Greetings and welcome to the Crane Co. Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jason Feldman, Director of Investor Relations. Thank you. You may begin.

Thank you, operator, and good day, everyone. Welcome to our second quarter 2019 earnings release conference call. I'm Jason Feldman, Director of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Senior 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 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. Now let me turn the call over to Max.

Thank you, Jason. As outlined in our press release last night, I'm pleased to report Crane's second quarter EPS, excluding special items was $1.58, up 12% compared to earnings in the second quarter of last year. Sales of $842 million decreased 1% with 1% core growth more than offset by unfavorable foreign exchange of 2% and a slight divestiture headwind. Core growth was very strong across Fluid Handling and Aerospace & Electronics, with expected headwinds of payment and merchandising due to extremely challenging comparisons. Operating profit, excluding special items increased 9% from last year to $132 million. Adjusted operating margins improved 140 basis points to 15.6% in line with our expectations, and led by very strong margin performance across our three primary growth platforms. Before I provide more detail on our businesses, I would like to make some comments on our recent offer for CIRCOR. Certainly our approach was atypical, but we have previously explained why we felt the need and the responsibility to go public. We are very thankful for the support we received from CIRCOR shareholders throughout this process. At expiration of the tender, we had just over two-thirds of CIRCOR's shares supporting our offer, a remarkable result. There was much stronger than typical for these types of situations, almost unheard of, and a stunning rebuke to the CIRCOR Board and their submitted plans for value creation. CIRCOR issued a statement yesterday that they remain open to any transaction in the best interest of shareholders strikes me at a minimum as extremely disingenuous. We've attempted to contact CIRCOR many times. I've emailed and called their CEO repeatedly, even over the weekend and yesterday. Our bankers have reached out to their financial advisors throughout the process to no avail. They won't even return our calls. We've also made it…

Thank you, Max, and good morning, everyone. As usual, I'll be providing segment comments that will compare the second quarter of 2019 to 2018, excluding special items as outlined in our press release and slide presentation. To start, I remain very pleased and impressed with our teams across Fluid Handling, who have shown consistently how well they balanced driving growth while executing successfully on repositioning. In the second quarter, Fluid Handling sales of $291 million increased 5%, reflecting core sales growth of 8%, partially offset by 3% of unfavorable foreign exchange and a small divestiture impact. Fluid Handling operating profit increased 31% to $40 million, with operating margins of 13.7%, increasing 270 basis points compared to last year, reflecting higher volumes and productivity. This was a very strong performance by the team in the quarter, again, driving very strong operating leverage by continuing to execute on repositioning actions as well as growth initiatives. Fluid Handling order backlog was $275 million at the end of June compared to $280 million at the end of 2018 and $292 million at the end of June of last year. In the quarter, we saw growth across all of our businesses, both on the commercial as well as the process side. Market conditions remain similar to what we described at Investor Day with our core markets positive and relatively steady, while that characterization generally still holds, we have incrementally seen a few spotty signs of softening order activity. After adjusting for foreign exchange, the backlog declined to 3% sequentially and 4% year-over-year orders also adjusted for foreign exchange improved 2% sequentially and declined 2% compared to last year. Order activity in the quarter was approximately in-line with our expectations and still consistent with the demand levels necessary for us to achieve our full year guidance.…

Thank you. [Operator Instructions] Our first question is coming from Brett Linzey of Vertical Research Partners. Please go ahead.

I want to start with Fluid Handling, very solid on the on the top line in the quarter, but specific to orders, you've noted some of the moderation you saw in the quarter. Has that trend continued in July and that -- the kind of down low-single-digit range and then maybe any specific areas within your vertical mix that have slowed a little bit more?

