Good morning, and welcome to the Crane Company Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Jason Feldman, Vice President of Treasury and Investor Relations. Thank you. You may begin.

Thank you, operator. And good day, everyone. Welcome to our second 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 will start off the call with a few prepared remarks, after which we will respond to questions. Just a reminder that the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in 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. And good morning, everyone. Thanks for joining the call today. First of all, I would like to acknowledge the sad news that my predecessor and CEO of Crane from 2000 to 2014, Mr. Eric Fast passed on July 15. Suffice it to say, I would not be here at Crane or in my present position, if not for Eric. Eric drove the vision of moving Crane from a holding company to an integrated operating company. Eric cultivated the beginnings of the Crane Business System created larger business units and restructured Crane for success. All of which helped enable the strategic actions and value creation we have delivered on over the last several years. For those who remember, Eric, he was a wonderful leader and man who care deeply for our associates, always upbeat and positive and even the most difficult circumstances. Eric was someone I learned from and tried to emulate to the best of my ability. Above at all, Eric was a deeply loving family man who always emphasize the importance of personal focus and balance for all associates in addition to a passion for the customer and driving growth and results. Our deepest condolences go out to his wife Patty of 43 years and their children and grandchildren. Eric Fast will be greatly missed by so many friends, family and work colleagues. Thank you, Eric, for your leadership and for everything you did to make us better and to make Crane a better company. Your legacy lives on forever. Moving on to the quarter. We delivered another impressive quarter, our first as a newly independent company following our April separation transaction. Core sales growth of 5% and with a 30% increase in adjusted operating profit and adjusted EPS of $1.10, great performance across the businesses…

Thank you, Max. And good morning, everyone. To start, my sincere thanks to the entire corporate team for their continued efforts on all aspects of the separation transaction and to our business teams for delivering another quarter of great results, an outstanding quarter with 5% core sales growth driving 30% adjusted operating profit growth and driven by excellent performance across all businesses. I will start off with segment comments that will compare the second quarter of 2023 to 2022, excluding special items, as outlined in our press release and slide presentation. At Aerospace & Electronics, second quarter sales were very strong, increasing 17% to $189 million. Segment margins of 20.2% increased 270 basis points compared to last year, primarily reflecting strong leverage on the higher volumes and productivity. Sales growth was better than expected, but we, along with the rest of the aerospace industry still remain capacity constrained due to continued supply chain issues. The combination of supply chain constraints and strong demand drove our backlog up another 26% to $675 million. In the quarter, total aftermarket sales increased 29% with commercial aftermarket sales, up 41% and military aftermarket up 7%. Commercial aftermarket demand was broad-based across spares, initial provisioning and repair and overhaul. And OE sales increased 13% in the quarter, with 15% in commercial and 10% in military. We raised our core sales outlook for the year to 14% from 11%, reflecting modest improvements in the supply chain environment. We now expect full year margins of about 20.3% reflecting 200 basis points of improvement compared to last year. We expect sales to increase sequentially for each of the next 2 quarters with margins slightly lower than the first half due to mix with more OE sales in the second half. Our Process Flow Technologies, sales of $263 million…

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

A couple of questions. First, on PFT, you gave a little bit of end market color. I was hoping you could get a little more granular with what you're seeing from an overall end market standpoint, particularly with respect to the four focus areas you pointed out and add a bit of geographic overlay to that? And then I have a follow-up.

