Earnings Call Transcript - CR Q4 2024

Operator, Operator

Welcome to the Crane Company Fourth Quarter and Full Year 2024 Earnings Conference Call. All participants are currently in listen-only mode, and we will open the floor for questions after the presentation. I will now hand the call over to Allison Poliniak, Vice President of Investor Relations.

Allison Poliniak, Vice President of Investor Relations

Thank you, Shelby, and good day everyone. Welcome to our fourth quarter 2024 earnings release conference call. On our call this morning, we have Max Mitchell, our Chairman, President, and Chief Executive Officer; Alex Alcala, Executive Vice President and Chief Operating Officer; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury, Tax and Investor Relations, who's also on for Q&A. We will start off our call with a few prepared remarks from Max, Alex, and Rich, 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-K, and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in 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, Chairman, President, and CEO

Thank you, Allison. Thanks everyone for joining the call today. We had a strong close in Q4 to another excellent year, with results significantly outperforming our expectations. But before we dive into the results, I want to touch on a few recent announcements. First, I want to acknowledge Alex Alcala, who was promoted to Chief Operating Officer back in December. Many of you already know him from his 12 years with the team, but for those that do not, Alex has been an instrumental partner to me as we have strategically transformed Crane's portfolio into a higher growth, higher margin, and higher return business. his appointment as COO allows me to focus my attention on accelerating Crane's growth through strategy deployment and strategic acquisitions. Congratulations, Alex, and thank you for all your hard work in driving results with the team. Also, a reminder that on January 2nd, we announced the completion of the divestiture of our Engineered Materials segment. This divestiture reflects yet another important step forward following numerous actions we've taken over the last few years to simplify and strengthen our portfolio, focusing resources on our two strategic growth platforms, Aerospace & Electronics and Process Flow Technologies. With this divestiture now behind us, we are focused on driving accelerated inorganic growth through capital deployment, as well as accelerating organic profitable growth through our disciplined cadence and execution. Following that divestiture, the results we discuss today treat Engineered Materials as discontinued operations for all of 2024. Adjusted EPS of $1.26 was achieved through an impressive 8% core sales growth, reflecting strength across both Aerospace & Electronics and Process Flow Technologies. Core orders were also solid, up 8% in the quarter. Despite some unique and temporary challenges, which included the impact of Hurricane Helene on our Marion, North Carolina facility, I'm pleased to report that the site is recovering ahead of schedule and is nearing normal full production rates. Our performance in 2024 is another great example of our consistently differentiated performance in the face of adversity. Full year adjusted EPS was $4.88, up 28% over 2023. Sales for 2024 increased 14%, driven by 8% core growth and a 6% contribution from acquisitions. Adjusted operating profit of $383 million for the full year increased 29% compared to the prior year. With the record performance in 2024 and looking ahead to 2025, I remain highly confident in the strength and resilience of Crane's team and portfolio. This confidence is reflected in the dividend increase announced last night of 12%. Additionally, I feel confident in our initial 2025 adjusted EPS guidance of $5.30 to $5.60, which represents solid 12% adjusted EPS growth at the midpoint. As we set this initial view for the year, we assume that the macro backdrop remains largely unchanged, with strong demand trends in Aerospace & Electronics and continued market outperformance in Process Flow Technologies. Further, our balance sheet is well-positioned to capitalize on M&A opportunities, and we expect additional opportunities to become actionable in 2025 across both Aerospace & Electronics and Process Flow Technologies. Our M&A funnel is strong, with a lot of activity, and I personally visited two potential targets with the team this month alone, one in the Midwest and one in Europe. Indications are that several assets we've targeted for years will become actionable over the course of 2025. Before turning the call over to Alex, a quick reminder that we will be hosting an Investor Meeting at our Aerospace & Electronics site in Fort Walton Beach, Florida on March 6, 2025. I look forward to seeing many of you there. Please reach out to Allison if you need further information.