Yes, sure. So Brett, I just start off by saying -- our full year or forecast in aggregate is largely consistent with what we expected coming into the year. So no major shifts and changes. Following the 6.5% core growth in the first quarter and 8% year, we're holding our 4% guidance for the full year, and so the cadence of what we've seen is, again, consistent. And with that core growth declining on a rate basis with the second half comparisons being more difficult. So just to frame up. So while we did -- we are positioning here some softness overall supporting our full year guidance. From a process point of view, I would say just to give you some color and I'll answer the question on trending, again, generally in-line with our expectations as we talked about at the beginning of the year, some signs of softness in specific areas related to projects, some push outs from on projects mainly in chemical, and we did see our first large project cancellation, not something that we had booked and canceled, but a project become canceled. On the MRO side, a little bit slower with distributors reducing inventory levels in particular in the Americas, so a little bit of color there on the process side. From a geographic point of view also in process, I would say that Europe has pretty much the same to slightly weakening from the last time we spoke. US decelerating a little bit from a growth point of view and still seeing some nice opportunities, both still in the US and in China as well. And then from an end market perspective, power, as you might imagine still weak; refining OK, it was actually a little strong for us here in the quarter and decent, and again underlying chemical demand, but again, some project push outs that impacted us in the quarter. From a commercial point of -- commercial point of view -- does that answer -- does that help, Brett?

Yes, yes, that's good and I appreciate that. And then maybe just pivoting M&A, it looks like you guys are shifting to sort of plan-B here. Maybe just a finer point on the actionable ideas that you currently have in the funnel and I guess, what's the concentration look like between small or medium size to something a little bit larger? And then maybe what's your preference within that size range? Thanks.

I think it's very fairly -- right now, it's interesting, it's fairly balanced on size as well as across the segments. We were looking to drive intelligent acquisitions, no matter which are the focus segments. So there's there's no strong preference between Fluid Handling, Payment and Merchandizing and Aerospace & Electronics. It's around availability and actionability and right now we are tracking in each.

Thank you. Our next question is coming from Damian Karas of UBS. Please go ahead.

Max, you made a comment about the share gains, it's driving about after growth Fluid Handling. I was wondering if you could maybe elaborate on that a little bit? Any end markets or product lines where you guys think you're really capturing most of the share, perhaps on the chemical side, even though you're seeing a little bit of weakness there now, maybe just any color around the share gains you've been able to achieve in Fluid Handling?

Yes, some of the new product that we've launched around emissions -- fugitive emissions controls in higher value added requirements by some customers, both in chemical as well as some petrochemical, where that's valued. We clearly are seeing some share gains, some in the pharmaceutical space with some new product introductions that we've had there. So it's a combination of new product as well as geographic execution, is how I would frame it up.

Okay. And you think that you could continue to gain some share going forward?

From a share gain standpoint, I think, like we're all reading right now and on the broader macro, are there signs of some deceleration. Markets are still solid. Things feel good. US economy is solid, more so than Europe. We're tracking everything that everyone else is reading around some of the decelerating signs, whether it's US PMI, orders index, freight volumes, so forth. So it's just a question of what we're seeing. Now, Rich just took us through on the process side. What are we seeing? A little a little bit of deceleration. We're seeing, as he's mentioned, for -- a little bit more of projects pushing to the right. First time we saw cancellation. So these were just some some indicators that things are not bad, but slowing. On the process side, generally -- general industrial is across all geographies, BASF came out with some weakness. So, having said that, if I go across the rest of Fluid Handling also, what's interesting is in the spottiness of the slowdown. For example, Canadian distribution is doing quite well. Construction is up, activity solid, little bit of recovery. It looks like on the western, the oil sands, potentially mining solid, particularly gold mining, U.K. conditions on the commercial side, probably better than we expected, holding up generally flattish. Middle East remains depressed, not dramatic change. I would say that in some of our other Fluid Handling businesses that have exposure to the European machine tool sector, a little little softening there. And then if you move over to the pump business with municipal visibility, good activity. In municipal, probably flattish on on construction activity on the pump side. And then, this industrial -- general industrial weakness showing up on the pump side as well. So it's mixed. We've got some bright spots as well as -- this early sign of generally solid end markets. Clearly, as Rich said, clearly supporting our full year and slowly decelerating. Hope that helps Damian?

It does. That's helpful color. And a follow up question on M&A, Max you sounded quite optimistic about your opportunities across the three growth segment, specifically as it relates to currency? One of your competitors there is going through a little bit of a management shakeup and there's some portfolio changes in the works. I'm wondering if you have seen any changes in the market environment or your relationships with the customers as a result of that? Would you potentially have any interest in those assets?

No comment on the asset. I would say that regardless of any of the competitive moves that our team continues to execute to our plan, driving enhanced value through our technology differentiation, our service, our delivery, our quality and all those things continue to play out.

Thank you. Our next question is coming from Matt Summerville of D.A. Davidson. Please go ahead.

