Greetings. Welcome to the Crane Company Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference 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 fourth 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, 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 to the comparable GAAP numbers and tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com, in the Investor Relations section. Now let me turn the call over to Max.

Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Well, we delivered another impressive quarter, with results again outperforming expectations with adjusted EPS of $0.90 in the fourth quarter, finishing and historic and very successful 2023. And after a truly outstanding year, we started off 2024 on a positive note with another acquisition announced January 3, this time in Aerospace & Electronics, founded in 1968 and based in Auburn, California. Vian is a global designer and manufacturer of multistage lubrication pumps and lubrication system components technology for critical aerospace and defense applications, with sole sourced and proprietary content on the highest volume commercial and military aircraft platforms. Through August 2023, we estimate that Vian had trailing 12-month sales of approximately $33 million, and adjusted EBITDA of approximately $8 million with a solid order backlog. The purchase price was $103 million, which is approximately 13 times trailing EBITDA. Vian is highly complementary to the fluid solution in our Aerospace & Electronics segment, significantly expanding our portfolio of mission-critical aerospace flow control products. Vian has strong positions on the most attractive commercial and military aircraft platforms today with significant content on the F-35 and the 737 and the A320 families of aircraft. Combined with our existing fluid and thermal management capabilities, Vian further strengthens our positioning for future content opportunities on auxiliary power units, gearboxes and engines. We expect this acquisition to achieve 10% ROIC with approximately $0.20 of EPS accretion, excluding intangible amortization by year 5. But as with most of our acquisitions, there are also several opportunities we see to deliver in excess of that return. In the case of Vian, that will include broadening their marketing efforts to additional customers where Crane has had long-term relationships for decades. We also see opportunities to leverage Vian's…

50, 50 basis points.

And a great new base for our margin growth from here as the business continues to structurally shift to higher growth and higher-margin end markets and products. And we have made significant progress with capital deployment, demonstrating we can complete high return and attractive acquisitions in both Aerospace & Electronics as well as Process Flow Technologies, to strengthen our businesses and further accelerate growth. Building off that strong 2023 performance, we are introducing adjusted EPS guidance for 2024, in a range of $4.55 to $4.85, reflecting 10% EPS growth at the midpoint. That growth is driven by expectations of another strong year at Aerospace & Electronics, tempered by known, understood and previously communicated end market conditions at Process Flow Technologies, along with a slightly higher tax rate and interest expense. Remember that M&A accretion is also limited in year one for both transactions based on current interest rates. This is a high confidence guidance that we have direct line of sight to delivery. Our 2024 guidance assumes muted industrial activity with slowing in certain industrial markets and continued gradual improvement in the aerospace and electronics supply chain. While this is our best thinking today, we believe there may be upside as the year progresses if those two assumptions prove conservative, and we are structured to meet any unexpected changes in demand. There's also a potential upside to guidance from capital deployment. We are successful with M&A in the quarters ahead as we expect. As a reminder, we have an extremely strong unconstrained balance sheet, providing us significant acquisition capacity. We have a proven track record of successfully integrating acquisitions and over delivering on synergies. We operate in markets with numerous potential small and midsized targets as well as a smaller number of large potential acquisitions. And in our current structure,…

Thank you, Max, and good morning, everyone. Another strong quarter, with 5% core sales growth driving 14% adjusted operating profit growth. On a full year basis, 7% core sales growth drove a 28% increase in adjusted operating profit from continuing operations, demonstrating accelerating core growth results and consistent operating leverage on higher sales. Continued excellent performance across all businesses and despite some persistent supply chain challenges that continue to impact the broader aerospace and defense industry. Getting into the details, I will start off with segment comments that will compare the fourth quarter of 2023 to 2022, excluding special items, as outlined in our press release and slide presentation, and then I'll comment on our 2024 outlook for each segment and for our overall P&L. Starting with Aerospace & Electronics. No change in end market conditions, which remain very strong as reflected in both our growth rate in the quarter and for the full year 2023 and as well as our backlog position. On the commercial side of the business, aircraft retirements remained very low due to high demand and limitations on aircraft deliveries. This results in an aging fleet that requires more aftermarket parts and service and demand for new aircraft continues to exceed what the OEMs can deliver. And air traffic activity is also strong, with global air traffic now basically at pre-COVID 2019 levels. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base given the heightened global uncertainty today. Across both commercial and defense, we are positioned extremely well, with many of our technologies seeing the most significant interest and highest rates of growth. Overall, just a solid demand environment with no signs of slowing anytime soon. That strong demand was reflected in our…

Thank you [Operator Instructions] Our first questions come from the line of Damian Karas with UBS. Please proceed with your questions.