Well, overall, I think fairly stable slowing, as Max mentioned and I alluded to in certain markets in the longer cycle process side, we mentioned orders down year-over-year in the low single-digit range, all that consistent with the guidance that we gave at the beginning of the year. So what we're seeing is slowing most notably in European chemical I would say, a handful of project delays and pushouts in North America and China, also in the chemical space. MRO activity in process is generally solid, I would say. And what I would add to that is that we are seeing customers keeping inventory levels fairly lean. So channel inventory below normal levels, we don't see that having much impact here in terms of demand. There's not sort of an exodus of inventory levels. From a project point of view, we're seeing opportunities in different areas, lithium efficiency programs and upgrades in certain areas, Chlor-Alkali and so forth. In general, industrial markets are also decelerating slightly as we pointed out. Pharmaceutical remains strong. I would say that there's some timing on order activity there that we expect to see pick up actually as we exit the year and move into next year. And generally, just leading indicators continue to reflect this mild downturn. That's -- as we predicted in the beginning of the year here and starting again, as we started to speak about earlier. In the shorter-cycle businesses, water, wastewater, I mean, just demand continues to be really strong, no signs of a slowdown there. That's our North American business. And then on U.K. nonresidential construction weak all year, continues to be weak and consistent with our original guidance.

I would add, Matt, we've called this from January. And just by understanding the cycles and what we've seen historically and how we were trending. That's why we gave the guidance we did starting in January, and it's playing out really as we expected. So from Europe, I think we're starting to see the Americas see delays, not cancellations, but some project pushouts and spend, decision-making. Order rates there almost flat to slightly negative in the quarter. So you're seeing that inflection point. As we look at it, as we move forward, this cycle for the broader end markets that we participate in. We'll see this continued order decline through the balance of this year, maybe high single-digit kind of range it bottoms out as we're projecting by, call it, the end of the year, and then you'll start to see slightly improving negative rates going into next year when we inflect positive again by, call it, September, October next year. But that's how we're modeling.

I want to talk a little bit about the aerospace supply chain and the aspiration that some of the OEs have to drive narrowbody build rates higher. Can you talk in a little bit more detail around what you're seeing in supply chain, whether the Crane specific supply chain you feel can support those higher production rates and whether or not in the context of the revised guide. The upwardly revised guidance for AME, whether or not you've been able to eat into any of that $50 million of -- I think you kind of referred to the supply chain trended revenue that you've highlighted earlier in the year.

Well, you're probably looking for broader color than we don't have titanium -- significant titanium, for example, our castings related to our flow business. So we see a little bit there. The casting suppliers in the U.S. are somewhat constrained. I understand, not impacting us to the same degree, although a little it remains broad-based. It's improving generally methodically. Many are calling out the improving trends. On the -- where it's impacting us the most is on the electrical components, semiconductors, active passives, we're tracking less shortages. We're tracking less SKUs that we're having to chase, but there's still enough that we're not seeing a material improvement in what we're able to get out the door. So that's why we just continue to see this trend just slowly, methodically getting better, it is getting better, but not allowing us to have a significant inflection point on working the backlog down in an accelerated manner. I can't -- I don't think I want to speak more broadly for the entire industry on the build rates for the ramp up other than we're keeping up with current demand for sure and not causing any of our customers' problems at this point. The backlog, that $50 million if you look at the increase in sales overall, that based on revised guidance and when you look at the increase in the backlog, which is we predict is going to continue to grow, it's probably closer to $55 million to $60 million maybe in that range now. Just -- but that's just a plug number that just we kind of look at what technically we could get out the door if we had unconstrained supply through the balance of the year that customers would accept -- it means opportunity as we head into 2024, hopefully, we'll see continued improving trends. Would you guys add anything else?

I mean the only thing I would say just on that -- just on that point with the $50 million, as Max mentioned that if you look at our guidance range, it implies roughly, I don't know, half of that number. But not necessarily consuming that $50 million. We're continuing to see that $50 million grow, I think is the point there. So Beyond that, I have no other comments. I think you captured it all.

It's not the same 50 , right? It's not a if there's just correct at $50 million that we can't ship. It's just backing into an ideal number that we could have shipped unconstrained.

