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Transcript of 1 Crane Co. Gabelli Asset Management 12th Annual Aircraft Supplier Conference September 7, 2006 J....
1
Crane Co.Crane Co.
Gabelli Asset ManagementGabelli Asset Management12th Annual Aircraft Supplier Conference12th Annual Aircraft Supplier Conference
September 7, 2006September 7, 2006
J. Robert Vipond
Vice President & CFO
Crane Co.
2
Forward-Looking Statements Forward-Looking Statements DisclaimerDisclaimer
This presentation includes forward-looking statements that are by
their very nature uncertain. There can be no guarantee that any
forward-looking statement will be fulfilled. The Company assumes no
obligation to update forward-looking statements to reflect actual
results or changes in or additions to the factors affecting such
forward-looking statements. Reference is made to the Company’s
Annual Report on Form 10-K and subsequent reports filed with the
Securities and Exchange Commission for additional information
involving known and unknown risks, uncertainties and other factors.
Please also refer to the full forward-looking statements disclaimer
contained in the Company’s Form 10-K and subsequent reports filed
with the Securities and Exchange Commission.
3
Overview Overview
Diversified manufacturer of highly engineered products- Focused niche markets which we dominate- Businesses high returns and cash flow- Acquisitions to strengthen existing businesses
Above all conduct business with integrity and honest dealings
Transitioning from Holding Co. to Operating Co. to
accelerate EVA Growth
Our Goal is to build shareholder wealth
4
Strategy for Profitable GrowthStrategy for Profitable Growth
Materially Improving Operations• Leveraging Intellectual Capital• Improving Customer Focus• Executing Operational Excellence
Strategic Linkages• Portfolio Trimming• Internal Mergers
Synergistic Acquisitions• 2001 - $197 Million – 6 transactions• 2002 - $82 Million – 7 transactions• 2003 - $169 Million – 4 transactions• 2004 - $51 Million – 2 transactions• 2005 - $9 Million – 2 transactions• 2006 - $162 Million – 3 transactions
Grow Profits from Existing Operations
Redeploy Free Cash Flow for Acquisitions
Integrated Operating Company
Strengthen Existing Business Units
Noble Composites pending Hart-Scott- Rodino
5
Gating ChartGating Chart
Financial Consistency
Customer Metrics
Profitable Sales Growth
Aerospace
Electronics
FluidHandling
MerchSystems
EngineeredMaterials Controls
0 100 200 300 400 500
3Q2005
6
Fluid Handling
Engineered Materials
Aerospace & Electronics
Merchandising Systems
Controls
Fluid Handling
Engineered Materials
Aerospace & Electronics
Controls
Merchandising Systems
2001($197 million)
1%
19%50%
17% 13%
Note: Pie charts show relative business unit contribution before corporate expenses.
2005 ($214 Million)
31%
35%
25%
3%6%
Business Segments Operating ProfitBusiness Segments Operating Profit
Better Portfolio BalanceBetter Portfolio Balance
7
Crane Co.Crane Co.
Operating Profit
155169
186
214
238
$0
$50
$100
$150
$200
$250
'02 '03 '04 '05 '06*
Sales
1,516
1,636
1,890
2,061
2,150
$1,000$1,100
$1,200$1,300
$1,400$1,500$1,600
$1,700$1,800$1,900
$2,000$2,100
$2,200$2,300
'02 '03 '04 '05 '06*
($ in millions)
• Operating profit before the 2004 net non-cash charges for asbestos and environmental and for 2002 before asbestos charge.
* Dec. ‘05 Guidance
**
8
2006 Guidance2006 Guidance
Crane Co. estimates for sales, operating profit and margin % provided in Dec. ’05
Crane Co. estimates for tax rate and EPS updated in July ’06.
•Operating profit before asbestos and environmental charge and Victaulic gain. For further details see non-GAAP reconciliation that accompanied our March 7, 2006 investor presentation on Crane Co. website at www.craneco.com.