Alex Alcala, Executive Vice President and COO

Thank you, Max. Thanks for the kind comments. It's been really rewarding and I’m proud of our team. I look forward to continued investor communications. Within Aerospace & Electronics, demand remains strong across all categories of our defense and commercial business. I'm proud to report that we received the first F-16 brake control upgrade order, further solidifying our confidence in a steep ramp-up for this program that will begin at the very start of 2026. The total orders received for this project are now about $44 million, including some foreign military sales. As a reminder, this is a three-year brake modernization program for the US Air Force’s fleet of F-16 fighter aircraft at about a $30 million per year run rate. With total life of program sales expected to be between $150 million and $200 million, including foreign military sales, most of which will follow the US portion of the program. We also made continued progress on vehicle electrification demonstrator programs and are actively pursuing additional AESA radar proposals. Within Process Flow Technologies, we've continued to show strong results, exceeding our expectations in 2024. For 2025, we see little change in the demand environment, with North America remaining the region of greatest growth for Crane. In the fourth quarter, we secured a sizable order for a large fertilizer project in the Middle East. Our valves provide superior abrasive resistance, and we have a preferred manufacturing location aligned with Saudi Vision 2030 that prioritizes localization, which was key to winning this contract. Additionally, we received sizable orders related to the expansion of a facility for a major chemical customer in North America. Through the acquisitions of CryoWorks and Technifab, Crane has entered the high-growth market of space launch and semiconductor cryogenic equipment, adding approximately $55 million of revenue and solidifying our position as a top provider of cryogenics vacuum jacketed pipe in the US, which we expect to continue expanding in 2025. Overall, we had another strong quarter for both Aerospace & Electronics and Process Flow Technologies, reflected not only in our reported results but also in our ongoing activities supporting current and future growth. As reiterated during our 2024 Investor Day, we remain confident in a 4% to 6% long-term core sales growth rate from resilient and durable businesses, with solid aftermarket and substantial operating leverage on our already strong margins today, which should lead to double-digit average annual core profit growth, with potential upside from capital deployment. Given our virtually no debt situation, the opportunity for capital deployment is significant. Now, I will turn the call over to our CFO, Mr. Rich Maue for more specifics on the quarter and some details on our guidance.

Rich Maue, Executive Vice President and CFO

Thank you, Alex. And congratulations on your promotion as well, and welcome to our quarterly calls. Starting with total company results, we achieved 8% core sales growth in the quarter, with notable strength across both segments. Adjusted operating profit increased 38%, driven by strong volumes, solid net pricing, and productivity. Leading indicators were also strong, with core FX-neutral backlog up 9% compared to last year, driven by outsized strength in Aerospace & Electronics, while core orders were up 8% year-over-year. Another strong quarter reflects our focus on accelerating core growth along with our consistently differentiated execution. For the full year, we generated $234 million of adjusted free cash flow from continuing operations, well above the $165 million from the previous year. Recall, our October free cash flow guidance was for full-year free cash flow to be at the lower end of our $255 million to $275 million range. That included approximately $20 million that we expected from Engineered Materials. Excluding Engineered Materials, that range would have been $235 million to $255 million, so results were in line with our expectations. We are confident that in 2025, we'll deliver adjusted free cash flow conversion above 90% as the supply chain improves. Total debt at the end of 2024 was approximately $247 million, with $307 million in cash on hand. Net proceeds of $208 million from the divestiture of the Engineered Materials segment were received after the end of the year, giving us substantial financial flexibility with roughly $1.5 billion of debt capacity for M&A. We remain committed to deploying our capital with strict financial and strategic discipline, prioritizing internal investments for growth, followed by M&A and returns to shareholders. As previously indicated by Max, our M&A pipeline remains active, and we are excited about acquisition opportunities in 2025. Now turning to our 2025 guidance, we are initiating a full-year view estimating adjusted EPS to be in a range of $5.30 to $5.60, reflecting 12% year-over-year growth at the midpoint. Our guidance assumes total core growth of 4% to 6% and about 12% growth in adjusted operating profit at the midpoint. We also anticipate a 1% to 2% sales benefit from acquisitions and around a one-point headwind from foreign exchange. Overall, we expect another very strong year in 2025. Looking at the segments, starting with Aerospace & Electronics, there are no material changes in end market conditions relative to our expectations, and the demand environment remains very strong. On the commercial side of the business, aircraft retirements remain low due to high demand and limitations on aircraft deliveries from an aging fleet that requires more aftermarket parts and service. On the defense side, we continue to see solid procurement spending and a focus on reinforcing the broader defense industrial base, reflecting heightened global uncertainty today. As highlighted earlier, we secured a substantial order for the F-16 brake control upgrade program, which has been a point of discussion in previous calls. Our fourth quarter growth in this segment was impressive, with sales of $237 million, increasing 11% compared to last year, comprised of 7% core growth and a 5% contribution from the Vian acquisition. Aftermarket sales increased 21%, with commercial aftermarket sales up 15% and military aftermarket up 36%. Adjusted segment margin came in at 23.1%, an increase of 290 basis points from 20.2% last year, primarily due to higher volumes, net pricing after inflation, and productivity gains. For the full year, core sales growth of 13% exceeded our expectations and our long-term targeted range of 7% to 9%. Looking ahead to 2025, we anticipate core sales growth for the year to be high single digits. In the Process Flow Technologies segment, we are well-positioned to continue outgrowing our markets. Our site in Marion, North Carolina, is on track to resume full run rates by the end of the month. In the fourth quarter, our results included an approximate $0.09 impact from production downtime, which fell within our expected headwind range. The financial impact from the hurricane will be fully offset by insurance recoveries. Demand trends remain consistent with 2024, with moderate improvements expected in the first half and further strengthening in the second half. We delivered sales of $307 million, up 13%, driven by core sales growth of 9% and a 4% benefit from the CryoWorks and Technifab acquisitions. For the full year, core growth of 5% exceeded our expectations and was at the high end of our long-term targeted range of 3% to 5%. Market dynamics in 2025 suggest an expectation of low to mid-single-digit core sales growth, leveraging above our normal targeted 30% to 35% given expected mix, strong productivity, and pricing benefits. We had a fantastic year at Crane in 2024, and we remain confident in our trajectory for 2025. Now, we are ready to take our first question.

