Greetings. Welcome to Crane Co's Third Quarter 2021 Earnings Call [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to Jason Feldman, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good day, everyone. Welcome to our third quarter 2021 earnings release conference call. I'm Jason Feldman, Vice President 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 the call with a few prepared remarks, after which we will respond to questions. Just a reminder that 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 Web site at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max.

Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Another exceptional quarter with solid results across the board. Even in this environment of persistent inflationary pressures, random supply and logistics issues and continued various COVID recovery conditions globally, we finished the third quarter with record adjusted EPS from continuing operations of $1.89, up 103% compared to last year, along with extremely strong adjusted operating margins of 16.8%. We delivered adjusted core sales growth of 19% with a number of strong leading indicators reflected in core order growth of 31% and core backlog growth of 13% compared to last year. Based on this performance, we are raising our adjusted EPS from continuing operations guidance by $0.35 to a range of $6.35 to $6.45, which is effectively our fifth guidance increase this year. Remember that our original guidance for 2021 was $4.90 to $5.10, and that guidance included $0.44 of earnings contribution from Engineered Materials. That means we have effectively raised guidance more than $1.80 on a comparable basis since January. Compared to 2020, on a like-for-like basis, excluding Engineered Materials in both periods, our current guidance midpoint of $6.40 compares to 2020 EPS of approximately $3.52, reflecting more than 80% year-over-year EPS growth, absolutely stellar performance by any measure. While uncertainty will continue related to COVID variants, sporadic supply chain constraints, inflation and overall global resource challenges, we have a high level of confidence in our revised guidance based on our team's outstanding performance, driving customer satisfaction and proactively and effectively managing inflation and the supply chain. For context, we were approximately price/cost neutral in the third quarter. Let me put our performance in perspective another way. The midpoint of the updated guidance of $6.40 is well above our prior peak pre-COVID adjusted EPS of $6.02 in…

Thank you, Max, and good morning, everyone. I have an easy job today because I think our results speak for themselves. Even in these challenging times, we have continued to execute and my thanks to our leadership teams and associates globally for their consistent focus on driving sustainable value creation for all our stakeholders. Moving to segment comments that will compare the third quarter of 2021 to 2020 on a continuing operations basis, excluding special items, as outlined in our press release and slide presentation. At Aerospace & Electronics, sales of $169 million increased 7% compared to last year. Segment margins improved 370 basis points to 19.3%. In the quarter, total aftermarket sales continued to gain momentum and increased 24% compared to last year after 3% of growth last quarter. The strength was driven by commercial aftermarket with spares, repair and modernization and upgrade sales, all up substantially. On the military side, spares and repair both improved in the 10% range, but military modernization and upgrade sales were lower. Commercial OE sales increased 31% in the quarter, following 4% growth last quarter. As expected, defense OE sales declined in the teens. On a year-to-date basis, defense OE sales are down 6% after three years of double-digit growth. Given our strong position in major projects that we have already won that will be ramping up over the next few years, we remain confident in our ability to grow our defense business at a high single digit CAGR from 2021 through 2030. The fourth quarter of last year marked the trough for both sales and margins at Aerospace & Electronics. While the Delta variant had some short term impact on demand, the overall momentum in the industry continues. Specifically, we expect near term relaxation of international air travel rules and rising global…

[Operator Instructions] Our first question is from [Elizabeth Grunthal] with Bank of America.

I just had a few questions. The first one is, how do you think of like the minimum cash balance that you'd want to have on the balance sheet to maintain that flexibility for M&A versus what you could deploy for share buybacks, assuming that you could obviously do more than the $300 million authorization that you announced?

I think it's more about just general capacity versus cash on the balance sheet. So we target anywhere from 2 times to 3 times debt to EBITDA in line with how our rating agencies view capacity. So that's our first starting point as we think about how much we would then allocate potentially to capital deployment to shareholders.

And then secondly, when we think about margins in aerospace, is there any reason -- I think you said it could be greater than 17%, but it seems like it could be much greater than 17%. Just given where we are year-to-date and what that would imply for the fourth quarter?

We do expect margins to moderate in the fourth quarter a bit. We had some very strong aftermarket shipments that shipped in Q3 versus Q4 that we were otherwise expecting in Q4. So some of the margin outperformance in Q3 was timing related and we see that as at the expense to an extent to Q4. So the guidance that we gave you here for Q4 is what you all should be modeling.

And as Rich has commented before, by the way, for next year, he has said that we expect to reach 20% by the second half of next year. So we're committed to good growth in '22.

And then my next one is just can you speak to any concerns you're seeing with regards to the supply chain and inflation, any sort of headwinds you're potentially seeing or how you're mitigating those?