Hey good morning guys. Congrats on the quarter.

Thank you.

Thank you, Damian.

You bet. Maybe we could start on the A&E margins. You're capturing a little bit less incremental than we'd expect, just given the sales strength. Rich, maybe you can just kind of help us bridge that there? I know you mentioned you're getting some additional costs related to expedited shipping. Are you not presuming that some of those costs abate in 2024, and that some of these supply chain conditions actually get a little bit worse before they get better?

Yes. I think we do expect to see some of those headwinds abate as we move forward. It's a gradual improvement, I would say. In the quarter itself, margins, the leverage was a bit lower, but not too far off what we expected when we issued our revised guidance last quarter. So continuing to see those headwinds from a supply chain perspective. Look, overall, we leveraged at 31% on the full year, which is pretty impressive overall considering the environment we're in and those supply chain constraints. We're back to above 20% OP, and we are guiding to some pretty impressive leverage performance next year at 35%, and we have that confidence, Damian. So we see that path. And again, a little bit of improvement gradual as it relates to the supply chain constraints that we've seen in those costs that have impacted us here in the second half, or really throughout all of 2023.

Got it, thanks. And then maybe switching over to PFT. You've only seen orders down, really, one quarter, but the last few quarters actually are showing stability or modestly up organic order rates. So could you just help us to understand like the short cycle versus some of your comments on the long cycle, I'm presuming that the orders are still up on the project base. But maybe if you could just give us a sense for like how much the short-cycle volumes have, in fact, kind of come off the peak? And it sounds like going forward, you're thinking that maybe short cycle is kind of stable, longer cycles down the next couple of quarters, but then starts to improve. Is that how you're kind of thinking about it?

Yes. Look, we see -- we saw -- Max had outlined a number of projects that we won in the quarter again. And yes, they've offset some of the underlying trends that we've been communicating in terms of weaker demand on the short-cycle MRO portion of the business, where most of the chemical companies that we're servicing are focused on cost reduction right now still, and we see that happening as we move through the first nine months of 2024. So that trend is continuing. So there was declines in MRO, mainly in Europe, but also a bit in the U.S. But the projects have really been what we're seeing and what you're seeing as the uplift, offsetting that underlying demand shortfall. So the new LNG facility, the projects in China and so forth, the pharmaceutical project win. So these are great, great wins and very strategic, but they are offsetting what we're seeing as a fundamental underlying demand shortfall as we move through the first nine months.

Still very consistent, Damian, with the trend that we're seeing. We just -- as we said last quarter, it hasn't declined quite the rate that we had thought going into 2023. We still see the clear trend to trough, being reached in an inflection point by Q3, Q4 of 2024. So all the underlying data still supports our forecast here in our guidance.

Okay. But any ballpark number on kind of how much the short-cycle volumes are down from the peak earlier last year?

I mean the short cycle piece, do we have the breakout of that off hand. It's probably -- it will be low double digit, probably in total, just on that portion. Something like that, Damian.

Okay, cool. Thanks a lot. Appreciate it guys. I’ll pass it along.

Thanks Damian.

Thank you.

Thank you. Our next questions come from the line of Scott Deuschle with Deutsche Bank. Please proceed with your question.

Good morning.

Rich, sorry if I missed this, but how does the aftermarket growth at A&E in the fourth quarter decomposed between commercial aftermarket and then defense aftermarket?

Yes. Commercial aftermarket was up about 44% and defense was up 11%.

