Greetings and welcome to the Crane Holdings Company First 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 your host, Jason Feldman, Investor Relations for Crane Company. Thank you. You may begin.

Thank you, operator and good day, everyone. Welcome to our first quarter 2023 earnings release conference call. I'm Jason Feldman, Vice President of Treasury and Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Executive 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'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 the 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 and good morning, everyone. Thanks for joining the call today. While here we are, the separation is complete and an entirely new beginning for Crane Company. We last gave you an update at our March 09, Investor Day as we approached our successful separation on April 03, followed by the honor of my representing our global team by ringing the opening bell of the New York Stock Exchange on the 4th. It seems just like yesterday that we laid out the case for separation in March of 2022, but here we are 14 months later having successfully executed on schedule. The separation was the logical next step in our multi-decade journey from a holding company to an integrated operating company and now into two separate strong and focused independent businesses; technology leaders, each well-positioned to outperform in its respective markets and each equipped with strong management teams to drive continued success. I'm incredibly proud of how the corporate organization executed on the separation, on schedule and according to plan. My sincere thanks to the entire corporate team for their incredible efforts over the last year and now moving into post separation support. And a quick reminder on why we believe Crane Company is such an exciting opportunity today. We have delivered decades of consistent and differentiated execution. We have an accelerating growth profile after years of relentless investment in our technology roadmaps, each aligned with key secular growth drivers in our end markets. We have a long track record of creating value through acquisitions and capital deployment more broadly, and we have a very strong balance sheet today, giving us significant financial flexibility. Now that the separation is complete, Crane Company is a streamlined and more focused leading technology business. The market's reaction since we announced the…

Thank you, Max, and good morning, everybody. Overall, an outstanding quarter with 8% core sales growth, driving 27% adjusted operating profit growth and once again, achieving record adjusted margins at 18.5% at improved 460 basis points compared to last year and driven by excellent performance across all businesses. I will start off with segment comments that will compare the first quarter of 2023 to 2022, excluding special items as outlined in our press release and slide presentation. At aerospace and electronics, first quarter sales were very strong, increasing 15% compared to last year to $180 million and segment margins of 20.9%, increasing 300 basis points compared to last year, primarily reflecting strong leverage on the higher volumes as well as strong pricing and productivity gains. Despite the impressive increase in core sales growth, we along with the rest of the aerospace industry still remains somewhat capacity constrained due to continued supply chain issues as we properly planned for in our guidance. The combination of supply chain constraints and strong demand drove our backlog up another 27% to $645 million. In the quarter, total aftermarket sales increased 21% with commercial aftermarket up 32% and military aftermarket down 5% on program timing and OE sales increased 12% in the quarter with 17% in commercial and 8% in military. At process flow technology, sales of $271 million decreased 13% driven by the 20% impact from the divestiture of crane supply in May of last year, and a 3% impact from unfavorable foreign exchange. Core growth for Process Flow Technologies was very strong at 10% and was broad based across the segment. Record adjusted operating margins of 23.4%, increased 710 basis points from last year, primarily reflecting strong pricing, leverage on the higher volumes and delivering on productivity gains, continued excellent execution by our…

[Operator instructions] Our first question comes from the line of Damian Karas with UBS. Please proceed with your question.

Congrats on the really strong start of the year. I want to start by asking you about these PST margins and the big step up to 23.4%. You basically ripped past your long term target. So I'm wondering if there was anything one-off or non-repeatable in nature that that happened in the first quarter and just looking at the 18% guidance for the year, it basically suggested, you go from that 23% down to more like 16% or 17%. So I'm wondering what will drive that margin sequential decline through year end.

