Greetings and welcome to the Crane Holdings Company Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jason Feldman, Vice President of Investor Relations. Thank you. You may begin.

So thank you, operator and good day, everyone. We've been having some technical issues with the provider. If anyone has any issues, please e-mail me directly and we'll sort them as soon as we can. Welcome to our third quarter 2022 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 our call this morning 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'll be using some non-GAAP numbers which are reconciled with 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.

So let me just verify here, Jason, first. We've had -- our provider has had some technical issues. Apparently, we -- Darryl, if you're still there, we -- the webcast is not being...

I am here. I could hear, it coming through the webcast. I do apologize. If people that are joined via the webcast, if you could just refresh your browser…

Well, they may not hear you then. Okay. But those dialed in can hear us.

Correct.

Okay. Well, we will -- and it's being recorded, Jason. So at least we'll have a live.

Yes.

All right. Fantastic. Well, we will keep going. Technical challenges. We appreciate your patience. Thank you, Jason. Good morning, everyone. Thanks for joining the call today. I want to lead off with just a thanks to our global Crane team for another strong quarter with solid results across the board. Third quarter adjusted EPS was $1.86, consistent with our expectations in our prior guidance commentary. Adjusted EPS declined $0.12 compared to last year. But operationally, we had a very strong quarter as the EPS decline was due to the known $0.16 impact from the May divestiture of Crane Supply and a $0.19 impact from comparison against an unusually low tax rate last year. Adjusting for those items, adjusted EPS increased 14% compared to last year. Core sales growth of 2% was impacted both by supply chain constraints and the extremely challenging comparisons for the Payment & Merchandising Technologies segment. Remember that the third quarter of last year was an all-time record for sales at Payment & Merchandising. Notably, general demand indicators remain very strong. Core year-over-year orders increased 10% and core year-over-year backlog increased 26%. Demand remains strong in nearly all of our core markets with continuing strong trends even in these uncertain global macroeconomic times. The overall message both regarding operations and the market environment is really unchanged from last quarter: a clearly continued momentum with yet another quarter of strong results; continued differentiated execution in a challenging environment and continued success driving accelerating growth despite supply chain constraints. The environment is similar to what we saw 3 months ago with continued robust demand across our end markets. As always, we continue to carefully watch for any signs of softening but the order rates in backlog I cited earlier point to continued strength without any notable signs of slowing…

Thank you, Max and good morning, everyone. My thanks as well to our teams and all of our associates globally for delivering another quarter of strong results. I will start off with segment comments that will compare the third quarter of 2022 to 2021 excluding special items, as outlined in our press release and slide presentation. At Aerospace & Electronics, sales of $167 million, decreased 1% compared to last year. Segment margins of 16.9% were lower compared to 19.3% last year, primarily reflecting less favorable mix and lower absorption on reduced volumes, partially offset by strong productivity. Pricing offset fully the impact of inflation in the quarter. Core orders increased an impressive 30% compared to last year and backlog increased 24% but sales remain constrained by material availability, consistent with conditions across the aerospace industry and supply chain. Sales improved sequentially from last quarter by 4% and we expect further sequential improvement in the fourth quarter as the supply chain constraints slowly improve. And we expect continued but gradual improvement throughout 2023. In the quarter, total aftermarket sales declined 3%. Commercial aftermarket sales increased 16%, led by growth in spares and repair and overhaul. Commercial aftermarket demand is very strong, reflecting continued improvement in flight hours and high utilization of an aging fleet, as new aircraft deliveries are not ramping up as quickly as the demand due to the supply chain environment. Military aftermarket declined due largely to timing and supply chain constraints, although orders for military spares were very strong in the quarter. OE sales were flat year-over-year, with 2% commercial growth offset by a slight decline in military OE sales. While sales were flat, demand is very strong and will be a tailwind as the supply chain eases throughout 2023. Looking ahead, we expect a sequential increase in…

[Operator Instructions] Our first question come from the line of Matt Summerville with D.A. Davidson.

Maybe first start with the Payments segment and the backlog growth there, Rich, I think you mentioned 40% year-on-year. Can you parse out a little bit? Maybe a little bit more detail around how much of that is being driven by CPI versus Crane Currency? And obviously, that backlog is well, well above prior peak. How much of that is market versus market share? And then I have a follow-up on that business.

Yes. First, Matt, on the split and I'll let Rich go from there. It was somewhat more on the CPI side than the currency side but they were both up well, well, well, well into the double digits. .

