Greetings and welcome to the Crane Holdings Company Fourth Quarter 2022 Earnings 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 call over to Jason Feldman, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator and good day, everyone. Welcome to our fourth 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; and Aaron Saak, who is President and Chief Executive Officer of the Future Post separation Crane NXT. 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'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.

Thank you, Jason. Good morning, everyone. Thanks for joining the call today. Well, we had an exceptional end of 2022 with outstanding fourth quarter results. Fourth quarter adjusted EPS was $2.13, an increase of 63%, compared to last year. We have broad-based strong operational execution with core sales up 11% and we drove adjusted operating margins up 660 basis points to a record 18.6%. On a full-year basis, adjusted EPS was a record $7.88, up 15% compared to last year, driven by 6.4% core sales growth and 220 basis points of margin expansion to a record full-year adjusted operating margin of 17.7%. Adjusted free cash flow of $395 million was also very strong and above the high-end of our last guidance range. As a reminder, last quarter we reaffirmed and tightened our adjusted EPS guidance range to $7.58 to $7.72 dollars with a $7.65 midpoint. At that time, we said that we felt that the high-end of guidance could only be achieved, if we had supply chain improvement and an ability to turn specific shipments quickly. We actually saw that play out in each of our businesses with a bit of unanticipated upside all aligning. With the biggest impact in the last few days of the quarter. While there are still broad based and random supply chain constraints across our businesses, we did receive shipments from a number of suppliers that we honestly didn't expect and our teams did an incredible job turning them into sales for our customers quickly. We also had some favourable tax items that contributed about $0.04 to EPS as well. Really just a perfect alignment of unexpected, but good news very late in the quarter and solid work by our teams and my thanks to all of our associates for the year end effort. To…

Thank you, Max, and thanks for those kind comments. I am incredibly excited for the future of NXT and would like to thank the Crane Board for their trust in my leadership, and I know they expectations are high and I am confident with the outstanding team we have here at NXT that the future is very bright. As Max mentioned, I've had the opportunity in the past two months to travel to all of our major sites and meet with our NXT associates. Our team has been incredibly welcoming and I appreciate their enthusiasm for our path forward. It's an outstanding team and one that I am honoured and humbled to be part of. Now in terms of my background, I'm an Engineer by training and I've spent my career with diverse well-known industrial technology companies. This background has given me a depth of experiences that I feel is uniquely positioned to help successfully lead NXT moving forward. In my most recent role, I had direct in-market overlap with NXT, so I'm really hitting the ground running and already working with the team to accelerate existing growth initiatives. I'm also passionate about innovation and delivering technology-based solutions to our customers. And we will continue to drive this focus at NXT and I look forward to sharing more about our strategy at our upcoming Investor Day on March 9. As I mentioned, over the past few weeks, I've visited all of our major NXT sites with Max and the Senior Leaders of the NXT business. During these visits, I've been incredibly impressed with the disciplined cadence and execution of CBS. The focus on continuous improvement and operational excellence, absolutely met and in many cases far exceeded my expectations. And it's exactly what I expected to see in joining Crane. I…

Thank you, Aaron, and good morning, everyone. I will start off with segment comments that will compare the fourth quarter of 2022 to 2021 excluding special items as outlined in our press release and slide presentation. At Aerospace and Electronics, fourth quarter sales accelerated increasing 15%, compared to last year to $181 million; segment margins of 20.6% increased 750 basis points from 13.1% last year, reflecting the combination of strong leverage on higher volumes, improved pricing and productivity. Pricing fully offset the impact of inflation in the quarter. Despite the impressive increase in core sales growth, we remain somewhat capacity constrained, due to continued supply chain issues along with the rest of the Aerospace industry and leading indicators reflect that demand continues to outpace the supply chain generally. Specifically, core orders increased an impressive 45%, compared to last year and core backlog increased 34%. In the quarter, total aftermarket sales increased to 25% with commercial aftermarket sales up 25% and military aftermarket up 23%. OE sales increased 11% in the quarter with 15% commercial OE growth and 7% military OE growth. At Process Flow technologies, sales of $252 million decreased 16%, driven by a 19% impact from the May divestiture of crane supply and a 5% impact from unfavourable foreign exchange. Core growth for Process Flow technologies remained very strong at 8%. Adjusted operating margins of 16.1% increased 180 basis points from last year, primarily reflecting strong productivity and pricing and here as well pricing continues to fully offset inflation. Compared to the prior year, core FX neutral orders increased 11% and core FX neutral backlog increased 16%. Sequentially, compared to the third quarter, core FX neutral backlog increased 1% and core FX neutral orders declined 3%, reflecting normal seasonality. Moving to Payment and Merchandising Technologies, sales of $338 million…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.

