Greetings, and welcome to Crane Co. Fourth Quarter 2021 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. I would now like to turn the conference over to your host, Jason Feldman, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good day, everyone. Welcome to our fourth 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 our 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 website at www.craneco.com in the Investor Relations section. Please also mark your calendars for our March 30 Investor Day event. We expect to host this event in person in New York City. Please contact me directly if you would like details. Now let me turn the call over to Max.

Thank you, Jason. 2021 was yet another year with an extremely difficult operating environment, but one in which we drove phenomenal results. I want to start by thanking our teams globally across Crane that drove these results through another year with COVID-related uncertainty, supply chain challenges, rapid inflation among other difficulties. We have worked along with the full management team to protect our associates, both physically and financially as well as possible. And 2021 was the second year in a row where our teams had to work through numerous personal sacrifices and challenges while still protecting our customers and creating value for all our stakeholders. Despite all of these challenges, our combined efforts drove impressive results. Record adjusted EPS of $6.55 increased 87% compared to 2020. Record operating margin of 15.8% and record free cash flow of $415 million, which was 107% of adjusted net income. For the fourth quarter specifically, adjusted EPS was $1.25 compared to the $0.92 in the fourth quarter of last year. Let me put our performance into perspective, a few different ways. First, our original 2021 guidance midpoint was $5. That guidance included $0.44 of earnings contribution from Engineered Materials. So we delivered approximately $2 in EPS better than our original guidance on a comparable basis. Second, our 2021 results were better than prior pre-COVID peak in 2019. Again, results in 2021 better than prior pre-COVID peak in 2019. Excluding Engineered Materials in both periods, 2021 adjusted EPS of $6.55 was 15% or about $0.86 higher than the prior peak, even though many end markets remain below 2019 demand levels. Remember, our Aerospace & Electronics business in 2021 was still approximately $150 million in sales and $80 million in operating profit below 2019 levels. That's about $1 of EPS to be realized over the next…

Thank you, Max, and good morning, everyone. As usual, I’ll be providing segment comments that will compare the fourth quarter of 2021 to 2020, excluding special items, as outlined in our press release and slide presentation. Before I begin, I would like to reiterate Max’s comments, the effort from our teams over the last two years in particular has just been amazing to watch and I’m incredibly proud to be part of this organization with so many dedicated and committed associates. Their efforts are clearly evident in the outstanding performance we delivered last year, without question, the best performance I have seen in my time at Crane. So to start, at Aerospace & Electronics, fourth quarter sales increased 10% to $158 million. Segment margins of 13.1% increased 280 basis points. Margins declined sequentially, but we did tell you last quarter that we were expecting that sequential decline based primarily on shipment timing and mix. I expect margins to be back to the high teens by next quarter. Total aftermarket sales in the quarter increased 25% compared to last year, driven by a 59% increase in the commercial aftermarket and a mid-teens decline in military aftermarket. Commercial OE sales increased 26% with the defense OE business down 10%, reflecting shipment timing. On a full year basis, 2021 showed that we are well on our way to a recovery in our key aerospace end markets. Full year commercial OE sales increased slightly with commercial aftermarket up 12%, even though both had relatively tough comparisons in the first quarter of 2021. This recovery was faster than we expected and better than we guided to in January of last year. We expect accelerating growth as we head into 2022. On the defense side of the business, sales declined as expected in the high-single digit…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Damian Karas with UBS. Please go ahead.

Good morning, Damian.

Hey. Good morning, everyone. Congrats on the quarter.

Thank you.

So I wanted to ask you about the EPS growth guidance here. I get kind of up 6% if you adjust for the buyback, just seems a little disconnected from your positive comments about the demand outlook. I think the order rates that you’re seeing, the backlog expansion as well. Could you maybe just elaborate on that $7 to $7.40 range, quantified to the extent you can on the supply chain constraints you’re factoring in and any other key risks? And maybe just talk about any areas where you suspect you’d have a chance to outperform there?