2004* 2005 2006E $ %
Sales $1,890 $2,061 $2,150 89 4%Operating Profit 186 214 238 24 11% % to Sales 9.9% 10.4% 11.0% Tax Rate 31% 31% 31 - 32%
EPS / EPS Guidance $1.98 $2.25 $2.60-2.70
9
1H’06 Results1H’06 Results
($ Millions) '06 vs. '051H'05 1H'06 $ %
Sales $1,033 $1,108 $75 7%Operating Profit 97 123 $26 27% % to Sales 9.4% 11.1% Tax rate 30.9% 31.5%EPS $1.01 $1.32
10
2006 Guidance Free Cash Flow2006 Guidance Free Cash Flow
($ Millions) 2004 2005 2006 E*
Cash Flow from Operations before Asbestos 149$ 217$ 260$
Asbestos Related Payments (1) (38) (36) (45) Cash Flow from Operations 111 181 215
Capital Expenditures (23) (27) (30)
Free Cash Flow (2) 88$ 154$ 185$
(1) Net of insurance reimbursement. Furthermore, 2004 asbestos related payments includes $18M of payments relative to the
Master Settlement Agreement (“MSA”) and in 2005 includes a net receipt of funds of $5M relative to the termination of the MSA.
(2) Free cash flow guidance was raised from $165 to $185 million in April '06
* Crane Co. estimate April ‘06
11
CapitalizationCapitalization
FY'03 FY'04 FY'05 06/30/06Debt 396 297 294 294$ Shareholder Equity 786 664 753 862$ Total Capital 1,182$ 961$ 1,047$ 1,156$
Total Debt % of Total Cap 34% 31% 28% 25%
($ in millions)
•12/31/05 Cash $180 million
•6/30/06 Cash $100 million
12
2006 Capital Deployment 2006 Capital Deployment
Crane Co.Asbestos Liability
- Recent trends more stable
$100 M of Cash at 6/30/06
Rating Agencies- Stable BBB Baa-2
$185 M ’06 Free Cash Flow
Shareholders- Dividends
- Acquisitions
- Stock Repurchases
Redeploy Capital to Accelerate GrowthRedeploy Capital to Accelerate Growth
$294 M of Debt - 25% of Capital at 6/30/06
•Quarterly dividend increased 20% in July 2006•2006 acquisitions $162 million•In 1H’06, repurchased 636,300 shares for $25 million
13
2006 Summary2006 Summary
Profit Growth From Existing Operations
Strengthened Management Teams
Strategic Acquisitions for Core Business
Operational Excellence Traction
Late Economic Cycle Exposure
Expect To Surpass 2005 Record EPS
Redeploy Capital to Accelerate Growth
$100M of Cash at 6/30/06 $185 M ’06 Free Cash Flow $294 M of Debt: 25% of Capital at 6/30/06
14
Gabelli Aircraft Supplier ConferenceGabelli Aircraft Supplier ConferenceCrane Co. (CR)Crane Co. (CR)
Crane AerospaceCrane AerospaceSeptember 7, 2006September 7, 2006
Gregory A. Ward
President
Crane Aerospace Group, Inc.
15
Crane Aerospace GroupCrane Aerospace Group
$ M's Resource $M's Resource
OEM 4 2A/M 2 3M&UPlanned M&U
Totals 6
North America 2005 2010
2005 Sales $339M No. of Employees 1,450 Mfg Space 478,800 sq ft Global Business 30+ countries
Our 4 Brands: ELDEC - Hydro-Aire - Lear Romec – P.L. Porter
Lynnwood, WA
Burbank, CA
Wichita, KS
Elyria, OHLyon, France
Two plant consolidations
completed
Divested
Resistoflex
2006
16
Products and SolutionsProducts and Solutions
AIRCRAFTELECTRICALPOWER
AIRCRAFTELECTRICALPOWER
CABINCABIN
SENSING/UTILITY SYSTEMSSENSING/UTILITY SYSTEMS
LANDINGSYSTEMSLANDINGSYSTEMS
FLUIDMANAGE-MENT
FLUIDMANAGE-MENT
• Battery Systems• Ground Fault Interrupters (SafeTripTM)• Inverters• Power Management & Distribution Systems• Automatic Transformer Rectifier Units
• Battery Systems• Ground Fault Interrupters (SafeTripTM)• Inverters• Power Management & Distribution Systems• Automatic Transformer Rectifier Units
• Seat Actuation• Lumbar Support• Integrated Control• Power Conversion
• Seat Actuation• Lumbar Support• Integrated Control• Power Conversion