Good morning, Matt.

Thanks. Good morning. Excuse me, a couple of questions. First, on Crane Currency. You talked about just a little bit, but flat core growth, the 17% OP decline, I guess I'm looking at it, $11 million in revenue, operating profit down $23 million. I mean the deleveraging effect there is just more substantial than I would have thought. And I guess I'm just trying to kind of handicap whether or not you're basically assuming sort of a doom’s day sort of scenario. And we've done quite a bit of work on that business and the trends there globally. And I guess so maybe a little bit more upbeat relative to this outlook. If you can maybe help that a little bit.

I'll take it, and then others can chime in as well, Matt. First of all, my compliments to you for your January 5 deep-dive Fed '23 print order, that is some incredible research. I would encourage investors to read the level of independent research that you did was -- is absolutely impressive. Look, if you think about where we've been where we are, and of course, the trajectory that we have as we move forward, leading up to COVID, the Fed used to published one number, and they absolutely took that number. Once we went into COVID, they moved into a range. and there was a lot of uncertainty. And we saw that play out in the mix and the mix change. The 100s were much higher than anyone anticipated as a store of value. And the Fed desired more notes than the BEP was even able to produce. Now we're moving into a range that's been somewhat lowered, but still a wide range. And Matt, even in the Fed's print order, this is all very positive news for us for the future, but it just paints a picture of a little bit of uncertainty in exactly how this is going to play out in ‘23. But when the Fed comes right out and says in their order of verbatim that they're allocating BEP production capacity to essential products to support the U.S. currency program strategic priorities that -- those priorities include producing a new banknote series with the signatures of the new Treasury and Secretary. So, they're absolutely trying to get to the new series, remediating deferred equipment maintenance, completing equipment upgrades, making note production process improvements, installing and validating new equipment and transitioning additional denominations to 50 subject-based sheets to improve efficiency and quality. Additionally, there was a shared Board and BEP support for allocating resources to achieve the planned security feature, that's us and bank note design milestones required to meet the Department of Treasuries announced 2026 issuance date. So, we got production in ‘25 for the Catalyst 10, which will require production of that note in ’25. So, I couldn't have been more pleased with the order the transparency of the Fed, the BEP. We have our planning assumptions. I can tell you that we have very high confidence in our plan. We certainly didn't want to go out with a number that had variability that we were concerned about achieving. If you feel that based on your modelling, things might come in a little stronger that's your prerogative. I think that from a Crane standpoint, I hope that investors understand over our history, we've been incredibly transparent. We have significant credibility we put numbers out there that we feel very confident we're going to achieve and we work like heck to try to overdrive from there. So, I don't know if you guys would have anything.

I mean, Max, I think you nailed it. Look, when denominations shift within the U.S. government or even you compare the denominations between the U.S. government and international, it's all about the technology on the notes. And that creates this margin headwind, but it is all about the volumes that Max has highlighted and the mix.

And the mix…

Yes. And so…

And so, in this particular year, because they haven't had the same, it's not only more the low denomination in transactions, but it's also that they need to get back to their destruction rates to get the proper quality of bills in circulation. And so, you see a much heavier weighting to the ones as a bit of a catch-up and that mix, we just naturally have higher content on the $100 bill and higher denominations because of the security features involved versus the one, and that mix just is reading through. I mean it's just -- it is what it is. And with our careful prudent planning, this is -- we feel it's the right guidance to give.

Understood. Appreciate all that color, Max. Just as a follow-up, sticking with NXT. Could you give maybe a little bit more of a detailed overview into the demand trends you're seeing with CPI, the major end markets there, retail, gaming, transportation, et cetera, what a little bit more granular outlook might be around that mid-single-digit organic with the end markets? Thank you.

Aaron, you want to give that a go?