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

Nice work on the following quarter. Absolutely. So I have a few follow-up questions for you on PFP kind of repeat question that I hear from investors is that regarding your margin guidance. And now that you're running up more than 20% for the first half, I think the implied guide so if that. Rich, I know you talked a little bit about your expectations of some volume declines on the short cycle. But is there any way you might be able to just give us a bridge on that margin for PFP kind of thinking about short-cycle mix, the investment ramp up, anything else that's kind of factoring in there?

Yes. I'll give you some broad strokes that hopefully will be helpful. So when we look at that first half to second half performance, there's a few things that are playing in there, right? It's clearly its sales, call it, price volume, right? It's sales, you have mix elements, you have investments that we had planned to make at the beginning of the year and are flushing through more so in the second half of the year and then some inventory revaluation associated with inflation that we benefited from in the first half. When you look at each of those components, I would think about them as each within a range of 100 basis points to 200 basis points, something like that. And then as I look at the all of them in my mind are temporary without a doubt. But for clearly, what will play forward with respect to some of Max's comments on demand which could impact the sales and obviously, mix elements, which we'll get more and more comfortable with as we move through the balance of this year and implications to 2024. So structurally, we are super comfortable with the way we're set up in this business to continue to demonstrate what we've committed to historically around that, on average, 100 basis point margin improvement year after year.

And then, Max, you mentioned being positive price cost on both a dollar and margin basis. Could you just talk about the price trend more recently? And what kind of pricing you're anticipating through the rest of the year? And just kind of thinking about some of that short-cycle demand weakness -- is that going to present an opportunity perhaps for customers to maybe jab back at some of the price inflation from recent years? Are you kind of expecting prices there to remain sticky?

I mean I think overall, we're seeing prices stick without a doubt. I would say that the price cost relationship in the first half was very favorable. It's still going to be favorable in the balance in terms of margin and so forth, but it does close a little bit in the second half. So not as accretive but still positive. So that's sort of the dynamic first half to second half. As it relates to customers, I think it's about the value of the products, and we'll continue to do all that we should be doing to make sure that those prices stick.

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

Just follow up follow-up there on Damian's question about the margin, the impact from first half to second half. Obviously, those makes a fair amount of sense, right? Not going to get inventory valuation all the time at onetime. I just wanted to follow up on the investment side of it. Can you give us some more color on what these investments are these kind of onetime in nature? Or it's more hiring engineers that are going to be continuing? Just any color on those investments?

The bulk of it is related to the hydrogen investment and building out this team. So we've got investment that -- and we have products and we're launching. We're accelerating that investment. We had -- the spend that we had identified was fairly from a plan standpoint, equal in each quarter and probably only 20% of it has been spent in the first half. So we've got the balance that is ramping up into the second half. So that's a little bit of the overweight there. But this is a very conscious decision investing in a market that we like it has significant growth and the products that are right in our sweet spot. So we've told that story. There's also, I think, as we look forward, though, in terms of spend into next year, there's other investments that we've talked about that are rolling off. So I think I wouldn't look at this as necessarily a headwind even into ‘24, I think we can normalize into '24 as we move forward.

Yes, I was going to follow on with just that point.

I was going to follow on with a question about that. So I guess that takes care of that one. I wanted to follow up on a couple of comments that you made during your prepared remarks, Max. Firstly, on the unusually strong aftermarket backlog, is that something that's constrained by supply? Or is there something else driving that unusually strong aftermarket backlog? And what are your thoughts on when you can convert that?

Yes. Good question. And yes, look, we're balancing our customers' needs to the best of our ability and doing a really good job. But aftermarket sales would be stronger if we were unconstrained. So there's a mix and a margin impact that we're not seeing read through no risk of loss, no risk of cancellation, no risk. It's just a matter of the improving supply chain that allows us to clear that what we talked about. I think, Rich, we kind of -- a rough?