• Lube and Scavenge Pumps• Coolant Pumps and Package Systems • Fuel Boost, Transfer and Jettison Pumps• Fuel Flowmeters / Fuel Gauging Systems
• Lube and Scavenge Pumps• Coolant Pumps and Package Systems • Fuel Boost, Transfer and Jettison Pumps• Fuel Flowmeters / Fuel Gauging Systems
• Brake Control Components and Systems• Hydraulic Equipment• Gear Extension & Retraction Systems• Brake temperature monitoring
• Brake Control Components and Systems• Hydraulic Equipment• Gear Extension & Retraction Systems• Brake temperature monitoring
• Proximity Switches, Sensors, & Systems• Silicon On Sapphire Pressure Sensors• Weight & Balance Systems• Wireless Sensors (incl. SmartStem pressure)
• Proximity Switches, Sensors, & Systems• Silicon On Sapphire Pressure Sensors• Weight & Balance Systems• Wireless Sensors (incl. SmartStem pressure)
Current Products Value PropositionSolutions
Applications engineering excellence (system knowledge), lightest weight, highest value, highest power quality AC-DC power conversion
Applications engineering excellence, superior performance and flexible business models. Industry knowledge and expertise. Extending the life of braking components
Highest reliability, most accurate, and highest value position indication of critical systems such as landing gear, doors, and control surfaces (prox only)
Applications engineering excellence, superior product performance and packaging, fast development times and outstanding product support
Rapid development, on time delivery and use of emerging technology. Customers will pay premiums for passenger comfort and extended passenger services
17
OEM Sales MixOEM Sales MixTotal Civil Vs. Military
Sales
Strong Niche Shares
Landing: Brake Control 64% Sensing/Utility: Proximity Sensing 63% Fluid: Pumps 42% Cabin: Seat Actuation 41% Aircraft Electrical Power 30%
OEM Sales
Key Takeaway: Niche products and systems
* 2006E Total Sales
* 2006E OEM Sales
*BFE:Buyer Furnished Equipment
*Civil: Commercial, Regional, Business, BFE
18
OEM52%
BFE9%
M&U5%
AFTERMARKET34%
Three Business ModelsThree Business Models
New Buyer Furnished Equipment (BFE) Model
Cabin Solution only Serves both new and fielded fleets Replacement cycle every 5 and 13
years Short development and payback
periods
New Buyer Furnished Equipment (BFE) Model
Cabin Solution only Serves both new and fielded fleets Replacement cycle every 5 and 13
years Short development and payback
periods
Classic OEM - Aftermarket Model All Solutions except Cabin Driven by new platforms Long development cycles Long payback periods
Classic OEM - Aftermarket Model All Solutions except Cabin Driven by new platforms Long development cycles Long payback periods
Modernization & Upgrade (M&U) Model Focused on Operators Cost of
Operations Market based on fielded fleet Shorter development cycles Shorter payback periods
Modernization & Upgrade (M&U) Model Focused on Operators Cost of
Operations Market based on fielded fleet Shorter development cycles Shorter payback periods
2006E Sales Mix OEM (61%) /Aftermarket (39%)
19
Market2006 Build Rate
2007 to 2008CAGR
Key Industry Trends
Large Commercial Transports
800+ 4 - 5%World passenger traffic increasing 3-5% annually and driving demand.
Regional Jets 300+ (3 - 4%)50 seat market saturation. Focus is on 70- 100 seat platform for operating efficiencies.
Business Jets 700+ 2 - 3%Global economy sustaining modest demand. New VLJ segment.
Military Aircraft and
Rotorcraft
500+ 3 - 4%
CAGR driven by high mix of rotorcraft & fixed wing fighters. Uncertainty of new platforms like JSF in the out years.