A couple of questions. First, to your prepared remark Rich commented kind of on the third and fourth quarter earnings cadence. Can you talk about what's driving sort of the lopsidedness between the third quarter and fourth quarter? You mentioned timing. Can you just give a little more granularity maybe down to the segment level, why you're seeing that sort of split, if you will?

Yes. So what I would say, if the added granularity would be around payment and the lumpiness of some of the opportunities that we have there that we've been pursuing and in terms of when they'll actually realize and ship. So that's the primary move that we see here from Q3 to Q4, so the overall growth profile in Q3 relative to Q4 and what we have for balance of the year, it's off. It's all -- it's all in Q3 from that point of view. So, when you think about the full year guidance that we have out there, if you were to look at that midpoint that we're at, it's roughly a 45% to 55% aggregation, if you look at Q3 to Q4 in total.

Sure, sticking with the payment side of the business. Can you maybe parse out in a little bit more detail, the underlying organic that you're seeing in the CPI business versus the merchandising business? And then on the currency side, if you back out the one single large customer, is that business growing this year organically? Do you believe it's going to be up ex- that one large contract?

Sure. So, I mean, just going through them -- at CPI, solid year-to-date performance, the core growth there has been, I would say, exceptional in particular in the retail space showed strong signs, as I mentioned in the prepared remarks, not only there but in transportation and other areas, vending, etc. Gaming is one spot that's a little bit spotty in the business and it can be a sign of some softness in the overall economy and it's one that we're watching closely, but still executing really well with our growth initiatives in that space. But from a market point of view, I would point to that being the only really weak spot or the most notable weak spot within the business, but overall, the CPI business, exceptional core growth when you look at first half performance. From a merchandising point of view, I would say just status quo, not not a whole heck a lot of growth there at this point. We're following the bottlers and then on Currency, excluding Venezuela, yes, we are seeing growth. We're seeing notable growth in particular in the international market space year-over-year.

Thank you. Our next question is coming from Robert Barry of Buckingham Research Group. Please go ahead.

So I just wanted to maybe put a finer point on the comments about CIRCOR, the bottom line there, as far as you are concerned, it's just like a no go at this point?

Never say never. Right now we've done everything we feel possible to engage. I think CIRCOR shareholders had clearly, from all that we have spoken to have engaged with the Board of CIRCOR and have asked them to engage. There's no engagement. If something were to change in terms of engagement, we would certainly welcome that. The point being that with course of our process, what we can do, we had the full support of CIRCOR's shareholders. And at the end of the day, if the Board of CIRCOR wishes to remain entrenched and stick with their defenses and say, no, can do that and continue to work to their plan. So it's more one of as days continue to progress, Rob, it becomes less and less likely.

Yes. And the comments on the pipeline, it sounds like there's a fair amount of activity there. I mean, are there -- is it fair to assume that there are other actionable items kind of the next quarter or two?

We can never say -- we can never affirmatively say one way or another, but I would say our hopes would be yes.

Got it. Just shifting in the fundamentals and trying to make sense of the guides for a Fluid and Aero, I think both are guided to grow for, both are tracking up much stronger than that pertaining to the first half. it sounds like maybe 4%-ish for Fluid still makes some sense given things are softening a little, but on the Aero side, I mean their line of sight to the back half being, would have to be really materially weaker than the first half, is that the right way to think about it or is there something...?

No, I think it's good question, Rob. On the Fluid Handling side, you're right, we're going to be roughly right into where our guidance was. Just remember that we have tougher comps as we enter the back half of the year. So that 4% is still, we feel the appropriate guidance figure and for Aerospace & Electronics, I would expect us to be higher than the implied growth rate if you kept our 4%. So I would expect us to be in the high single-digit range by the end of the year.

Just lastly on price cost, curious if you're seeing any signs of help from inflation -- I'm sorry, deflation? And on the price side, whether the kind of pricing environment or ability to get price is perhaps getting a little tougher, end markets are slowing a little bit?

Yes, so overall, -- we've been doing -- the teams have been doing a fantastic job on price cost, dealing with the tariff exposures that we have as well as the dynamic movements on material cost. So overall the price is holding. We're continuing to be targeted in that area and strategic in how we do it. And the overall relationship has been positive for us on a year-to-date basis and we do see that result that we've seen in the first half continuing into the second half.