Yes. I mean if you were to -- if we were unconstrained and we were able to ship the aftermarket that we otherwise could you could see us almost reaching 2019 levels in sales, you come close to that. And the margin profile on those sales in aftermarket would essentially bring us back to where we were in 2019, if I'm not mistaken. So yes, it's definitely a nice tailwind is the way I think we think about it as we look at future years, future periods. The other thing I would add is some of it is you have airlines that are -- they are buying a little bit more, sort of moving away from just in time a little bit and having and keeping some on the shelf. But by no means, in our view, and based on all the discussions we're having, is there any sort of inventory building, there's just continued solid demand here that we are, again, pretty bullish on in terms of its impact to us as we look at '24 and '25

Go ahead. I was going to say that the inventory position, I think everybody would like more, not less at this point. We're still at that stage in every part of the channel.

So that $55 million, $60 million you're talking about being able to ship if you're unconstrained is primarily aftermarket subs, so very rich margin as well as a constraining some of the revenue growth.

Yes. Predominantly it's weighted towards aftermarket for sure. I don't know, predominantly.

Yes. What I'd say is that it's more weighted to the aftermarket than our overall mix, that's about 70-30, right? But I don't know that I'd say predominantly.

Then I just wanted to follow up on some of the PFP questions. You talked about [Indiscernible] great color on the end market weakness. I was wondering with lead times coming down, how that's impacting the order rates of your customers. It sounded like you don't think there's any excess inventory out in the market so this is really what you're looking at as underlying fundamental softness in some of these markets, I mean Europe and chemicals not particularly surprising given some of the PMI numbers out there, but this is -- you would characterize this more as end market weakening or totally as end market weakening rather than some normalization of inventory at the customer level?

Everything we continue to -- we see here feel is end market completely, no inventory correction. But with lean inventory in the channels, right, and in our customers that we think reduces what you often see as kind of that multiplier magnifying effect in any sort of decline and also recovery flow through much more quickly, right? No one's until is trying to clear things, right? So it's much more direct, much faster impact. But we're not seeing any of this being related to inventory right now.

And you mentioned lead times, Nathan. And the lead times have been more normalized here for the entire year. It's been nowhere near what we're seeing or continue to have to battle with in A&E. That's I would say, almost 12 months now or more of back to normalized levels. I'm not hearing any issues with lead times. So that really hasn't impacted the kind of dramatic reductions in people than canceling or seeing none of that.

Our next question has come from Ron Epstein with Bank of America. Please proceed with your question.

This is [Jordan] on for Ron. Just had a quick question. For the industrial segment, if there is a downturn in the U.S. or more of a slowdown, I know you said you guys are seeing orders get delayed -- but how should we think about how that would impact pricing that you guys are pushing through or even for aftermarket, how resilient that would be?

You're speaking specifically to Process Flow Technologies?

Yes, yes.

Yes. I mean I think, look, right now, our view is that we're not seeing -- our view is that we're not seeing a large impact here. This is, as Max pointed out a little bit earlier, the nature of the declines are such that we're going to continue to hold price. Do you have to give a little bit in some cases, maybe. But our view is that we're going to continue the price discipline that we have been exercising for the last couple of years for sure.

I think price won't be because of competitive issues as I see it. It's going to be because there's real continued deflation that we're still staying ahead of and passing some on to the customer. That's something we would normally do anyway. But I don't see that as a significant challenge for us at this time.

Our next questions come from the line of Damian Karas. Please proceed with your question.

I just have a few follow-up questions here. First, could you just clarify on the PFP guidance? Are you assuming that it's really just chemicals where you kind of take a hit as we progress through the year? Or are you kind of expecting a broader spanning impact across your short-cycle markets.

Yes. So it's chemical. It's a little bit of the industrial markets. And I would rope into that also the nonres construction in particular, in the U.K. and Europe. The rest is more yes, delayed projects and such, but those would be the categories, one of the areas.

And then you talked a little bit about the sequential improvement in A&E on the top line, but margin sort of being negative mix. Could you remind us sort of where on average, your commercial aerospace margins are relative to the segment?