Yes. So that's -- I was going to head there as well. So nothing more to add to that from what Jason was saying. I would say on the currency side, we continue to see nice wins internationally. We're making great -- continue to make great progress. I forget the number of new denominations we're going to have this year. I'm sure we'll announce that in January at the end of the year when we recap. And on the Payment side, we're continuing to make excellent progress on all initiatives in retail. North American gaming continues to be a nice success for us. We're continuing to take share actually in that area as well. And as we mentioned in the prepared remarks, vending is also -- we're making good traction there in terms of year-over-year growth in the backlog. So it really does kind of span across all of them and really in line with the theme that we've outlined on the payment side in terms of productivity and labor shortages, driving a lot of the demand right now in the market.

And then just as a follow-up, sticking with Payment, maybe just 2 quick ones. Whether or not you guys maybe have an early read on what the federal government print order might look like for its fiscal ‘23, seeing that fiscal ‘23 for the government has already started. And then maybe if you can talk about whether or not you’re starting to see some early successes with some of the products you’ve been launching in product authentication. .

Yes, Matt, Max here. So we don't have an official [indiscernible] order yet from the Fed but I think it's going to be in a similar range. We'll probably expect to see a range and a lot of uncertainty. The desire is for more. I think it's going to be similar to this year's story which is BEP somewhat constrained not only with manufacturing capacity but also ongoing trials. So there’s tremendous work being done that we are helping to support on the next series and that’s cutting into some of the capacity as well. So the best we can say right now is similar to ‘22, probably with a range, desire for more all good news long term, though is what I directionally say also. On successes, yes, our team is doing a great job on product authentication. I think there’s some new opportunities. I look forward to chatting about that. We continue to have trials, approvals, look to double that business again next year, some significant wins here coming up. So I’m very excited.

Our next question is coming from the line of Damian Karas with UBS.

Wanted to ask you first about the PFT segment. I think you had implied in your prior guidance that volumes would be moderating, maybe down slightly in the second half of this year. Could you just elaborate on whether that – to what extent that’s faring better than you had expected? And when I look at the 13% order growth which is pretty strong, could you possibly break that out between volumes and price? .

Yes. Well, I guess what I would say is we are doing a little bit better in terms of overall sales progression in the year without a doubt. Making -- the teams are making excellent progress, whether it's on new product development launches or pricing initiatives, really. So it really does span across the board. I would say most of what we're seeing right now is price at this point. But -- and the backlog feels, I think, really good as we're setting ourselves up here for 2023 and it really spans across all areas in PFT from -- I mentioned municipal in my prepared remarks but also chemical, pharmaceutical, industrial demand in the process side of the business.

Okay, great. And just a follow-up on the backlog discussion. For PMT, you mentioned up 40%. I know currency, right, that's -- you got pretty good visibility there. But on the payment side, just curious. That is an area of the business that has tended to be probably a little bit more macro sensitive in past cycles. So how much confidence do you have that if we are in a recessionary scenario next year, that kind of that backlog, those orders that you won on the payment side will hold firm? Or is there some possible risk of deferral or cancellation there? .

Well, there’s always risk, Damian. But the strength that we see in gaming continues – people continuing to enjoy getting back out, travel continues. On the retail side, I think – even in a recessionary environment, I think the pressure is – this is a very unique cycle with numerous pressures. I think productivity drivers, wage inflation, the difficulty of finding labor is driving a productivity trend that we believe retailers will continue to invest in globally for the long term, including through a down cycle, now depending on how severe and significant that is. But we think that trend continues. .

Yes. And I would just say, particularly on the retail side, a lot of the exposure there when you think about where you're seeing automation. It's not in highly discretionary areas of retail, typically, right, the sort of retailers that are participating, right? So there's always going to be some macro sensitivity but I think a lot less on the retail side. And on the gaming side, remember, a lot of that growth has been share gain, right? So we feel pretty good about next year. .

Our next questions come from the line of Nathan Jones with Stifel.

Maybe on the A&E business, obviously some uncertainty there in ‘23 with supply chains. But I think, Rich, you said there’s demand there for mid-teens growth or better next year and then high singles from there. If we look at that maybe over a 2-year period, we should anticipate 20% to 25% growth by ‘24 over ‘22. And then did you say you anticipate high 30s incremental on that growth? .

Yes, I did. Yes. I think your math's right. It might be -- maybe a tad on -- it's probably about right, actually. .

Those are the incrementals.

Yes. And the incrementals is, yes.

Okay. I wanted to ask on something that was written in the press release that noted activity on a number of acquisition. Are you thinking there could be anything upscale completed before the spin? And if so, how would that impact the capital structures of each company?