OEM Forecast For The IndustryOEM Forecast For The Industry
20
Commercial OEM Summary
2002 2003 2004 2005 2006 2007 2008
0
500
1,000
1,500
2,000
2,500
Bu
ild
Ra
tes
Landing Commercial OEM Sensing Commercial OEM Cabin Commercial OEM Fluid Commercial OEM
AEP Commercial OEM Other Commercial OEM Commercial OEM Build Rate
Strong Civil OEM Growth: 4 - 5% CAGRStrong Civil OEM Growth: 4 - 5% CAGR
Crane civil OEM sales growth consistent with
build rates
Re
ve
nu
e
21
2002 2003 2004 2005 2006 2007 2008
Rev
enu
e
-25
25
75
125
175
225
275
325
375
425
Bu
ild
Rat
es
Fluid Military OEM Landing Military OEM Sensing Military OEM AEP Military OEM Military OEM Build Rate
Military OEM Growth: 3 - 4% CAGRMilitary OEM Growth: 3 - 4% CAGR
Build Rate Excludes Helicopters
Crane military OEM sales growth consistent
with build rates
22
Aftermarket Industry ForecastAftermarket Industry Forecast
Key Industry Trends:
Robust Commercial Spares and R&O due to aircraft coming out of warranty & Increasing active fleet
• 15,000+ aircraft today
• 3 – 5 % CAGR projected Growing installed base for
Modernization & Upgrade opportunities
More Commercial Initial Provisioning
Key Industry Trends:
Robust Commercial Spares and R&O due to aircraft coming out of warranty & Increasing active fleet
• 15,000+ aircraft today
• 3 – 5 % CAGR projected Growing installed base for
Modernization & Upgrade opportunities
More Commercial Initial Provisioning
# A/C Parked
# A/C In Warranty
# A/C Out of Warranty
0
5,000
10,000
15,000
20,000
25,000
2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
A/C
0
2
4
6
8
10
12
14
16
18
Age
Avg. Aircraft Age
Active Fleet Analysis*
Market Issues: Financial stability of the operators Fuel prices / terrorism / air traffic control Increased use of third-party R&O and
logistics
Market Issues: Financial stability of the operators Fuel prices / terrorism / air traffic control Increased use of third-party R&O and
logistics
Commercial
Aftermarket projected
at 3 - 5% CAGR
for the Industry
* ACAS data
23
Operators Need To Modernize and UpgradeOperators Need To Modernize and Upgrade
Large fielded fleet• 15,000+ Civil Aircraft• 30,000+ Military Aircraft (fixed & rotorcraft)
New aircraft• Technology making the A/C more efficient• Difficult for legacy carriers to compete with
newer fleets
Crane focus on adding value to the older aircraft
• Mandated safety items• Systems and components that reduce
operating costs
Operators will pay for added value• M&U tends to equate to better margins
Focused on balancing our Civil / Military mix
• Adding sales force• Investing in Military technology
Commercial M&U65%
Military M&U35%
2006E M&U Mix
Commercial57%
Military43%
2007 – 09E M&U Mix
24
New M&U ProductsNew M&U Products
Weight and Balance System• AirWeighs under development
Reduces operator costs New pax & baggage weights driving need Government funded flight demonstration
program pending contract finalization• C-130 Technology Demo completed• Competing for 777 Freighter
Wireless Tire Pressure System• “SmartStem” flying now• In-service evaluation on 777
Reduces operator costs Handheld version
• Contract with Cessna
On Board System• Boeing contract 777• Smiths contract 787
Existing Hydraulic Pump
Existing Reservoi
r
Airplane Hydraulic Pressure
Strut Oil
Strut Gas
Return Pressure
Strut Manifo
ld
Actuator
Isolator
Flight Mgmt System
Control Unit
Sensors & Actuators Interface
Sensors & Actuators Interface
25
Crane Aftermarket Growth: 15 – 20% CAGRCrane Aftermarket Growth: 15 – 20% CAGR
2002 2003 2004 2005 2006 2007 2008
Core Af termarket M&U
M&U accelerating our
Aftermarket growth
26
Aerospace Market SummaryAerospace Market Summary
Major U.S. Airlines making a modest profit Global airlines continue growth Impact of Oil prices & terror threat still in
question LCC model driving industry changes Steady Aftermarket Sales growth New opportunities due to large fleets
• Modernization & Upgrades
Military business hard to forecast• JSF, Tanker
• Funded upgrades
Increasing OEM Build Rates • Thru 2010
OEM Price Concessions• YOY with Aftermarket pricing limits
Major military platforms in the out years• JSF / UCAV
Many OEM program opportunities• Replace incumbent systems• Airbus A350 XWB• Narrow body replacements• LJs and VLJs• UCAVs
Many M&U opportunities• Military• Civil
Operators OEMs
Key Takeaway: 3-5% CAGR is expected in this changing aerospace market
27
So What’s Our Strategy?So What’s Our Strategy?