Wow. Okay. And then, Rich, for the 10% core growth at A&E in 2024, can you say how that outlook bifurcates between commercial aero and defense, or any kind of split just between the different end markets there for 2024 and that 10%? Thanks.

Sure, Scott. We'll definitely provide a lot more detail at our Investor Day, but just to give you some maybe high-level numbers. Commercial OE is going to be up in the, call it, mid-teens area. Military will be maybe below single-digit to flattish, something like that, just given the momentum that we saw there all year. And then on the commercial aftermarket side, we're looking at low double-digit military will be in the double digit, I would say, firmly in the double-digit area, if that helps.

Okay. Yes. And then switching to PFT. I appreciate the conservatism on the margin outlook there, but can you go in a bit more detail as to why the margins would only expand 10 basis points in 2024, or maybe to ask it a different way, what scenario are you protecting yourself from with that [indiscernible]?

Yes. I mean remember, it's on flat organic growth. We've got an acquisition that initially is going to be slightly dilutive to margins longer term, it won't be. But next year, it will be. And the mix, right, if you think about the commentary in terms of what's been softest for us over the past couple of quarters and what we expect to be softest into 2024, it's chemical, right, which is a good margin business for us. So there's going to be likely unfavorable mix.

Yes, I would just supplement with the pricing associated with next year as well. So we are doing continued -- the teams are doing a fantastic job continuing to drive price that would offset what you'd obviously expect in the way of continued inflation, right? So that all taken together drives that flat margin performance, which given the volumes, in our view, a pretty good print for us.

Right. Okay. And then last question, just, Rich, anything on cadence for PFT margins for the year? Thanks.

Yes, it will be fairly level loaded through the year. There might be a little bit of strength in Q3. But right now, as we're looking at it, it's going to be fairly level loaded maybe a little, little bit shy or lower in Q1.

Thank you.

Thank you. Our next questions come from the line of Justin Ages with CJS Securities. Please proceed with your questions.

Hey good morning. Thanks for taking the questions. First one, just on hydrogen. I know you mentioned some shipments that were going out. Can you just give us an update on when that's going to reach critical mass, when we can expect it to turn, inflect, basically?

That's a good question as we think about inflection. I mean, we're building this business up ground up. This was -- we had looked at an acquisition years ago in the hydrogen space, and we're not successful. We clearly set our sights on the market. This is right in our sweet spot. So we have the core capability in balance piping. And we said on this journey, we're building this business. We're also looking at some M&A as we move forward. But right now on core, we see this as a -- easily by 2030, we're using some very large numbers internally that we are switching towards. I hadn't thought about the inflection point critical mass. But clearly, by 2025, I think we're seeing some [indiscernible] to provide more color at the Investor Day, too, Justin.

Perfect. No, that's helpful. And then just on acquisitions, Baum has been nice to see, Vian has been nice to see. And I think you mentioned in the prepared remarks about focusing on midsize. Can you give us an update? Are you currently involved in any processes? Are you close? And are those in A&E or PFT?

I'd say there's a lot of activity in both, which is normal. So our funnel is full. There's a lot of activity. It bodes well for the first couple of quarters here potentially. We'll see. But very solid activity.

I appreciate the update. Thanks for taking the questions.

Thanks Justin.

Thank you. Our next questions come from the line of Mariana Perez Mora with Bank of America. Please proceed with your question.

Good morning, everyone.

Good morning.

So my question is on Aerospace & Electronics, and a follow-up to Scott's on the end markets. Could you please describe how much is like wide-body versus narrow-body in driving this like mid-teens growth for commercial OE? And as a follow-up to that, how are you thinking about this like phrase in the 737 MAX production?

So overall, the way I would think about our revenue profile, we have an excellent mix of content on most major platforms, whether it's narrow-body, wide-body, etc. So narrow-body certainly is the engine that's driving the industry, but we do have significant content on wide-body aircraft as well. So there isn't a unique aspect to our guidance or our business that would suggest the importance of one versus another. We're just going -- we've got content on, again, most, and we're following the build rates.