Nothing of scale prior to the spin, Nathan. We're not going to put the spin at risk at all and keep the focus on what we have in front of us. I think there's a significant -- there might be some very -- some small strategic opportunities but even that is questionable. But the funnel is -- continues to be very, very robust on both the Crane and NXT side, a lot of planning, a lot of continued work and a potential scale would come after -- M&A of scale would come after separation.

Fair enough. I guess you’re probably not going to tell us exactly what the capital structures are likely to be at this point. But I think you said both companies about $1 billion of M&A capacity and they’re going to be relatively close to the same kind of EBITDA. So should we be just the [indiscernible] kind of thinking that both companies will have roughly the same leverage when they come out?

I think we'll give a little more on capital structure. .

Yes. So Nathan, so maybe I'll start with just the overall net debt to EBITDA targets that we had talked about previously at Crane Company being just under 1x net debt to EBITDA and at Crane NXT at about 1.5x. So nothing has changed with respect to that. In terms of sharing just progress on marching towards those numbers come April, our sense is that we've got some pretty -- well, we've got some pretty good clarity with respect to the nature of that debt. So we would wind up raising some form of a term loan to be determined on sort of the tenure and so forth but, call it, $300 million in the term loan on the Crane Company, that will enable us to dividend monies over to Crane NXT in order to satisfy or to take down the 2023 bonds that are outstanding there on a near-term maturity basis. And we're also making progress with respect to planned revolving credit facilities that we need to set up at both facilities -- at both companies. It'd also be a minor, I would say, a little bit of a smaller term loan to refinance the existing $400 million that we took out to satisfy asbestos. That's going to remain at NXT. So all of it progressing, I would say. Hopefully, a little bit more color there for you to understand. We think we're going to the term -- commercial banking market versus the debt -- issuing debt securities at this point.

Just one last one on supply chain. The disruptions that you’re seeing getting product delivered coming more from your supply chain to you or other issues in your customers’ supply chain that are inhibiting them taking delivery of products you’re producing?

Say the question one more time. I just want to make sure I understand it, Nathan.

On the supply chain, are you finding more impact coming from your [indiscernible] need to produce products or your customers’ supply chains overall inhibiting their ability to take delivery of products you produce?

Yes. No, it's much more so our supply chain than the customers in terms of pushing off on existing orders and deliveries. Stabilized -- so again, just in summary, A&E went into it later than the rest as we had supply chain challenges. Things are going to come out a little later as well, lagging. Certainly seeing stabilization. I mean, it's some very, very extended lead times that we continue to work through. So a very similar environment where you have new surprises in any given quarter that your – the team is doing an incredible job working through and around, not unlike anything else the rest of the industry is seeing. I mean, we’re triangulating across customers, working closely with customers in many cases, partnering, trying to work through these issues together. We are seeing clearly in A&E a stabilizing and I think it’s going to slowly improve into 2023. Across the rest of our environment, payment merchandising technologies on the electronics passive actives continues to be problematic but improving. And in general, across the board, outside of A&E, lead times are coming down, material availability more reliably coming in. So we are seeing those signs of improvement. Hopefully, that helps.

[Operator Instructions] Our next questions come from the line of Kristine Liwag with Morgan Stanley.

Max, you mentioned that the search for the I for Crane NXT was very competitive. Now I know it’s a little early and Aaron hasn’t fully onboarded yet but can you provide some color on what you and the Board liked about Aaron’s vision for the business? .

What we liked is he's got an incredible educational background, number one, Material Science, PhD. That's -- in the micro-optics business alone, it is a material science business. But the breadth of his experience is the number of product solutions background, been with world-class organizations. So he's incredibly -- has a fantastic general background. Also, from an operating standpoint, with the Danaher-Fortive-Vontier pedigree, very consistent with the Crane Business System mindset, cadence, discipline, execution and there'll be a consistency there. In addition, I think what we really liked about Aaron's thinking was understanding how in this environment to drive this core business forward and the incredible growth trajectory we have core for decades to come, while also exploring adjacencies that will take Crane NXT into very exciting growth vectors as we move forward. And that is the focus of these next 5 months for Aaron as well as the Board to really continue to solidify that vision as we move forward. I think it's incredibly exciting, incredibly exciting time. I'm personally very, very energized by where we are at this point. I think everything is playing out exactly as planned.

Great. And on the M&A front, you mentioned that you’re actively pursuing a number of potential opportunities. Can you provide color on where you’re seeing the strongest opportunities? And in terms of timing, does this mean we could see some of these opportunities materialize before the separation? And is that the case for both businesses?