Yeah, so thanks Damien. Yeah, look, we obviously are really pleased with the margin performance overall. Modestly surprised to the upside I would say, which is why we took up the target by 80 basis points. Much of the outperformance was timing. March was particularly strong for us, supply chain cooperated and we were able to get more volumes out than we expected. So we had a really solid march. I would also point out that, we didn't spend at the levels that we planned; still a challenging environment to get the right people on board in the quarter and I would add planned investments for growth also are going to increase as we look through the balance of the year. If you go back to our Investor Day, and we've said this a number of times, including in our prepared remarks, we do, we do expect to see short cycle slowing in PFT as we move through the year. In March, I would say things continue to be strong, but in April as expected, we did start to see that short cycle begin to slow. So, with that lower volume level we would expect obviously, less accretion. Mix was a bit of a tailwind in the quarter for sure and in the first quarter, we had a little bit of incremental benefit from an inventory revaluation just given the highly inflationary environment that we're finding ourselves in. So, those would be the majority of the puts and take. I would add that we're being a little bit cautious here just given the uncertainty in the environment. It's possible we do better than we expect or than we've outlined, but we really want to see a couple of quarters here before we get a get ahead of ourselves.

Let me add a little bit, Damien, just to be repetitive to what Rich said, but just say there was no one off. I would say that, it just, everything kind of aligned to come in very, very strongly here. Rich mentioned supply chain and our ability to get product out the door. The mix was favorable, the volume was favorable. Pricing was reading through the investments that Rich talked about, we've talked about building this hydrogen business as an example. There's a lot of hires that we had baked into the first quarter that were going to take place that we're just having some challenges getting everyone lined up in that business and some of our other growth initiatives because we've really set ourselves up for successful long term to invest for growth, invest in our teams and in this environment of hiring and finding the right people. It's taking a little longer than anticipated that read through favourably. So that's going to reverse in the back half of the year. And then as Rich mentioned, we still feel firmly that we've got the markets right here in terms of how we're predicting a gradual decline year-over-year and sequentially, as the back half of the year from order rates. You're seeing some of this I don't want to call anybody out, but if you look at some of the major chemical providers today, they've talked about it this quarter. There's just a bit of a slowing that's taking place and I think we've properly expected it and are planning for it, and that's what we think is going to take place through the balance of the year. So you won't quite see that same level of margin performance as we move forward.

Understood. Thank you for all the color. And switching gears to A&E, so you raised the guide by one point, which is something like $6 million in sales. So I wanted to ask you about the $50 million of unmet demand. What's your visibility and updated thinking around that, and does that still represent upside to your A&E guidance at this point?

Yeah the $50 million, it's not like there's a $50 million backlog was sitting there that we can just clearly identify. This is an average that we're just saying, if we had improvement in supply chain, we would be able to clear and right now, that is really not, see, we're not seeing the significant improvement in the supply chain. We planned for it this way. We had hoped that it would be better, but quite honestly, in the active and passive components, it's not worsening by any stretch. So I want to make sure that everyone clearly understands. It is not worsening. Lead times may be slightly improving, but it's the one-off components that we continue to have to chase their surprises here or there in terms of supply based rescheduling, a printed circuit board waiting on one component we are active. This has been, a couple years now coming out of COVID, where our teams are doing a phenomenal job, scanning the globe, finding components, helping sub-suppliers with their supply chain that is the norm right now, and that's continuing. I just do not see significant improvement yet. I don't see it worsening, and quite honestly, I think that it's going to continue through 2023, and that's what we have in our, in our outlook.

Appreciate it. I'll hop back in the queue.

Yeah, I would just add one thing is that when you look at the sales in the first quarter here, we had a fairly easy comp, if you look at the quarterly sales from the prior year as well. So the 14.8% we're very happy with, but it was a bit of an easier comp.

Thank you. Our next question comes from line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Thanks. Good morning. With respect to PFT, did we expect an immediate step function move down in Q2 in margins or more of a gradual step down, throughout the year and I guess at the end of the day, what I'm trying to get a feel for is this is probably the biggest kind of swing factor in the model, if you will, between how these quarters kind of cadence out looking forward. So to the extent you were able to help, talk about earning seasonality, I realize you're not trying to give quarterly guidance, but is there any way that you can frame this up to better help us think about, how these quarters should look for CR going forward?

Yeah, I would say and we typically don't give quarterly guidance, right? But if I was to frame it up, it'll be more gradual than a big step chain. So you'll see it come down a bit in Q2 and then a little bit from there, but stronger in Q2 relative to the second half, if that helps.