The way we've approached this all year, even going all the way back to our operating plan in November of last year, we made some assumptions about the operating environment. Inflation was going to be with us for quite a while. COVID, we're going to continue to see in and out. We're going to have X number of associates potentially quarantining on any given day, subsuppliers are going to see the same. Labor availability, continuing to be a challenge, wage pressure, logistics, I mean we're seeing it in the ports, it just continues. The way I think about this, the way we are operating at Crane is that we have forecasted at the current run rate, expecting continued disruption. What that means is, on any given month or quarter, things come in, you get surprised on some upside. You get some new surprises that you should have expected, but you just can't exactly pinpoint. That's the reality of the environment that we're in today. It's not getting any better. It's not getting any worse. The machine is working globally. It's just with higher variability, higher levels of disruption. So I find it interesting to see how others continue to call this out, whether they call it out specifically, whether things are cited. This is the environment we're going to be in and we're planning on for 2022 as well. I think what we have done in this environment are those decisions that we make every single day that our outstanding team of 11,000 associates globally are making to operate as effectively as possible in this environment, and that is starting with being very selective and intentional on how we serve our key customers. Protecting our factories and our workers from overstressed overburden, making sure that we balance customer needs with our ability to execute and manage through the supply chain disruptions. And I think we're doing a phenomenal job, which all leads through to outstanding performance in the P&L. So I know it's a long winded answer. I'm sure others have the same question. I think generally, questions want to be specifically what component, what commodity, where are you seeing it? And it's everywhere and it's nowhere. It's constantly changing and it's the environment that we're in. And we think we're well positioned to continue to operate effectively in that environment and continue to grow in that environment. And that's what I think we're clearly demonstrating as well.

I would just echo on that, Max, that the comments you made about the new reality and that we saw this early or earlier, as Max pointed out back in November during our plan season and our outlook that we have that we provided back in July as well as the updated outlook that we have today for you, accepts that new reality. So our forecast considers the environment that we're operating in today.

Does that help, Elizabeth?

Yes, that helps. And then if I can just ask 1 more. How are you thinking about the vaccine mandate and will that -- how that will impact you to the extent that your defense contracts exist?

Right now, we have no vaccine mandate in place and we're evaluating. Rules, regulations, we will certainly comply with the law but we have nothing more than that right now.

Our next question is from Nathan Jones with Stifel.

I'm going to start on the couple of businesses that are still fairly well below 2019. Max, I think you said the A&E business is $150 million revenues, [$80 million] in profits below where it was in '19. That would have you pretty much sitting on the same margin as you did in 2019, $200 million out of Payment & Merchandising. I would think most of that is probably about average margin, given Currency is doing so well. Do you guys have any commentary on when you think you'll be able to get those back to the 2019 levels? I mean we've seen things are going in your favor at the moment, more travel, casinos open, more business is open and all of those kinds of things, plus some tailwinds from labor shortages and things like that, that might even help you to eclipse that level. So just any commentary you can provide us on when you think you'll be able to get those back to 2019 levels?

Broadly, I would say, within two years, give or take, would be the quick answer, Nathan. So you're right about A&E with respect to the tailwinds there and how we should see ourselves lever up quite a bit. I made a commitment, as Jason mentioned, that we should be at the 20% level by the end of next year. As things continue to recover and how we operate in that business, by 2023, we don't see that as being an issue. And I would agree with your comment with respect to payment.

And then I wanted to ask about this high priced consumer goods opportunity that you were talking about using the Crane Currency technology there. It sounds like a very interesting opportunity. You mentioned an $800 million addressable market. What kind of market share do you think your technology could take in that business?

Well, just to clarify the technology itself. So any time you buy -- let's say, it's a sporting good device. You know the hologram that you see, you might see on some tags for -- all of this is aimed at trying to prevent counterfeit goods from coming in the country and easy identification. Well, the counterfeiters continue to get more and more sophisticated. The high end retailers and brand managers continue to care about the physical products and the counterfeiters and continue to seek higher and more difficult to counterfeit solutions like we provide with our micro-optic thread. And so we come up with our design teams, some incredibly attractive designs that are used in conjunction with broader spectrum like Octane5 offers in terms of software solutions, traceability, and we're pretty excited about the opportunity to capture share. I would say that I don't have an exact share number right now, Nathan, but I clearly have $50 million in sight honestly, in the foreseeable future as we continue to attack this marketplace.

And my last one is going to be on Crane Currency. I know you typically dropped down in the fourth quarter. I don't think the fed released the bill order for fiscal 2022, even though we've already started that. Is the fact that they haven't put that out yet part of the region that you're dropping off here in the fourth quarter and you should make that up, I guess, first three quarters next year?

No, I mean it wouldn't -- demand profile like that doesn't change that fast in that environment. And so absolutely not -- any part of the rationale. It's the timing that we expected. Again, we've been reiterating since the beginning of the year…

It was more around international…

It was more about international, not domestic.