Yes, most likely not before the separation, Kristine. They have to be smaller and -- but very strategic for us to do that. We have our sights set on -- staying very focused on the separation but our funnel is very full. We continue to work on a number of opportunities both across PFT in terms of core and near adjacencies, A&E, core and near adjacencies of all sizes with some very large opportunities that could add significant scale that we would potentially pursue quite soon after separation. Nothing’s given, nothing is certain in the M&A environment. But again, we’re working the process hard. And as I’ve just described on the NXT side, we have an existing funnel that we will be continuing to, in the next 5 months, refining even further the strategy for very meaningful targeted strategic capital deployment, as we move forward or as that entity moves forward with under Aaron’s leadership.

Our next questions come from the line of Elizabeth Grenfell with Bank of America.

I just wanted to clarify one question on the aerospace piece. I know you said that you expect mid- to high-teens growth next year ex-supply chain issues but how does that jive with supply chain challenges continuing into 2024? So what are you thinking about the net impact would be on sales next year within that?

I think we need to just clarify that a little bit, Elizabeth. I think what you meant was unconstrained.

Yes. So absent supply chain constraints, that’s – when you look at our backlog, you look at our order flow and what we think, that’s what that at mid-teens. But in terms of absent that and what should we expect given supply chain constraints, we’re not – we’re going to definitely have some – I think some nice growth next year. We’re not really prepared at this point. I think in January, we’ll provide some good guidance, obviously, as we always do.

We're about ready ahead in November, Elizabeth, to all of our businesses for our operating plan reviews and really syncing up with the teams to understand our expectations. So I think we're going to need -- I want to continue to just understand how supply chain progresses through the balance of the year before we really dial in our expectations for 2023. But clearly, at a high level, we do feel it's going to continue to slowly -- I mean, it's only stabilized right now in A&E. So I think it's going to slowly improve through the first half, hopefully accelerating in the second half. And we believe it will be on a more normalized level by 2024. That's our best thinking right now, more to come when we give our guidance in January.

Okay, great. And then, when you think about the drivers of the growth in the core orders within the aerospace segment for the quarter, what were the different driving – the different pieces that contributed to the strong growth?

Yes. So well, the commercial recovery, clearly one of the elements that's driving both the core order growth of 30% and the backlog growth but in addition to that, we did see some excellent continued progress, I would say, along the electrification front and strategic direction and investments we've been making there. So we – this is where we’ve been spending most of our time over the last 5 or 6 years in terms of technology development. We’ve talked about some of these really nice wins recently, particularly in the ground-based radar area. In the quarter, I would tell you that our defense power business which is the high-power business supporting that initiative, had its best order quarter, I think, ever. So we’re continuing to see some nice traction there and really all supportive of the 7% to 9% that we’ve been communicating for a while. I would also point to our lower power solution business, our modular power business, that continues to frankly just execute really, really well and take share. So we saw some really nice order growth in that business in the quarter as well. So a combination of those 3 would be the big pieces. Again, commercial recovery and then really continued good success in power.

Our next questions come from the line of Damian Karas with UBS.

I just had two quick follow-ups. First is on, yes, just curious, how much price carryover you might be expecting across the business into 2023 given the actions you've already taken this year?

Yes. So we are absolutely going to have price carryover next year. I think, Damian, I -- similar to the comment or question we just answered with respect to the next year's demand, we're going to be digging in pretty deep here in the month of November and really get that number solidified. But we absolutely will have some carryover. But remember, we did start off the year pricing, right? And it's just -- it wasn't like we started in the second half and we're going to get a full half recovery -- sorry, overlap. But we do absolutely think we'll have some healthy carryover impact but it's not going to be like double or carrying over 50% or something like that.

Okay. And then just on corporate expense. It seems like you’ve been running a bit higher than the kind of $75 million guide. Sorry if I missed it but what’s your expectation for corporate for the year now? .

It's -- let me pull up the number but it's unchanged from the prior guidance, right? We're trending a little bit higher, fourth quarter should be a little bit better but no change to the outlook for corporate.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Max Mitchell for any closing comments.

Super. Thank you, operator. Another quarter with solid performance and further steps on our path to separation to drive further shareholder value, pushing ourselves forward into the future while driving excellent results in the present. As the late and respected Mikhail Gorbachev once said, "If you do not move forward, sooner or later, you begin to move backward." This is the essence of our culture at Crane and the Crane Business System, celebrating our progress to date while constantly pushing ourselves for new growth vectors and improvement. And what progress we have made just in the last year, simplifying and strengthening our portfolio, driven by our firm commitment to shareholder value creation. It remains an exciting story and I look forward to sharing updates with all of you over the next several quarters along with Aaron as both companies continue to drive progress, profitable growth and shareholder value post separation. Thank you for your interest in Crane. Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.