Sure. Well, just to your question on the EPS guide and the components, the way I would look at this, you mentioned the shares being lower from the buyback. I would also point out that our tax rate is going to be notably higher. So they substantially offset one another. You look at the business unit performance together with the lower corporate costs, then essentially we have a 9% increase in core earnings growth. So that’s the way we’re looking at it. As I – we had an outstanding performance in 2021, Damian, just exceptional across the board, margins, free cash flow, growth initiatives, you name it. So, we do feel really good about 2022 and 2023 from a demand point of view without a doubt. So, our commentary, as we reflected on the call here in our prepared remarks, is clearly should be a takeaway for you in that regard as it relates to demand. Now, so the reason why the guide might not be higher than you otherwise would expect is entirely due to the supply chain. So, we think it’s a balanced view. If things do improve, we could see a path to another couple of points of growth, frankly, as we’re sitting here today.

Damian, with the supply chain, many others are talking about this in terms of why they’re missing or what are the challenges. And I would call it out again that you’re not hearing that from Crane. We’re managing with the challenges, and we’re doing an incredible job. Our teams are doing an incredible job. What’s within our control, there’s a significant amount of uncertainty. I think – I mean there’s no news here. We just read the newspaper and the volatility every day. But inflation rates, rate adjustments, Fed moves, what happens, the demand is there today, supply is being constrained, not much is changing on that front in the near term that we can see for the balance – certainly from a six month timeframe for sure. From logistics challenges, port congestion, I mean everything that we all know and are dealing with it. We – I think what we’ve done well at Crane is manage through this. We understand it. We’re not putting undue burden on our team associates facilities, while we’re communicating really well with our customers, being intentional on the decisions we make. And I think that we’ve really given a good, solid guide based on this environment. If you believe the environment is going to improve. I mean, you can model it and make your assumptions. And as Rich said, we have the opportunity to do better. But it really comes down to what’s outside of our control related to your economic assumptions.

Understood. And then I think you laid out the currency pieces for this year. Maybe you could just further spell out your growth outlook, what you’re expecting for CPI and thinking about the various end markets there? And Rich, I guess regarding your comments on Paypod in the U.S., I was able to see some of those products at NRF Expo last week. I was wondering if you could maybe just elaborate on that market opportunity for Paypod in the U.S. and kind of where you’re seeing the business gaining some traction?

Yes. So first on the differential growth rates. So the U.S. government, as Richard said in his prepared remarks, for currency, we expect to be about flat. International currency down at least in the first half, and then we see things picking up. And so that implies that CPI should be growing kind of in the low teens range. And it’s pretty broad-based, right? I mean it’s certainly retail and vending are probably the two leaders, but really good solid growth out of gaming and financial services as well. Rich, on the – do you want to elaborate on the Paypod?

Yes, I mean on the Paypod, look, we’re – like I said in our prepared remarks that our intention to be in different jurisdictions now in the U.S. we see – look, I think an excellent opportunity with the smaller format for convenience stores. It’s an opportunity that just given the success we started to see out in the other geographies that we could capitalize on here. So, we do see, I think, an excellent opportunity to continue to push ourselves in retail into different formats. I would say it’s – while a little bit early, we feel like we have a funnel here that’s substantial enough for us to have mentioned this on the call today.

Great. Appreciate the color guys. Best of luck.

Thank you. The next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

Kristine, welcome back.

Yes, thanks. Following up on the supply chain question, I have a multipart question here. Can you provide more color on the actions you’ve taken to manage your supply chain and labor issues? I mean, you’ve highlighted that you’ve done better than everybody else. So, what makes you different? And then also, if the raw materials and labor inflation stay higher for longer, do you anticipate that your supply chain can manage as well as you have?

What I think we’re doing better than others from – throughout the two years, the last two years is understanding the reality of the situation and not anticipating it to improve and making it ugly and getting the facts and understanding the true forecast, which allowed us to – whether it was – we have such diverse businesses, but it could be everything, from inventory moves to substitution, to finding alternative sources of supply, nothing that everyone else isn’t trying to do and having to do today. I think we started earlier and balance it against our forecast and expectations versus assuming improvement and finding out that we’re getting surprised. That’s the general supply chain comment in general and some of the actions we’ve taken. On the inflation side?