Yeah, no, it does, and just sticking with process for a moment, I was wondering if you could provide a little bit more specific commentary around the key end markets and the relative strength that you're seeing there. When you think about the 4% kind of order growth you saw, FX neutral in the quarter, what end markets are really leading that, what geographies, you mentioned a little bit of slowing in Europe in the UK, has that business actually turned negative for you guys, just trying to get a better geographic kind of end market deep dive, if you will, for PFT? Thank you.

Yeah, sure. So maybe I'll give some color here. So, I would say MRO continued to be pretty strong or through the quarter, I would say consistent with what we were seeing coming out of the fourth quarter projects down slightly, I would say overall tracking to what we had thought coming into the quarter. Compared to last year, if we were to peel that back in the Americas, we were a bit stronger as well as in the Middle East, although that's a bit smaller for us, but Europe down slightly I would say and China was a bit weaker in the quarter, but again, I would say nothing overly different or concerning relative to what we expected. We still feel like we're going to have that more modest outlook on MRO as we move through 2023 as Max just pointed out and, and some of the color I provided. We didn't see any order cancellations, Matt or major delays in project activity, though in Europe, to your point, a couple of the key players in Europe continue to look at their cost base and in some cases are reducing capacity. So it's something that we're watching closely. I would also say that in Europe it's a largely MRO driven business businesses at this time for those reasons. So there's not a lot of project activity that we are seeing in Europe. If anything, it's a little bit of increased project activity we should see in the Americas. No significant impacts yet from China reopening. Hopefully, we do see some of that as we, you close out the year or head into 2024. And then on the commercial side, our wastewater pumps business here domestically, just continuing to see, I think I would say solid demand. I think they're performing from a share perspective incredibly well. So our growth profile there has been I would say notably greater than market. And then in the UK, I would say more of the same with the building -- commercial building applications and water business where demand just continues to be at pretty depressed levels relative to say Q4. So pretty consistent thinking there.

[Operator instructions] Our next question comes to the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning, this is Adam Farley on for Nathan Jones. I wanted to start with, hey, good morning. I wanted to start with inflation. There's volatility in various raw materials in the quarter, I think steel is up and maybe some energy costs are down. So are you seeing inflation accelerate or stay about the same?

Yeah, we've got some movement up and down, on average in the quarter, we're probably a year over year basis up around 4%, seeing some favorability in freight and resin in our engineer materials business year-over-year, offset with probably leading with the electric components, like I mentioned, actives, passives continue to see inflationary pressures there, some of the metals around steel and aluminium but about 4% in the quarter.

Okay, that's helpful. And then turning to capital deployment, you highlighted very strong ability I think $1 billion in 2023 going up to $4 billion 2023 to 2028 may be, could you describe your M&A funnel of opportunities today, with a separation complete, can we expect an accelerated level of M&A activity in the near term? Are there any macro factors may be putting a damper on any activity in the near term?

Yeah, thanks Adam. Thanks for the question. So, as I've been saying consistently, through the separation, we put any M&A on hold. We were active in our continued process but we waited for the separation. So what has increased? Our activity has increased now around moving forward with those deals that are active to conduct due diligence and pursue. So things are active. I would not say necessarily that it's going to lead to action. We're always going to remain disciplined. We're only going to do what makes strategic sense, has the proper return on invested capital. I would say that the environment is friendly for us right now with making it more difficult for private equity, some of the other strategics where their leverage is our fire power. In terms of market dynamics, the only thing I would say is that, we're watching those that have announced some very large deals and learning from that and watching the market reaction. In some cases, there's been some very negative reactions. So I think that's just helping to make sure we frame up the level of risk that we're willing to take on but all very positive here. There's a lot of activity and we're working it hard, but, I couldn't say that that's going to extrapolate quite yet into completed deals, but we'll see.

Thank you. Our next question is a follow up from the line of Damian Karas with UBS. Please proceed with your question.

Hi again, guys. So I have a follow up on your comments regarding, short cycle activity. I was wondering if you could maybe just put any numbers around kind of the level of volume declines that you are sort of baking into the guide for this year. And if you could just remind us on sort of the margins kind of on the short cycle versus short cycle side of PFT kind of versus the project side.