Operator, Operator

Thank you. The floor is now open for questions. We'll take our first question from Nathan Jones with Stifel. Your line is open.

Max Mitchell, Chairman, President, and CEO

Good morning, Nathan.

Nathan Jones, Analyst

Good morning everyone.

Max Mitchell, Chairman, President, and CEO

Good morning.

Nathan Jones, Analyst

I don't know why anybody would choose another call when they get these results and the comedy show that goes along with it.

Max Mitchell, Chairman, President, and CEO

We appreciate it. Thanks, Nathan.

Nathan Jones, Analyst

I'll start off just with some questions on PFT. Strong growth, 8.5% in the fourth quarter, but you did burn off some backlog in the fourth quarter, which I don't think has been typical over the last few years. So, just if you could provide a little more color on the dynamics going on there.

Alex Alcala, Executive Vice President and COO

Yes. Sure, Nathan, this is Alex. On the backlog, the way I think about it, our backlog grew in the first half with the timing of project bookings, and then we were able to ship some of that with excellent execution reflected in our results. So, it did decrease a little bit in the second half. However, during the last three quarters, our orders have remained consistent sequentially. The way I view it, our backlog still finished in a really strong position. When you compare it to 2019, we're up about 40%. So I think we're entering 2025 with a strong backlog and expectations of moderate improvements in demand, which is aligned with our guidance of low to mid-single-digit growth for PFT.

Nathan Jones, Analyst

Thank you for that. This may be a longer-term question. In recent years, you mentioned, I believe it was Rich, regarding the transition of the PFT portfolio to businesses with higher growth and higher margins, which has clearly been demonstrated by the significant margin expansion over the past few years. Can you elaborate on how far along you are in that process and when we might see a return to a more stable state? I understand you still plan to outpace the market and increase margins, but at a more consistent rate rather than the substantial margin growth we've experienced recently.

Alex Alcala, Executive Vice President and COO

Yes. This is Alex again. Thank you for that question. When we talked during the investor conference, we mentioned this has been a long journey toward these high-growth markets, like chemical, pharma, wastewater, and cryogenics. In 2017, our portfolio mix was around 30% in these markets, and now it's over 60%. We aim to reset 70% of our portfolio into these higher-growth markets in the mid-term. We're also targeting mid-20s in operating profit margins. We still believe there is room to improve mid-term, driven by executing our strategy, driving innovation, and enhancing commercial excellence.

Nathan Jones, Analyst

And then I guess just one more question. Max, you talked about the industrial economy putting out some mixed signals. Maybe you could unpack that a little bit on where the signals are good and where they might be not so good. If you're expecting any changes in the cadence of any of those markets or geographies? Just any detail you can share would be appreciated. Thanks.