I mean, I think I’ll chime in on the inflation side. Look, we’re not planning for this to ease up. We see this being a continuing challenge through the balance of the year. And I think your question was centered around with that in mind and the supply chain constraints that exist today, can we still continue to operate the way we are. And just – I would reiterate everything that Max just said, yes, we believe we can, and we will. I think the cadence that we have put in place over the last 18 months when we started to see this all come to pass is going to stick with us here. I think we’ve got an excellent set of teams across the globe that are very tight to all these different variables that we’re seeing, whether it is supply chain, whether it’s labor, what jurisdiction and so forth. So, we feel good about being able to continue to tackle this through 2022 – at least through 2022.

Great. And how much conservatism is baked in to your 2022 guide? Is that what’s driving the range of $7 to $7.40?

I would say that the range is based – is effectively both sides of supply chain. To the extent that things ease up, which we really expect, we feel like we have that upside opportunity. As I mentioned in my prepared remark – within my – and in response to the first question, we see a couple of points of potential growth to the extent that, that eases up.

I would hesitate to call it conservative. I mean, again, based on what we see and know today, we feel confident in that range. Our assumptions are the current environment continues for all of 2022. So again, based on your own views of the economy recovery, if things improve, both on the demand side, supply chain, air traffic, which I know we’re all hopeful for, the news that we want to convey is that we feel solid in this range, given things continue at the same level through all of 2022. I hope that helps.

That’s really helpful, Max. Yes, that helps a lot. And if I could squeeze one last one. When you look at your 2022 segment margin guide and your revenue, this incremental margins of about 35%, I mean this is trending above your historical target, which is in the 20s. And so looking beyond 2022, and I’m sorry if I’m looking ahead beyond your guide, but is this 35% run rate how we should think about the business today? I mean, after not having engineered materials anymore with your cost reduction and also all these new products you have rolling in? Is that the 30-ish range more of how the business is running going forward?

Kristine, yes, I would absolutely say that. We feel like we've made a bit of a step change with respect to our leverage rate. You mentioned new products that's absolutely a component of this. If you look at our gross margins over the last, call it four years and frankly, in our 2022 guide, we see just continued upward momentum even in this inflationary environment. So that's a combination of obviously being able to offset with price, but it's really the new product development initiatives and the value that's driven by those new products. So 35% is something that we would expect to see. If you look beyond 2022 and you're in 2023, the other thing I would point to is the two highest margin businesses in Crane still have substantial recovery to go. So aerospace, the commercial aerospace portion of A&E and then on the payment side of the business, Crane Payment Innovations still has a very long way to go. So there's some excitement, I would say, around 2023, maybe even bleeding into 2024 on the leverage rates that will drive those margins.

Great. Thank you very much for the color guys.

You’re welcome.

Thank you. The next question is from the line of Matt Summerville with D.A. Davidson. Please go ahead.

Thanks, good morning. A couple of questions, getting back to the payment business. For lack of a better word, you can sort of drive a truck through the low and the high end of the print order range, provided several weeks back. What in your mind ultimately flexes actual production to the low end versus the high end? What are the key constraints here? And I realize we’re planning for, you're planning for it being flattish. But at the high-end, it's up some 30% or maybe even more. So help me understand how you see that rolling forward?

First, Matt, I'd give a nod to – read some of your research, both on cash as well as the retail segment. And I thought the depth of analysis, data analytics, insight was absolutely exceptional, so just a nod to your research. On the specific USG order, so without going through that entire cycle of the average, which probably is going to be around 6.5 billion notes, we went into COVID, and there's clearly been a demand. The BEP is also challenged as a manufacturer. They're doing the best they can. They're also struggling with COVID, with other challenges, other supply chain issues that they're dealing with outside of our paper and so all those factors weigh in. In addition to the exciting new series, which we're all working together to make progress on, takes cycle time-off of the press, just as it does with us as we continue to run samples. So you're under pressure as you're trying to move to a new series, you're trying to also satisfy current demand. I think the BEP is doing a phenomenal job, but it is constrained. Once again, as we – the Fed would love to see 9.6 billion notes. The constraint in the supply chain is tapping it out at 7 billion to 7.2 billion in that range and that's why we believe it's going to be flat. And so you saw the range widened where last year, it was 7.696 billion, now it's 6.9 billion to 9.6 billion. So they’ve widened the range because of the reality of the situation. I think from an investor's viewpoint, take confidence in the demand that's being flattened level loaded out that's going to continue for many, many years into the future. So that's how I think of it.