Thank you. Our next question is coming from Nathan Jones of Stifel. Please go ahead.

I'm going to beat the circle to get a little bit more. Really, it sounds to me like you have a pretty full pipeline on the M&A front. It sounds like there's some executable things in there. Rich mentioned again here today that you've got a couple of billion of M&A capacity over the next few years, which CIRCOR would have sucked up almost all of it. Is it fair to say here that, if you execute on any kind of deals of size, it basically takes CIRCOR off the table for you guys for an extended period of time?

It's hard to say with any deal size, but conceptually I think you're accurate.

Would you have any intention of looking to force changes at the board level when it comes to their election next year? Is that something that you'll now leave up to CIRCOR shareholders? Just how you might approach that, let's say if you don't get any kind of deals done over the next six to nine months?

No, I think Nathan that we'll continue to monitor, CIRCOR and their performance and depending on our own path forward, continue to explore. I think it's important for us to have certainty of our Crane shareholders and not have uncertainty continue to linger, where we may or may not do. So right now, we have absolutely no plans whatsoever to pursue this in April and fight a long entrenched battle if they remain completely unwilling to talk, but again, we certainly will monitor the situation, but we have no plans to do what you've just said.

Okay, fair enough. I just wanted to move on to Engineered Materials here for a minute. You guys have talked about expecting the destock there to be done about mid-year, now, it sounds like you're thinking it's going on to end of year. It certainly looks from the comps here that it's a little bit more than just destocking in the channel. It looks a little bit like the cycle might have rolled over here. As you said, it's it can be a leading indicator of softness economically, which I think what we are seeing. Can you maybe talk a little bit more about what the possible outcomes here could be? What you're seeing in terms of sell-through in the end markets there?

Yes, I would say that I don't think our position is materially changing from last quarter. We said that destocking would be largely complete around midway through the year. We do see that is taking a little bit longer. We're going to start to see core growth we believe in the fourth quarter. So we do think that we're getting through the inventory appropriately here in the channel.

In terms of end markets, it's RV. This is the soft spot, building products and transportation in that segment are actually holding up fairly well, surprisingly.

Okay. I got one more on Fluid Handling margins. You're about 50 basis points in the first half ahead of the full year guide. I would assume that price cost should actually be a little more positive for you in the second half with input costs having fallen -- you have to do about 12.5 come down in the second half, it looks like the revenue numbers are probably still going to be basing around flattish. Should we be expecting you to outperform that full year margin guide given the execution that you've had here in the first half?

Yes. Yes, I would -- I would expect that. It will be modestly higher than our guidance at 13% that we have provided at the beginning of the year Nathan. We'll be a little bit -- we'll be better than that.

I like the short answer of yes for those kinds of questions. Okay, I'll pass it on. Thanks very much for the time.

Thank you. Our next question is coming from Kristine Liwag from Bank of America Merrill Lynch. Please go ahead.

Max. As you evaluate your acquisition pipeline, can you discuss the hurdles that you look at and the main things that you evaluate during due diligence? And a follow on to that is, when you look at the big acquisitions you've done in the past few years MEI and Crane Currency transformed your payment business, are you interested in adding another leg to Crane through transformative action, there may be a complete new leg? Or do you want to do more deals like CIRCOR, where there's an obvious strategic fit?

Yes, so right now Kristine, no new leg -- in our strategy, there's enough fragmentation and opportunities within Fluid Handling, Payment and Merchandising technologies, as well as Aerospace & Electronics that we believe that we're going to stay very focused on those three core segments right now. I'll ask Richard, just to remind us again on the acquisition.

In terms of what we look at from a return perspective, Kristine, obviously a positive NPV at the right risk adjusted rate is how we value, and then an ROIC, that's appropriate as well and we have targets for three and five years. So we like to see 10% by year three and depending we might stretch that a little bit to year five, but that it's year three, 10% ROIC and a positive NPV. Again, at the right risk adjusted rate. There's other elements that we'll look at, but those are the two primary ones.

Thanks. And on Fluid margins, in the past you guys have mentioned that you could expect the next $100 million of revenue in Fluid to get you at least 50% in incremental margins. When I look at the quarter, you're kind of tracking around 69% year-over -year on an adjusted basis, so first, were there any one-time items in Fluid margins that contributed to that? And then also second, even with a slowdown in order activity that you're seeing, do you still think you can get that 50% run rate going forward?

