delivery. Our 2024 guidance assumes muted industrial activity with slowing in certain industrial markets and continued gradual improvement in the aerospace and electronics supply chain. While this is our best thinking today, we believe there may be upside as the year progresses if those two assumptions prove conservative, and we are structured to meet any unexpected changes in demand. There’s also a potential upside to guidance from capital deployment. We are successful with M&A in the quarters ahead as we expect. As a reminder, we have an extremely strong unconstrained balance sheet, providing us significant acquisition capacity.

We have a proven track record of successfully integrating acquisitions and over delivering on synergies. We operate in markets with numerous potential small and midsized targets as well as a smaller number of large potential acquisitions. And in our current structure, we are entirely focused on our two global strategic growth platforms, Aerospace & Electronics and Process Flow Technologies. And reflecting our confidence in both our near-term and long-term outlooks, yesterday, we announced that we are raising our dividend by 14% to $0.82 per share annually. I’d like to also share a few success stories in the quarter as well on core growth and share gains within our segments. In Aerospace & Electronics, our fluid solution was awarded the fuel cell coolant pump for a hydrogen electric zero-emission powertrain.

While the initial application is intended to be for smaller regional turboprop aircraft, our customer is also working on solutions for larger regional jets. This is another example of how our focus on next-generation technologies over the last decade has positioned us as one of the providers of choice for emerging applications. Two quarters ago, we discussed our selection to provide high-power, bidirectional power conversion for both demonstrator platforms for the M2 Bradley replacement vehicle. With those demonstrator programs secured we are now seeing a substantial number of additional hybrid electric ground vehicle demonstrator opportunities. And we are currently pursuing five additional programs where we are optimistic about our prospects.

We’ve also previously commented that we’ve been selected to provide content for a number of sixth-generation fighter demonstrators and collaborative combat aircraft programs. That activity is also accelerating. We now have six platforms either secured or in various stages of RFPs. Our antiskid brake control system was selected by Deutsche Aircraft for their D328eco regional turboprop platform, another promising zero-emission platform. And activity remains robust across our solutions with proposals in process or submitted for additional content on a number of other programs across a wide range of our solutions from power conversion and thermal management to proximity switches and antiskid brake control systems. At Process Flow Technologies, we also had a number of notable developments.