Sure, I will. Hey, thanks, Max, and thanks for the question, Matt. So, I think that's where we're very encouraged. As we go through each market and the ones you’ve listed obviously are the key end markets for us. We'll start with gaming as an example, we continue to see strength in that market, again, tending to a run rate of high single-digits in terms of demand and a backlog that's growing and that's not just for our core components hardware, but also for the services and the aftermarket connectivity solutions we have in that market that helps us in terms of share of wallet. You take that to retail; we're continuing to see the underlying trend of automation. I'd say that's the, you know, one of the primary threads of that market. That's where I come from in my background and it's extensible here into the CPI business. So again, both on our components, as well as into more of our systems solutions. And as I mentioned in my prepared remarks, Matt, we see Paypod doubling this year and that's our self-checkout solution again on the trends of automation. So again, I'd start to think about that as mid to high-single-digit growth. And then I think broadly, you've got to look at what was done here two years plus ago with Cummins-Allison and expanding into more of a system solution, but that recurring service that comes along. So, we have a high attachment rate on that service that’s accretive margin above fleet average and that's been very resilient and we continue particularly with deploying our operational excellence programs in CBS into that business to drive margin expansion. And I can tell you from looking at those businesses over the last few weeks, my background years ago in running large sales service businesses there's more margin expansion and more growth inside of that business as well. So very positive.

Great. Thank you, guys.

Thanks, Matt.

Thanks, Matt.

Thank you. Our next question comes from the line of Damian Karas with UBS. Please proceed with your questions.

Good morning, Damian.

Hey, good morning, everyone and Aaron, congrats on your new role. Great to have you on the call.

Hey, thanks, Damian. I really appreciate that. Thank you.

Yes, absolutely and I appreciate all your guys' details -- through details on the guidance and everything. I just wanted to ask you first about Aerospace and Electronics. You mentioned you see yourselves outgrowing the market, but the 10% guidance does seem, kind of, low compared to, I think, more mid-teens to 20% outlook we've seen from some of the other large aerospace suppliers. So, it would be helpful if you could maybe just perhaps reconcile that and elaborate a little bit on how we should be thinking about this $50 million of unmet demand?

Yes, Damian, this is Max. I'll take a stab and then let's see Rich or Jason want to add in as well. Very similar comments to currency. Listen, right now, while the supply chain is stable, we are still -- we have extended lead times, and we're still reacting to the odd unpredictable outage here or there. So, we just don't see that significant improvement at all. It's -- outside of Crane, if I think of CPI and some of the electronic components we have there, it's -- lead times are starting to come in, you're starting to see that gradual slow improvement. It's very difficult to predict when A&E will supply chain will see significant improvement. We don't believe that's going to happen in the first six months of this year. As a matter of fact, look, as we triangulate on this, I think we're continuing to be careful, prudent and we're going to absolutely hit these numbers and have the opportunity to deliver upside if supply chain improves. I think what you're going to -- my hypothesis is, as we head into Q2 and Q3, you're going to hear people describe -- they were caught by surprise, because China reopening with COVID and then going right into the Chinese New Year. We're not seeing this in terms of any impact yet or inventory because those longer lead times are being delivered. I think you're going to see a little bit of a lag spike there, while I think long-term, China reopening is incredibly positive for the back half of the year that we're baking in all of the economic uncertainty that we continue to see if the Fed makes the wrong move. So, while the demand is going to continue to be very, very strong, we're being very careful and prudent on the supply chain. We are not seeing significant improvement in A&E yet. We anticipate it to gradually improve in the second half, but that's where our assumptions are. If you believe that supply chain is going to improve significantly faster, I would -- you can model that and make those assumptions, because if we get the supply, we'll be able to deliver. It's really that simple. We don't see any significant capacity constraints if we get it all tomorrow, turning it around immediately will be impossible. But we certainly are not significantly capacity constrained. This is how I think about it in the guidance. I don't know if you have anything.

The only thing I would add is that there's nothing unique about our supply chain constraints too, just to make sure that, that's very clear. It's not like we're seeing something very unique to Crane. This is our guidance assumptions based on when we think the supply chain will or will not improve. I think it's important.

And I think we're very close to the details. And again, I would hope that investors give us credit for the credibility and transparency that we have historically provided and continued to.

Understood. Appreciate your thoughts there. And then I wanted to ask you about corporate expense. I mean it just seems a bit higher than what you had previously communicated. So, what's happening there? And what's your plan to drive that down?

Yes. It is higher than our original target. As we continue to build out both teams and this is pros cons separation, it's going to be significant value creation in separating and focusing two new teams, but we have those dyssynergies’ with corporate costs. When we rolled up our initial estimates, we thought they were good targets as we pulled what is going to be required to support both teams and the growth that we are absolutely focused on. This is how it shook out. Now we didn't want to cut and just to hit the target. We want to staff up appropriately to support the continued transformation for both Crane and NXT. And we believe that we will absolutely grow into that expense line to lower as a percent of sales, that's the plan. That's how we're thinking about it.