Balanced Long & Short term EVA Growth
Strategic Issues• High program investments• Intense price pressures• Technical resource shortages
Prioritization of Investments
Commercial
Military
Commercial
Military
Commercial
MilitaryOEM
Aftermarket
M & U
Intellectual Capital and Operational Excellence
MaintainMargins
Everyone, Everywhere
IncreaseOrganicCAGR
Protect & Maintain
All Solutions
• Airline financial health• Increasing build rates• Fuel costs & terror threats
Business Factors
28
Protect and Maintain the FranchisesProtect and Maintain the Franchises
Satisfy our customers• Voice of the Customer
• Dedicated team and process• Monthly review and actions• Train the entire workforce
Flawless customer metrics• Responsiveness
• On Time Delivery
• Quality
Satisfied Customers give us:• Follow on core business• New growth opportunities
29
Giving our customers more valueGiving our customers more value
Lean is our way of life• Enterprise-wide Operational Excellence
• Structured daily process• Visual controls• All functions
• Centralization of functions and processes• Leverage automation, standard work• Organized by value streams
• Streamlined Organization Structure• Easy to do business with• Right people in the right roles
• Increased productivity
• Low cost sourcing
• Facilities Consolidation
30
Reducing Costs & Improving ServiceReducing Costs & Improving Service
Legacy BusinessLegacy Business
4 Business Units w/ P&L
4 Leadership teams
Separate Functional Organizations
Multiple internal & external customer interfaces
Varying strategies & industry knowledge
Unique processes and procedures
4 Business Units w/ P&L
4 Leadership teams
Separate Functional Organizations
Multiple internal & external customer interfaces
Varying strategies & industry knowledge
Unique processes and procedures
One Company ChangeOne Company Change
1 Business Unit (w/ P&L) 1 Leadership team One bonus system
Centralized several functional organizations
Sales & Marketing single face to the customer
Began common ERP system implementation
Group processes and procedures
Common strategic agenda
1 Business Unit (w/ P&L) 1 Leadership team One bonus system
Centralized several functional organizations
Sales & Marketing single face to the customer
Began common ERP system implementation
Group processes and procedures
Common strategic agenda
Organization TransformationOrganization
Transformation
Streamlined organization
Right People, Right Roles
Centralized processesEngineeringQualityProgram Mgmt Infrastructure
Simplified customer interfacesOrder entry
Enterprise-wide OpExSDP, KaizenValue StreamsStandard work
Streamlined organization
Right People, Right Roles
Centralized processesEngineeringQualityProgram Mgmt Infrastructure
Simplified customer interfacesOrder entry
Enterprise-wide OpExSDP, KaizenValue StreamsStandard work
2002
2002 Sales = $257M
Employees = 1,299
Mfg space = 494,000
2002 Sales = $257M
Employees = 1,299
Mfg space = 494,000
2004 Sales = $309M*
Employees = 1,433*
Mfg space = 584,000*
Annual Savings = $7M 2004
(Acquisition of PL Porter)
2004 Sales = $309M*
Employees = 1,433*
Mfg space = 584,000*
Annual Savings = $7M 2004
(Acquisition of PL Porter)
2005 Sales = 9.7% growth
Employees = 10% less SG&A
Mfg space = 27% less 2006
Annual Savings = $5M 2006
(Sold Resistoflex 5/06)
2005 Sales = 9.7% growth
Employees = 10% less SG&A
Mfg space = 27% less 2006
Annual Savings = $5M 2006
(Sold Resistoflex 5/06)
2005
31
Investing more in Organic GrowthInvesting more in Organic Growth
Maintain margins while increasing R&D investments• Growing the Core Solutions
• Expanding Solutions with new M&U opportunities
Must Increase engineering capacity• To take advantage of growth opportunities
• Retention of key contributors• Re-recruit the Keepers
• Utilize remote engineering locations
• Greater mix of low cost capacity
Self funded R&D• 2005 - $36M 10% of sales
• 2006F - $43M 12% of sales
32
Organic GrowthOrganic GrowthL
on
g-T
erm
Sh
ort
-Ter
m
Segment Issue/Need Strategy
OEM Price Reductions Relentless competition Many new platforms
Win new platforms with flexible business models
Modular and reusable technologies
Niche products, systems
Aftermarket Airline financial health Global support More efficient aircraft
Improve TAT times Increase support
network Reliability of legacy
products
Modernization & Upgrades (M&U)
Shorter Development Cycle
Condensed Delivery Cycle
Airlines need lower operating costs
Airlines ROI = <1yr Can retrofit fleets
quickly
New M&U products and services
Focus on aircraft systems and cabins
33
Summary: Stay the CourseSummary: Stay the Course
Our focus remains on • High value niche products
• High margins
• High growth
All five niche Solutions are in high demand• Grow the Solutions by satisfying our customers
• Expand the Solutions with products and systems• That lower operating costs
Accelerate our M&U strategy
Aerospace Group Strategy Delivers:• Franchise protection• High margins • High annual growth