On the 737, I would say that, first of all, it's not good news for the industry. I wouldn't add anything that we're not reading all publicly as this continues to be uncovered difficult times here for Boeing, and we share the concern and look forward to assisting in any way we can as we move forward. As it relates to the freeze rates impact, I would say that our current guide has no risk, as the way we are thinking about this and have planned for the current environment. So from a Crane standpoint, I would just reiterate our guidance and have high confidence.

And is there any way [indiscernible] you could share...

I...

You could share -- sorry, go ahead.

No, I was going to say the one thing I'd add is just next year, we also do expect, given our specific mix in the market, a pretty big uplook in regional, which is contributing to that growth rate nicely as well.

And particularly on the MAX, could you please share like, I don't know, shipset content or any metric for us to be able to measure how much of an impact that could have?

Yes. We don't provide shipset content. But what I'd say, and obviously, it depends on what's going on in the rest of the business and specific shipment rates for 737. The 737, generally, 2023, next year 2024, and in most years, it's somewhere in the vicinity of 5% to 10% of sales on the OE side on probably a little bit below the middle of that range.

And last one from me is on M&A. Where are you seeing in terms of pricing? And how competitive are the deals that you're pursuing?

Yes. It's still a very competitive environment. We haven't seen too much easing in pricing. I would say no real big changes that we've seen over the last six months in that regard.

Great. Thanks so much.

Thank you.

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

Good morning, Matt.

Thanks, good morning. Just a couple of follow-ups on A&E. When you look at the business in 2023, almost got back to a top line equivalent to where it was pre coded yet margins are still comfortably below. Can you help kind of bridge the A&E business circa 2019 to where it is in 2023? And do you have a longer-term line of sight to those to that pre-COVID level of profitability? And then I have a follow-up. Thank you.

Yes. We absolutely see that ability to get back to those margin levels without a doubt. In terms of what -- a comparison from this year to 2019, I would also say that the volumes, while we're seeing a lot of demand aren't yet fully back in terms of volumes. So a lot of what you've seen in our progress this year has been priced to offset inflation, not as accretive as we've seen in the Process Flow Technologies business. So there's a little bit of a volume price mix that impacts the overall margin profile. So when those volumes do come back, we will see that leverage at that higher end of that 35% to 40% range, and that will yield a margin profile that's back to those levels.

And then as a follow-up, can you talk about sort of the timing looking out? I realize it's probably not 2024, all that significant for you guys. But can you talk about when you start to see some of the more material, programmatic-driven ramp on your military side of the business? What part of the current -- the 2020s, do you really start to see that begin to rev for Crane?

Yes. 2025, without a doubt, yes. And then just ramping into 2026, we might see a little bit at the end of 2024, but it will be that sort of low rate initial production, but mainly 2025, 2026. Those are the AESA radars. Those are the F-16 brake control upgrade. I mean there's some pretty sizable wins that should start to ship in 2025.

Understood. Thanks Rich.

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

Good morning everyone.

Good morning.

Maybe just following up on that question. Is there any quantitative measures you can give us on those 2025 and 2026 defense platforms, the ramp-ups and how big they might be and how much impact they might have to revenue?

Well, we've talked in the past to be consistent on defense power. As we've described, we've got this incredible platform of existing wins that we have -- that we're delivering on today, commercial and defense. We're winning new business, defense power, in particular, the ESA radar, LTAMS, TPY4, Sentinel, F110, all in the $10 million a year range. Landing the F-16, $30 million over the course of three years, with further upside. 2025, 2026, with foreign military opportunities as well. That's sizing a little bit of those that are...

Maybe $100 million-plus from those kinds of platforms stepping up in 2025?

Not all on 2025, and that's probably that's a little on the high side.

So we'll work towards that goal.

I think the exciting thing about those programs is that their duration as well, right? So these are multiyear -- and that number that you just mentioned is the way to think about the size of each of those programs on average. Some are actually larger than that, starting in that 2025, 2026 time frame and extending out. And just to reiterate for everybody's knowledge, these are all programs that aren't replacing anything else we have. So they're all incremental. That's the exciting thing about the programs...