Got it. And then just as a follow-up, and thank you for the acknowledgment, Max. But I want to talk about – and as you know, we've done a lot of work around the payment business and on the retail side. One of the things that we're seeing now in retail self-checkout, what appears to be a little bit more of a pivot towards deployments of cashless self-checkout. What does that ultimately mean for Crane? How should we be thinking about that trend in the context of your business? Thank you.

So the first point, Matt, that I'd make is that there's been explosive growth across various types of self-checkout, both traditional formats as well as new formats, right? And some of those new formats we've talked about for a while, the Paypod, the PayTowers, but also some retailers saying they want a nontraditional format and developing it kind of their own homegrown solution. Where we're seeing cashless only is almost exclusively, if not exclusively, in new applications that historically have not been served through any form of automation at all. There are also entirely new areas of automation in certain markets, certain settings that are using both cash and cashless or cash-only, right? So what I'd say is that there's no cannibalization that we're aware of our existing business. It's really that depending on the specific type of a store or retail outlet, depending on the specific needs and whatnot, there's a different structure, different format that makes sense. And the cashless only is in new areas, not areas that historically have been cash.

The other thing I'd chime in on here, Matt, is when you look at the overall pool of self-checkout overall and the growth that we're expecting to see, notwithstanding the growth in cashless in some areas to Jason's point in areas that are new, on the cash side, the entire pool is expanding, right? I think you actually maybe even cover some of that in your report. So we just see the opportunity just by having that bigger pool continue to show great opportunities for us as we look forward.

And a reminder, we are – and we are participating on the cashless side as well. We have solutions in that realm that we're benefiting, gaming as well. The gaming one that absolutely just announced, which is an excellent format, so that's a cashless conversion of two player in that space. Right?

Perfect. Thank you guys.

Thanks Matt. Thank you.

The next question is from Nathan Jones with Stifel.

Good morning, Nathan.

Good morning everyone.

Good morning.

I'm going to ask a few questions about asbestos, the business is running at a free cash flow yield or I guess it stops running at a free cash flow yield of about 7%. If you take out the asbestos expenses, it's about 8.5%, which is probably about as good as you can find for industrial companies. I know you guys have had a policy of defending a lot of these things. I think about two-thirds of the expenses are on defense and one-third on settlement. And at some point, it was likely to be more valuable to not defend those claims and to settle them. Can you talk about where you are in that cycle with the balance sheet having essentially no net debt pro forma for the Engineered Materials business? What thought have you given to actually getting that off the balance sheet? And do you view that as a good use of Crane's capital?

That's an excellent question, that the market certainly has evolved and changed. It's something that we've looked at, studied for quite some time. There's some vehicles out there that are interesting. The market has gotten very competitive. I would say that we're actively investigating no guarantee, no certainty there, but we are actively investigating on that front. In terms of the strategy, it has changed over the years. We were defending hard, but with unfavorable rulings, we’ve shifted the strategy to reduce our defense costs and more of a settlement strategy. And so I think we're doing an outstanding job there and having a consistent and understood a repeatable outlay. But that's a good question. And you guys have anything else that you'd add?

No, the only other thing, Nathan, is that the 60% that you mentioned is a historical number I believe it was after the Dummitt decision when things changed a little bit. Today, our settlement costs are approximately two times to three times defense cost, right? So that ratio has changed pretty substantially over the last five years. And come down in the aggregate.

Continues to reduce.