So that's just normal timing. And on US, you're right. The Fed has not put out the order yet. I think as we've discussed and described, the 7.6 to 9.6 range we had this year, which was highly unusual for a myriad number of reasons, difficult to hold at the low end. I think it's what we're probably going to see is that, as we predicted, is that this is going to help extend a higher run rate for the foreseeable future. We can probably expect that low end of that range again this year, it’s kind of how we're thinking about it.

Our next question is from Damon Karas with UBS.

So just a follow-up question on currency here. You talked about sort of the step down in the fourth quarter margin as you've been discussing due to shipment timing. Just I guess, thinking about kind of going forward and the margin trajectory, is 4Q sort of the run rate we should be thinking about for the business then? I mean, obviously, this year, you had some positive mix from the US side of the business earlier. So should we be thinking of the fourth quarter as kind of the run rate on margin or more of kind of like the full year results?

I wouldn't use the fourth quarter as a jump-up point for '22 for currency or any of the businesses actually. Every quarter is going to be a little bit different. Rich actually said in his prepared remarks that we expect the Payment & Merchandising segment to be back into the 20s again next year. So we're not going to give more precise guidance than that at this point in time, it will be in the 20s.

And did you happen to give the breakout on how much the underlying growth was for both currency and then the payment side in the quarter?

No, we did not. But it's in the high double-digit range for both.

And then just one last question on the corporate cost about significantly higher $10 million or so. Rich, what's the reason for that?

So we took -- in my prepared remarks, I mentioned that we did take a charge in the quarter or we anticipate in the quarter in the fourth quarter or taking a charge related to closing out a foreign pension plan. And so it's noncash charge in the quarter. So that hits us. And then general professional fees that we're spending across a myriad of things that we're working primarily around M&A due diligence and things of that nature. We would expect to come back down as we look at next year.

Our next question is from Matt Summerville with D.A. Davidson.

A couple of numbers that you gave that really stuck out. I want to focus on, one is pertaining to CPI. I think Rich mentioned that with respect to the retail vertical with some of the things you're doing on a more of a customized or partnered basis with retailers that funnel being $185 million. I guess I'm curious over what time frame does that funnel convert? And is that still growing or has that shown signs of peaking out? I was pretty struck by that number.

I would say, I would probably think of that as about two year funnel in terms of when ideation starts and when a program would be executed by one of our customers. I would say two years is a typical time line for that. We would expect to win a good piece of that, as you might expect. So I think that would be the way to think about it, Matt.

And then with respect to pricing and how you're thinking about '22, Max. How much incremental price do you feel like you need to go get and I guess, are you thinking about it strategically different? How you implement these increases versus how you went about '21 in kind of your late-stage planning process that you highlighted earlier?

I'll start off and I'll see if Rich has anything else to add. But in terms of pricing, all of our businesses are very, very different. There's no one size fits all. I would say that certainly, as it relates to -- certain charges that are more immediate, it hasn't been baked into prices we've actually implemented surcharges. So we expect those surcharges to go away when certain excessive logistics charges and so forth would go away. Others, we've been openly communicating with our customers about why the pricing increases. We think we've been very, very effective in managing that. Quite honestly, Matt, I view it as we're going to react as we need to, based on inflationary pressures. We're also going to look to stay as competitive as possible. We need to be careful that we're prepared on some of those surcharges if the market improves, if inflationary pressures subside that we're able to adjust when necessary and continue to grow. So I think we've got an incredible balance. I think our teams are doing an awesome job. I would say it's a continuation of how we're operating in 2021 into 2022.

I would say the same thing in terms of it’s -- we don't see these challenges subsiding in the near term. So we'll continue the same discipline.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Max for closing comments.

Thank you so much. Another excellent quarter and continuing to deliver on our promise of inflection and momentum, further evidence that the investment thesis we presented last February is playing out as expected. We are in the very early stages of a strong market recovery. We've invested heavily in our organic growth initiatives and results are reading through in consistent above-market sales growth. We have growing opportunities for acquisitions in Process Flow Technologies, in Aerospace & Electronics, building on our core competencies. We continue to have confidence in our ability to add value through acquisitions. However, we remain financially disciplined. And as shown with our repurchase announcement yesterday, we will return excess cash when it is attractive and appropriate to do so. And we have an incredibly strong foundation to build upon grounded in the Crane business system, driving consistent execution along with the culture of ethics and integrity. And as a late great inventor of the Veg-O-Matic, marketing guru and creator of the infomercial, Ron Popeil would say, but wait, there's more. Very fitting for us today. We're just getting started. And I'm incredibly excited about our opportunities to drive continued shareholder value in the quarters ahead. And remember, Crane stock is in limited supply, not available in store so act now. I look forward to speaking with you in January on our fourth quarter earnings call and then hopefully to see many of you in person later at our March 2022 Investor Day event. Thank you for your interest in Crane and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.