In one...

And then, of course, when you look on towards 2030, this is why we're so excited also about all the demonstrators that were on, winning that content. That's the picture we painted in the script as well.

Thanks for that one. At the Analyst Day last year, on PFT margins, you guys had targeted 380 basis points of margin expansion over the next few years. And I think, Max, you suddenly mentioned that you got 370 basis points of that in 2023. Can you talk about the major factors that led to you recognizing that margin improvement a lot earlier than planned? And then because I work on Wall Street, and it's what have you done for me lately, what the path is forward to improving those margins from here?

Okay.

Yes. So the major elements are going to be our price cost discipline, without question, is going to be a major factor there. Launching new products that have higher margin than predecessor products, in particular, in areas that are higher growing end markets for us. So a combination of just the pure margin profile of those products plus the associated mix in those areas that carries that margin profile. We also, you might recall, we executed on a repositioning initiative several years ago or a few years ago, and those benefits also reading through. So -- and then just to reiterate, when you think about things moving forward, we should continue to see that margin expansion associated with the higher-end growth markets that we're pursuing. Again, with that new product development and with continued disciplined pricing. But to answer your question, historically, those would have been the components.

As we think about moving forward, Nathan, it's as opposed to just flat out margin improvement, it's accelerating growth. And that's where this team is focusing here and leveraging on that growth in that 35% range as we have historically, while we continue to deploy capital and grow inorganically as well. So that's going to be our key strategic focus as we move forward. The team is energized like never before. I mean the teams across Crane are having so much fun right now, not without some of the supply chain challenges and so forth, we've mentioned before. But just the excitement that we have post separation, the new product development, where we're positioned, we're just having a lot of fun, and I'm so proud of our teams globally.

Thanks very much.

Thanks Nathan.

Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Please proceed with your question.

Hey good morning everyone.

Good morning.

Just a quick one for me, and I apologize, I'm bouncing between a couple of calls this morning. I know you touched on the China demand, which is interesting. We've heard that to -- people are thinking, reshoring is a U.S. thing. But for China, it seems to be happening in petrochemicals. We've heard that from others. But I'm just wondering if you could elaborate a little bit more on what you're seeing in China. And then maybe just more broadly, and again, I apologize if you did cover it in detail. But if you just think about the other key verticals in PFT, kind of the visibility on CapEx and other trends as we progress through the year, anything starting to percolate there that you can shed a little more light on?

End markets...

Yes. I'll hit maybe Jeff, the broader market comments and maybe just touch on China a little bit as well. But where most of the slowing that we're seeing clearly is in European chemical. I think that's consistent with what we've said in the past, project delays and pushouts still are recurring in both North America and China, although they've held up better than expected. So that while there are pushouts, we are seeing some wins. Strength is -- largely related to on our side right now, pharmaceuticals, some in Asia and China, in terms of chemical projects related to localization. China remains, as you know, a net importer of chemicals, but trying to accelerate localization and so forth. MRO in process, again, like I mentioned in my prepared remarks, remains pretty weak. It's worsening modestly, and I would say, with Europe being the worst of that.

Well specifically on China, I wouldn't call anything out. But for us, it's not a major shift or trend. I would say that China generally is a little stronger. I would say that our localization efforts are playing out as we anticipated. No major shift to trend, just kind of general solid growth for us in China, but nothing to call out for us, from a Crane standpoint.

[Indiscernible]

Yes, thanks.

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

Super. Thank you. Wow, what a fantastic year in 2023, executing on our strategic separation and driving core execution on growth across Crane, while delivering on shareholder value. Another great quarter and an exciting outlook for 2024. As I complete my 20th year with Crane and year 10 as CEO, I am incredibly proud of the portfolio transformation. Our entire team has driven over decades, higher growth, higher returns and more predictable. And now that we are past the separation, we are energized in delivering continued acceleration of organic growth and further margin expansion, complemented by capital deployment on value-creating acquisitions. As the late, great Charlie Munger said, our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. We will continue to execute simply and logically as we move forward and as we continue to scale with our consistent focus on driving shareholder returns. Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.