Yes, so in the quarter nothing unusual, it's just us executing on the repositioning actions. You're going to see incrementals that are higher than here and there, as you're executing on things like repositioning a variety of different productivity initiatives, so they'll layer into quarters maybe a little bit different. I would say that the 50% still holds and we would expect -- we're already at 13.7%, now, here, I think we did 13.5% last quarter, so already in our range right before the end of the year. And I think at the beginning of this year, we said that we'd get there by the end of the year so clearly we're achieving what we said. With the order rates as long as we're in a growth environment, we're going to leverage at a pretty -- at a pretty solid rate.

Thanks. And lastly for me. If you're not able to find any viable targets in the next year or two, would you consider returning more cash to shareholders?

Always part of our analysis is capital deployment and allocation and shareholder return, always is part of that equation we evaluate.

Thank you. Our next question is coming from Ken Herbert of Canaccord. Please go ahead with your question.

Max or Richard just wanted to first ask about Aerospace & Electronics margins, very strong in the quarter and you clearly looked -- looks like you benefited from mix. Can you somewhat -- can you talk about anything else, maybe one time or unique in the quarter that contributed to margins in the segment? Or maybe how much of it -- how much of a benefit mix was in the quarter?

Yes, when looking at the overall performance in the quarter, it was largely mix and it was -- it was tied to the aftermarket in that regard as you know. So that was the primary driver in the quarter. No unique one off benefits that were recorded Ken in the quarter.

Okay, and as you look, similar commentary, I mean, is it fair to assume that the full year margin assumptions for the segment, barring any significant change, should be ahead of the full year guide provided back in January at the Investor Day?

Yes, we would expect to finish stronger than -- stronger than the 23.7% I think, guide that we had, not a whole heck of a lot stronger, but we'll finish stronger on the year.

Okay, great. Thanks. And another -- I mean, against very sort of strong growth a year ago, another quarter of very good growth in the backlog in Aerospace & Electronics, can you just provide any more detail again on where you're seeing the strength and timing of what's flowing into the background in terms of what's getting shipped, maybe this year and into 2020 and how we should think about that growth and where it's coming from and the timing of deliveries?

Yes, it's a little bit tougher. We're seeing -- we're seeing the growth in the backlog come from a lot of different spots, right. A large portion of where we're seeing it over the last call, it six months has been in the Power area -- Defense Power, so we're seeing some nice opportunities on the defense side that are rolling in. I would say the order rates from -- on a year-to-day basis coming through commercial are -- they're coming through on the platforms that I know you're well aware of that we're on. So how they cascade into 2020, I'm not really prepared to give you a whole heck a lot of granularity on that at this point, Ken. But I think the overall message here is that we're seeing broad strength on the commercial side, on the defense side, on the aftermarket side and the OE side, and I would leave it at that and let us come back to you as we give guidance on next year when we do that in January.

Okay, that's helpful. If I could, just one final question. I mean, it sounds like we may finally start to get a little more direction or certainty around Brexit. Can you just level set us again on maybe your exposure or implications for your business or how you're thinking about that as the potential impact?

Yes, I mean, so on the Fluid Handling side, I would say the primary spot where we have an exposures there -- exposure, whatever comes of it, right, is part of our -- it's again a part of our Fluid Handling business on the commercial side. We have a UK business that has exports and it's the area that would be most susceptible. But honestly, we don't see it having a big impact on us as we think about the balance of this year or next year.

Thank you. At this time, I would like to turn the floor back over to Max Mitchell for closing comments.

Thank you, operator, and thank -- thank you all for your time this morning. We had a very solid first half of the year driving growth, improving our cost base and positioning Crane for the future. Our results are a testament to the strength of the Crane team and the value of the Crane business system. It was also an eventful quarter with our offer for CIRCOR. While ultimately disappointed with the outcome, our approach should reinforce that we are prepared to make bold moves, but we will remain disciplined, both strategically and financially. In closing, I will leave you with the words of the recently deceased renowned Chinese-American architect Ieoh Ming Pei, stop worrying about missed opportunities and start looking for new ones. Thank you for your interest in Crane. Have a great day.

Ladies and gentlemen, thank you participation. This concludes today’s conference. You may disconnect your lines at this time and have a wonderful day.