Got it. I mean I looked at ITT getting rid of their asbestos liability, which would imply that it would probably cost $450 million, $500 million for you guys. And if you're spending $45 million of cash a year, it's kind of a 10% cash-on-cash risk-free ROI, simplifies the story. So it would seem like a reasonable avenue for cash deployment. The other one I wanted to ask was on the Process Flow business. Can you talk about the differences in the growth rates between commercial and process valves? I think you said – I mean, obviously, the Canada business had a great year last year and just where we are in the recovery process for the valve side of the business.

Yes. So commercial absolutely had a fantastic year last year, we did mention Canada, but the other portion also just had a really strong year last year. On the process side of the business, orders – the orders were growing throughout the year and core growth started to inflect. So as we look forward into next year, we see commercial waning a little bit, but still growing for sure. And we see the commercial valves business, in particular, that the areas that I mentioned on the call, North America, Europe, China, being areas where things will continue to pick up, not just debottlenecking and MRO, but some early nice signs around project activity. So high level, Nathan, I would say it’s, it was a phenomenal year at commercial in 2021. It's still going to be a good year next year, but muted growth rates, and we'll see the process start to pick back up.

We see there's some opportunities to simplify the portfolio, particularly in that Process Flow segment, I think maybe some of the commercial businesses might not quite fit the strategy in that. Are you looking at further business portfolio simplification, post the divestiture of the Engineered Materials business? Some of those businesses seem like they might be at kind of peak revenue levels and might not be a bad time to start thinking of disposing of those?

Well, we look at the portfolio all the time. Nathan, and we'll continue – nothing – we're focused on what's in front of us right now, no other decisions at this time, but we actively continue to evaluate.

Okay, thanks for taking my questions. Looking forward to seeing you in March.

Yes, Nathan.

Yes. Looking forward to seeing you in March. It's going to be a great day. A lot of great news to share. It's great updates. So thanks, Nathan.

Thank you. The next question is from Elizabeth Grenfell with Bank of America. Please go ahead.

Good morning, Elizabeth.

Hi, good morning everyone.

Good morning.

I was hoping you could just speak to what you're seeing in the M&A environment and how you're continuing to think about your portfolio shaping? And any evolution you might be thinking about there?

Well, we continue to be active in each of the segments. I can tell you that we've been very aggressive on a couple of deals that last year that maintaining our discipline, even though we're being fairly aggressive on value and making sure that we fully uncover our synergies, we ended up not being successful in the flow space. In particular, there's some opportunities as we're thinking about it right now in A&E as well as the flow space that continues. So it's an active market, we continue. There's a lot that we bring from a synergy side, and we're being aggressive. So I'm hopeful that we'll have some opportunities that present themselves here in 2022. I don't know if you...

Yes. I would just echo. I mean, I think we had – in A&E and during the year as well, we did see similar situations as in process in PFT from a multiple perspective. We had the announcement in the fourth quarter on the share repurchase. That reflects – looking at the size of the deals that were out there and these multiples and the cost and our discipline, it felt like just given what we – frankly, I hope you're hearing it on the call, but how we feel about our medium and long-term growth.

One of the best values out there, Crane's stock.

That, this made a lot of sense to us. But it was – it was taking into context the cost of these deals we were seeing and some of the multiples that simply the math didn't work for us relative in particular to our own math.

Alright, thank you very much.

Thanks, Elizabeth.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Max Mitchell for closing remarks.

Thank you for joining the call today, and thank you for your interest in Crane. 2021 was a year of incredible performance in an environment of uncertainty and challenges. And for that performance, thank you to our global teams, our leadership, our customers, our suppliers, and all of our stakeholder communities. And even with continued uncertainty in the macro environment, Crane will continue to credibly deliver on driving consistent profitable growth. As the late great Colin Powell said, "If you're going to achieve excellence in big things, you develop a habit in little matters. Excellence is not an exception. It is a prevailing attitude." our attitude at Crane remains centered on excellence, honed further and sharper over time by focusing on the many little matters, which add up to big things and are the critical driver of our consistently strong results. We hope you're all able to join our upcoming March 30th, Investor Day event. Don't miss it. We have a lot to share. It has been an incredible journey for all of us and it is not over yet, we are just getting started. Thank you all. Have a great day.

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