Makes sense. Thanks a lot. Best of luck.

Thanks, Damian.

Thanks, Damian.

Thank you. Our next question is coming from the line of Kristine Liwag with Morgan Stanley. Please proceed with your question.

Hey, good morning, guys.

Hi, Kristine.

Hi, Kristine. Good morning.

Hey, thank you for all the comments, Max, Rich and Aaron, I mean, Rich, I think you deserve a glass of water now. It's a lot to digest here.

I thought, I had to try to be there and [indiscernible] I was trying to sneak a sip in here and there. I couldn't get it done.

Yes. So maybe first off, Aaron, congratulations on your role. And look, I think this is a hard question. I know you'll provide more details on the upcoming Investor Day, but wanted to get a 30,000-foot view from you. When you kind of look at the past decade as Crane Co. had acquired more payment businesses, we've seen multiple compression for the stock. Now with Crane NXT as a standalone, how do you think about getting the market to put in a higher multiple for the business? What's your strategy for that? And then also a follow-up question to that is, look, if the public market doesn't give a higher multiple to match the quality of businesses in NXT, how do you think about refocusing efforts to cash return to shareholders with a heavy emphasis on buybacks? I mean, ultimately, if the public market doesn't value NXT as it should, does it make sense to be private instead?

Sure.

Well, as usual an easy question from Kristine.

Yes.

I could have saved it for the Investor Day, but I was hoping to get a little impatient and get one off here.

Yes. Hey, well, first of all, Kristine, thanks for those really nice remarks. I appreciate that quite a bit. And I think you know the answer as you've said we're really focused on telling the story at Investor Day and that's where we're going to be spending a lot of time outlining it. So let me frame it at least how I'm looking at it now to give you some conceptual model to think about how I'm seeing the business to some of the questions you're talking about on compression, but also long-term value to the shareholders. So, I think in any business and I think Crane has done a fantastic job putting together assets that are very strong core businesses. And Max has always talked about how we're starting the separation from a position of strength. I think you can see with the fourth quarter results and where we stand on our cash balances, that's absolutely true in margin profile of the businesses. And my observation is we have very strong healthy businesses with leading market positions mid to, in some cases, high single-digit growth or more in some of those businesses and very healthy backlogs that we're going to execute on going forward in ‘23 and beyond. And obviously, as Max alluded to and with Matt's question, lumpiness in this currency business in the U.S. government, but a wonderful long-term franchise that's very valuable to us. So strong core business. We want to continue to drive the operational excellence. I can tell you, as I said in my prepared remarks, Kristine, that this is an outstanding culture for CBS execution. And I see that, and we're going to continue to have opportunities and productivity that's going to lead to free cash flow generation. And as Rich said, that's…

Well said.

Great. Thanks, Aaron. I kind of regret not going to Malta, when I had a chance a few years ago, wish I did that.

Oh, it’s wonderful. It's very impressive. You would come away as excited as I am, when you see that.

[Multiple Speakers] facility, absolutely limitations there.

Great. And maybe as a switching gears, Max and Rich, following up on Process Flow Technologies, core FX-neutral orders were down 3% on the quarter. Can you provide more color on what you're seeing by end markets and how we should think about the outlook for the business, if, in fact, we do see a recession?

Yes. Well, look, for the quarter, I would say just generally speaking, we had a good quarter from an orders point of view across PFT, right? When you look at project. We had some good project activity, a couple in Europe, a couple here in North America, China, actually as well. So, there were some just nice projects that did flow through in the quarter. But one I would tell you that we were expecting now whether that was expected to hit in December or January, some of them just happened to hit a little bit earlier, but overall, positive. On the MRO side, I would say that since probably around that October time frame and some of this is seasonally expected where you see that MRO demand tend to decline. We did see that. I would say so far as expected, both in North America and Europe. So absolutely, as we expected. Now the funnel of activities, I would say, is something that we're watching closely and to be cautious and careful about, and that's, frankly, I would say nothing new and all aligned with the way we set up our plans for 2023. So however, we have this backdrop of this wonderful backlog as we enter into 2023. We are seeing this underlying softness just a little bit. And we feel like with the supply chain that's in front of us and being a little bit cautious and careful, while improving slowly, I think the way I would think about our 2023 guidance is prudent as well in terms of how we framed up during our prepared remarks.