Yeah, from a margin perspective, I wouldn't expect any material difference between them. I don't know that we necessarily want to quantify the degree of sequential decline. What I'd say is that, you can see what our first quarter growth was relative to guidance for the rest of the year and most of that kind of sequential deterioration we would expect this year to be from the short cycle. And on the long cycle side, we're a little more immunized in the near term because of the backlog, right? So you'd see it in the orders first, but on the long cycle side, I don't think we'd see much slowdown in sales till the tail end of the year and into '24, if that does in fact slow down.

Okay, great. And then a follow up question on capital allocation. Thanks for the color on M&A opportunity but should deals not materialized in the near future, how are you thinking about, kind of pulling some triggers on buyback?

Sure. Great question. It's still too early. We certainly have a history of share buyback when it makes sense. We will certainly consider other options if that is needed Right now we think that there will be some M&A opportunities that we'll be able to deploy, but of course, Damien, we're going to do the right thing and not have a lazy balance sheet if it comes to that and pursue those options.

Thank you. Our next question is a follow up from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Thanks. So you mentioned in your prepared remarks, I think it was Max talking about price, cost and the impact, the fact that it was not negative on either a dollar or margin basis. I was just wondering maybe if for Crane overall, if you could talk about whether or not you actually had, price cost positivity on the margin and maybe on a relative basis how much that may have driven margin performance in the quarter?

Yeah, so what I would say Matt, is it, yeah, it was accretive to margins. I wouldn't say it was incrementally accretive relative to how we were performing last year. We had good strong price discipline as we moved through last year. We have targeted price increases that sort of cadence their way through and we had a couple of more, I would say that occurred towards the end of the year last year that we benefited from obviously coming through the first quarter. So perhaps a little bit more, but I would say on the margin, it's similar to our performance last year. So accrete of overall to margins.

Let me add this Matt though that I would like to add on to and how to think about this from a historic Crane standpoint, of course, we've been appropriately offsetting inflation and rightfully and we were early, we hard, fast and executed through '21, '22. What has taken place over many years now is our continued evolution at value based selling and understanding the full value. So as we've continued to develop stronger technology roadmaps that are more valued by our customers, we have continued with our crane business system to put process around this to educate our teams on how to price for value. And I would say that we continue to become better and better at seeing that read through. So it's not just, price just offset inflation. It's the mix of product that's changing, it's what we're winning on, and it's the pricing levels that we're setting. It's the value that we're getting for our solutions. I just think we've gotten exponentially better and I think you, I would say that I have a clear expectation that that will continue as we move forward for sure. So hopefully that adds a little bit too.

Yeah, I appreciate that color and then just to make sure that I have it down correctly, remind me, CR is subject to what kind of potential lockups as we think about strategic actions on non-core businesses. Is there any -- does anything pre preclude you from buying back stock? I realize I think, the company can't be sold for two years or something like that, but can you just walk through all those things so, we all have that level set please?

There's nothing yeah, there's nothing that yeah from a -- you're asking about an approach, Matt?

No, I guess with the spin and the tax-free status of the spin, I would imagine there's a two-year window where things can't happen. Like I don't think Crane can get sold…

If there were conversations -- if there were conversations prior, there's some rules that kick in. But we've had no conversations. There's nothing locking us up for any period. There's no constraints that I'm aware of, Matt.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Mitchell for any final comments.

Thank you very much. So a solid start in Q1 and excellent results, life post separation. We approached our corporate conscious uncoupling with loving care, and we remained deep friends with our NXT counterparts. Our associates are fine and coping well, but now it is time to go our own ways in new directions of value creation. As the late great Burt Bacharach, 'knowing when to leave, may be the smartest thing anyone can learn'. Now post separation, new Crane is now charting a fresh course and ready to deliver on accelerated growth and enrichment. And our first quarter results are a testament to our progress. While we are also dating again and looking for new partners to join our strategic platforms of aerospace, electronics and process flow technologies. Do you like that, Rich? I look forward to speaking to you next on our Q2 call in July. Thank you all very much for your interest in Crane. Have a great day.

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