Max Mitchell, Chairman, President, and CEO

Thanks, Nathan. I'll add a little bit and see if Alex has additional color as well. Exiting the year, some projects have been a bit unpredictable in terms of timing. However, leading indicators continue to be fairly strong. The guidance we've set has high confidence regarding our range and about being able to deliver. Overall, I feel somewhat bullish. The US remains generally stronger, while Europe remains stagnant and China shows similar signs. Alex, would you like to add any more details on the segments?

Alex Alcala, Executive Vice President and COO

Sure. We're not observing any particular market or region worsening. Over the past few quarters, conditions have been relatively stable. Following these trends, we anticipate some improvements entering 2025. Our observations include growth in the Americas, Middle East, and APAC regions, while Europe and China have displayed stagnation. We expect to see similar dynamics in our vertical markets, with strong demand in cryogenics and consistent project activity in chemical and pharmaceutical sectors.

Nathan Jones, Analyst

Thanks very much for taking my questions.

Max Mitchell, Chairman, President, and CEO

Thanks, Nathan.

Operator, Operator

Thank you. We'll take our next question from Matt Summerville with D.A. Davidson. Your line is open.

Matt Summerville, Analyst

Good morning, guys.

Max Mitchell, Chairman, President, and CEO

Good morning, Matt.

Matt Summerville, Analyst

Maybe, Max, you mentioned in your prepared remarks that you've recently been on site doing some diligence on a couple of potential deals. Can you provide some details around the quality of the assets you're looking at, the segments, and the sizes? How does what you've seen recently compare to what you expect will be available in the market over the course of the year? I have a couple of follow-ups.

Max Mitchell, Chairman, President, and CEO

Generally, one is in Aerospace & Electronics, and the other in Process Flow Technologies. The enterprise value ranges from hundreds of millions of dollars to about $100 million less. Overall, we are pleased with the quality of the assets we are considering, and that aligns with what we anticipate will come to fruition as we move forward.

Rich Maue, Executive Vice President and CFO

No, I think that's accurate. I believe these assets fit nicely with our targeted end markets that focus on higher growth, margin potential, and cash flow accretion.

Matt Summerville, Analyst

Got it. Regarding Aerospace & Electronics and the high single-digit organic growth you're projecting, can you break down the assumptions for commercial OE and aftermarket, and military OE and aftermarket? Additionally, how are you thinking about the MAX restart in your commercial OE view?

Rich Maue, Executive Vice President and CFO

Sure, looking at how we project next year: for commercial OE, we expect low double-digit growth. Military OE is mid-single-digit, commercial aftermarket is mid- to high-single-digit, and military aftermarket is similar at mid- to high-single-digit. These assumptions are factored into our guidance.

Max Mitchell, Chairman, President, and CEO

Regarding the MAX startup recovery, we based our guidance on previously communicated ramp rates, which we consider to be achievable and conservative. Boeing has indicated the potential for some acceleration in that area, which is great news for us—if confirmed, we will capitalize on those benefits.

Matt Summerville, Analyst

And lastly, can you wrap up how we should view the overall quarterly earnings cadence as we move through 2025 for Crane?

Rich Maue, Executive Vice President and CFO

On balance, it's about a 50-50 split between the first and second halves. However, the first quarter will be seasonally the lowest, which should help you frame your model.

Matt Summerville, Analyst

Regarding the business interruption insurance recovery, how much do you expect on a per share basis? Is this already baked into the guidance?

Alex Alcala, Executive Vice President and COO

We anticipate the recovery will match the income lost in the second half of last year. From a timing perspective, we expect to receive that in the second quarter this year, possibly extending into the third quarter. Yes, it is included in our guidance.

Matt Summerville, Analyst

Perfect, thank you. I appreciate it, guys.

Rich Maue, Executive Vice President and CFO

Thanks, Matt.

Alex Alcala, Executive Vice President and COO

Thank you.

Operator, Operator

Thank you. We'll take our next question from Jordan Lyonnais with Bank of America. Your line is open.

Rich Maue, Executive Vice President and CFO

Good morning, Jordan.

Jordan Lyonnais, Analyst

Good morning. For the margins in 2025, can you provide details on how you're considering pricing versus volume and overhead absorption?

Rich Maue, Executive Vice President and CFO

Certainly. Our overall guide anticipates healthy leverage rates, above 40%. We expect pricing to offset inflation baselines and continue the right practices we've been executing in terms of value pricing. As for volume absorption, that will align with expected volumes across our businesses and is included in our 40% guide.