You're talking about commercial versus defense. I mean on a blended basis, they're very similar. There's a different aftermarket profile on the commercial side, right? But as a result, where we have less aftermarket or OE pricing tends to be stronger. There's not a material difference.

And then one last question for you here. So there has been some deal activity in those markets. They long got acquired, obviously, CIRCOR in the process of likely going private here. Just any thoughts on what these transactions could mean for the industry? Any potential impacts on your business? And do you think that this recent deal activity is going to have any effect impact on your ability to kind of land an attractive deal in that space, whether for better or worse?

No, I don't see anything unusual. Nothing that we predict out of those particular deals that would impact us either negatively or positively. I think the trends are generally those in the -- those that have consolidated the space, whether it's in the process on technology side or Aerospace & Electronics are looking at our portfolio and making strategic decisions about what's strategic and what's not. I think that's going to provide more opportunities for us, some of which were very much interested in. We're tracking a number of them that we expect to continue to come out. I'm not going to discuss whether we participate or not. I can say that we're absolutely active in each and make conscious decisions about what we want to choose to play in and what we don't. I think we'll be very competitive for those that we do want to play in. The ones we're looking at right now are some nice bolt-ons that just would be a clear fits within the business. I think the shareholders would immediately understand and appreciate the value creation that we would drive. So right down the middle of the fairway on those. But certainly, activity is high, and I think it's going to continue. I think this is a market that we'll continue to see a lot of opportunities. And I think in some cases, some of our peers for various reasons are constrained, whether it's leverage, whether it's deals that they've already done, it actually helps us. So we're properly positioned no debt, ready to move and I think that helps us. Anything else that you'd add?

Our next questions come from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.

Just 1 or 2 quick -- just 1 or 2 quick follow-ups. If some of these defense opportunities and Max, I think as you went through quite a few, if some of these break in your favor, ultimately, what can that 7% to 9% look like in more of a bullish scenario for A&E through the course of the remainder of the decade.

Well, the hard -- to take the Heart example, I mean if you take the projections, I mean, is it going to hit is it going to -- there's a lot of assumptions, right, Matt, but even the Heart Aerospace, which is years away. Based on the projections and orders that are out there, could add 5 points of growth alone just from that opportunity on an annual basis. On the defense side, some of the others that we're looking at.

Yes, they're a similar size to sort of the -- the ones that were -- that we've recently won in our high-power defense business, so these are 9-figure programs over multiple years, 10 years, 15 years, some cases, 20 years. So the one that Max highlighted on the call, the Heart Aerospace, one really exciting technology and really a nice fit for us. And very successful on. That program is a development program today that finishes around 2027. And so the sales that could come would be out there would be in the 2027 time frame and starting there for about a 10- to 15-year period. Provided that they're successful, right? This is a smaller 30-seat regional aircraft, subregional aircraft. But if it's very exciting.

Optionally manned vehicle you're probably looking at a double digit. The 7% to 9% would move to low double-digit potential. All in a lot of assumptions in that though. And it's early days.

But the other key takeaway, I think, is not just that there's upside to the 7%, but that 7% to 9% sustainable, right? I mean when we originally put this out in May of 2021, I believe, it was for this decade. Right? And some of these are extending well beyond that. And so I think that part of the takeaway is, yes, there's upside to 7% to 9%, but also at that 7% to 9% is really structurally how we position the business to continue to have new wins following on some that we've already announced, right? There's a huge portfolio of the next set of wins after the ones that we've already kind of announced ramp up fully to sustain that growth rate well into the 2030s and beyond.

And then I apologize if you touched on this, but just a little bit more deal color in terms of the multiples you're seeing between the two businesses and if you were a betting man where you see the higher probability, you closed the deal between A&E and PFP?