You mentioned the 3% down that was actually sequential, so year-over-year, it's up 11. FX core neutral FX neutral. Well, it was down sequentially, still very, still very stronger than I anticipated.

Yes. The sequential is typical at this point of the year, Kristine, so from Q3 to Q4, we generally do see that slight downtick. But on a year-over-year basis, up double digits.

Great. Thank you for that clarification. Appreciate it.

Sure, sure. Thanks, Kristine.

Thank you. Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions.

Good morning, everyone.

Good morning, Nathan.

I'm going to re-ask Kristine's question, because it was such a good one. If the market assigns the NXT business relatively low multiple, but it looks like it probably will when these businesses split up. How would it be possible for you to make a better return on capital by making inorganic investments rather than buying your own stock, given that this business is likely to throw off a ton of cash and an analysis of the present value of discounted cash flows should get at a much higher multiple. I don't understand why you wouldn't embark on an aggressive share repurchase campaign under those circumstances?

Well, I'll let Aaron take a stab out in a second, too. But I'll place Wager, friendly gentlemen's bet on the post trading range, getting closer to small, mid-industrial technology companies. I think that's what we're going to see, because that really -- when you really look at the underlying technology and margin profile of this business, as we've talked about, it's really quite unique and shouldn't be at that multiple. I think separating it, we hope investors are going to see that. Look, when you go to a stock buyback only, you're really saying that you have no other opportunities to provide value to shareholders other than core growth and just plough all that stock, all that cash back into stock. And I think there are a number of exciting opportunities that will far exceed return than simply stock buyback, if I just look at the economics. But there could be a debate on this and an argument. But that's clearly not the intent as we separate. I don't know, Aaron, if you have any other thoughts on value-creating options between full share buyback versus reinvesting inorganically.

Yes. No, I think that's right, Max. I mean when you look at this business, Nathan, in the last few years, we haven't really done a lot of M&A since 2019, effectively. And as we're looking at what's in our funnel, our pipeline where we can add value, we see a rich set of opportunities that are adjacencies to the core, help diversify the business. We think we can go in and add a lot of value, and that's what we're going to be talking about in the -- at the Investor Day of how we diversify. So that really is strategy one, and we want to go after that invest in the core, but allocate to the M&A funnel, that's rich and deep and diversified. Certainly, we'll always take a look as that strategy evolves, but again, I think we have a high confidence we can give value to the shareholders and execute the strategy very well over the coming several years.

Thanks for the commentary. Max, you talked about 15% core or FX. Can you give us some more details on price versus cost in the makeup of that? And then what you're looking at for price versus cost in 2023?

Yes. So, Nathan, so on the price cost in the quarter you're referring to and the next year, right? Is that what you…

In the quarter and in the order rate, yes.

Yes. So, I mean, in the quarter, we -- what I would say was a little bit different in the quarter relative to the first three quarters is that we saw volume a little bit more materially flips in the other direction in terms of being a contributor across some of the groups, which is a positive thing. Our pricing was, I would say, fairly accretive as well. So not just covering cost, we saw quite a bit of read through on our price, that disciplined cadence that we started a couple of years ago. So just good momentum, price cost, I would say it was accretive to our margin profile overall. Now as we look at next year, I would tell you that our pricing discipline is going to be, of course, intact and similar in terms of our approach. We're properly balancing price with demand. And as we see things shake out, our assumptions for next year, though are that price will continue to offset the cost profile in the business, and that's materials, labor freight and other types of costs that we experienced.

Should we say price carryover in -- from 2022 into 2023 that's actually make it accretive to earnings?

It depends on which business, but I would say on the margin, yes, but not as much as what we saw in 2022.

Okay. Thanks very much for taking my questions.

Thanks, Nathan.

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

Super, thank you. On track, exceeding expectations, strong close to 2022, well positioned for 2023 and beyond, another clear inflection point for value creation upon separation. As the late great Brazilian soccer star Pele said, "Success is no accident." It is hard work, perseverance, learning, studying sacrifice and most of all, love of what you are doing or learning to do. We love what we do at Crane and our team's success is no accident. I want to welcome Aaron Saak again, and we both look forward to presenting our new entities post-separation investor thesis to Investors March 9 in New York City. Thank you all, and 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.