Jordan Lyonnais, Analyst

Do you have any concerns regarding exposure in China for Process Flow Technologies and potential tariffs from the new administration?

Max Mitchell, Chairman, President, and CEO

I have very little concern. Our position in China, because of our localization, is not too significant. We understand the supply base well and have been effective in managing inflationary measures. We're not inclined to overreact. I think we're well-prepared to address any measures that may be implemented. That's my perspective, Jordan.

Jordan Lyonnais, Analyst

Got it. Thank you so much.

Max Mitchell, Chairman, President, and CEO

Thank you.

Operator, Operator

We'll take our next question from Justin Ages with CJS Securities. Your line is open.

Max Mitchell, Chairman, President, and CEO

Good morning, Justin.

Justin Ages, Analyst

Thanks. Good morning, all. Just a quick housekeeping question—are there any transaction-related expenses we should be aware of going forward, given the January 2nd closing on Engineered Materials?

Alex Alcala, Executive Vice President and COO

No, there shouldn't be any. If there were any related expenses, they are usually treated as non-GAAP anyway, so nothing significant for Engineered Materials.

Rich Maue, Executive Vice President and CFO

Additionally, most of that work was completed prior to the end of the year since we closed in early January, and we only have a modest TSA arrangement in place. The separation will be quick.

Justin Ages, Analyst

Okay. On previous calls, you mentioned positive demand trends on the nuclear side for valves. Are you still seeing good demand there? Any changes since the election?

Max Mitchell, Chairman, President, and CEO

While it is less significant overall, it remains an important business for us, accounting for about 7% of our total revenue. We provide services for nuclear valves, including refurbishment and inspection during regulatory shutdowns, which is a strong business for us, especially with the recent resurgence in nuclear energy. Our team is also engaged with next-gen small modular reactor providers to ensure we get specified into future construction projects. Therefore, while it's a smaller segment, we are seeing positive developments in it.

Justin Ages, Analyst

That's very helpful. Thank you.

Max Mitchell, Chairman, President, and CEO

Thanks, Justin.

Operator, Operator

Thank you. We'll take our next question from Tony Bancroft with Gabelli Funds. Your line is open.

Tony Bancroft, Analyst

Good morning team. Congratulations, Alex, on the promotion, very well deserved. I'm sure your first task, Max will have you heading out to the Catalina Wine Mixer to snap the necks and cash checks.

Max Mitchell, Chairman, President, and CEO

Rich wanted to start a new company called Prestige Worldwide.

Tony Bancroft, Analyst

You've grown your company to a $10 billion revenue level with remarkable performance over the past few years. As you look ahead, what are your strategic plans—are there opportunities for larger transformations or acquisitions, and how do you view that in your long-term planning?

Max Mitchell, Chairman, President, and CEO

Thanks for that, Tony. We go through regular strategic planning that considers different scenarios and possibilities. I don't want to raise concerns amongst investors; whatever we do must make sense and fit our strategy. We've looked at larger assets before and will look at larger opportunities in the future to drive shareholder value.

Tony Bancroft, Analyst

Thank you, Max and team. Great job.

Max Mitchell, Chairman, President, and CEO

Thanks, Tony.

Alex Alcala, Executive Vice President and COO

Thank you.

Operator, Operator

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

Max Mitchell, Chairman, President, and CEO

Thank you, operator. Once again, we had a strong year with results exceeding expectations, even in the face of challenges outside our control. 2024 demonstrated that our strategy is working, and the team is executing effectively, driving improved earnings through growth and commercial excellence initiatives. Our M&A pipeline is full, and we have the balance sheet capacity to follow through. We're well-positioned for continued growth and delivering on expectations in 2025, and I look forward to another successful year. We're excited to see many of you at our Investor Day on March 5th and 6th in Fort Walton Beach, Florida, where we’ll dive deeper into Crane's business system strategy. Like Quincy Jones once said, 'Once a task has just begun, never leave it until it's done.' At Crane, we pay attention to the details because they lead to significant results and performance. Thank you all for your interest in Crane and for your time this morning. Have a great day.

Operator, Operator

Thank you. This concludes today's Crane Company fourth quarter and full year 2024 earnings conference call. Please disconnect your line at this time and have a wonderful day.