Actually, I'm bullish on both spaces. And I think we're going to be competitive. The multiples are for the flow business is probably still averaging in that 13 times the -- but it depends on the business. It depends on the specifics, of course, north, south of that and the synergies that the acquirer can bring. Any deals or maybe still averaging 15 plus high teens, we'd say.

Which is -- when you think about where our multiple is today relative to where we were 12 months ago, obviously, our currency is a little bit different today as well.

For sure. Totally agree.

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

Yes, a couple more follow-ups, and I'll go on the capital allocation side first. Obviously, our multiples are higher than flow multiples at the moment and aerospace markets are pretty hot for deals. Does that -- do you think more about flexibility from that perspective, maybe it's today to be acquiring PFP? It might be better later on to acquire Aero, or are there specific deals out there where you have an advantage in terms of being able to generate synergies or being able to leverage those assets. So just any more color you can give us on -- just how you're thinking about the differences in multiples and how that maybe changes your approach to allocating capital here over the short term next year to this.

Yes, you bet. Thank you. It always starts with the strategic fit. The attractiveness of the space and extendability. And in some cases, there's some technology and some extensions that are just really nice fits for the portfolio. So we don't like to value and pay for any sales synergies, but there's significant synergies that we can bring through CBS and integration of some consolidation. So it all starts with attractiveness. As we think about it, there might be an ideal timing that you can wish for. But the reality is when these opportunities come up, it could be in private equity that's coming out. It could be a family run business that all of a sudden, the owner decides to make a life change decision or a large industrial decides to carve out something that's no longer strategic. You've got to be prepared to move and that opportunity is not going to come back around. And so we're not -- we're going to stay disciplined. We're not going to overpay, but we're going to bring the full synergies that we can bring I think we're going to be very competitive, and I think we're going to get some things accomplished towards our accelerated growth strategy in becoming more of a serial acquirer post separation.

Yes. I would just add that our objective here is to grow both businesses, right, through organic and inorganic means. And with both of these businesses at $2 billion plus, as we've alluded to, that enables other optionality for us to consider. So trying to decide on multiples and pricing and does it make sense today versus tomorrow or to wait and considering everything that Max just mentioned as well, what I just said sort of plays into our calculus as well.

And then just one on Aero with the supply chain constraints. Are there any opportunities on pricing that, that creates for you?

Not specifically for Aero. I mean we're always value pricing depending on the opportunity and whenever contracts up renegotiating and having those discussions standing up for our value prop. The technology that we drive, whether that's in microwave, whether that's on the defense power side. So not necessarily due to supply chain constraints. I don't see that.

Yes. I would agree with that. And the team is doing, I would say, a very good job with price in Aero, just like across the rest of the business. I would -- I'd offer up that -- if there's an area of potential upside in the future to our -- or to really just increase the confidence level on the high side of our 7% to 9%, it's our successes that we think we're going to continue to see in price.

Because of the technology, because of the technology we're driving and the differentiation and the value to the customer.

These additional opportunities we've been discussing on the last few questions on upside to the 7% to 9% would you expect those to be accretive to the margin profile or decretive to the margin profile?

Yes, we would expect them to be, I would say, consistent with our margin profile, not necessarily something that's going to continue to drive them up. I mean the -- so I would say consistent, Nathan, at this point.

Fair enough.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Max Mitchell for any closing comments.

Thank you, operator. A great first half of 2023 with excellent results and a strong outlook ahead. On the broader macroeconomic front, I have no predictions, soft landing, minor recession, no recession, inflation came inflation persistent, global tensions, elections, as the late great Tina Turner, once said, reflecting on life's journey, it's not about what happens, but how you deal with it and at Crane, as always, we are ready for anything with a proven ability to execute under any set of circumstances responding by being nimble and quick to adjust while driving execution and results. That's what gives us such high confidence in our ability to create value in the years ahead. I look forward to speaking to you next on our Q3 call in October. Thank you all for your interest in Crane. Have a great day. Thanks, everyone.

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.