Greetings. Welcome to Crane Company's Third Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Jason Feldman, Vice President of Treasury and Investor Relations. Mr. Feldman, you may now begin.

Thank you, operator, and good day, everyone. Welcome to our third 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 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 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. Well, we delivered another impressive quarter with results again outperforming expectations. We delivered core sales growth of 9% with a 42% increase in adjusted operating profit and adjusted EPS of $1.03, with strong performance across all of our businesses. Our performance year-to-date along with our market outlook gives us confidence to narrow our guidance range with a midpoint $0.175 higher than our prior guidance updated in July. Our revised adjusted EPS guidance range is $4.05 to $4.20. While the comparison to last year's EPS isn't meaningful given the recent separation, on an operational basis, our revised full year guidance reflects 7% core sales growth driving a 24% increase in adjusted segment profit. Strong core growth, along with very impressive execution on productivity and pricing initiatives, delivered more than 50% operating leverage with operating profit increasing more than 3x the rate of core sales growth. Hey, I want to start off with an update on the M&A front. Since our separation announcement, we have described how we expect acquisitions to be a meaningful contributor to our growth story as we move forward, as we have an extremely strong 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. In our current structure, we are entirely focused on our 2 global strategic growth platforms, Aerospace and Electronics and Process Flow Technologies, all factors that set us up to be a consistent serial acquirer moving forward, adding value above and beyond our organic growth investments and opportunities and strengthening our business to further accelerate growth. Last quarter,…

Thank you, Max, and good morning, everyone. Another outstanding quarter with 9% core sales growth, driving 42% adjusted operating profit growth and driven by excellent performance across all businesses despite some end market and continued supply chain challenges. We are confident in both our outlook for 2023 and in our ability to drive significant growth in 2024 and beyond. Getting into the details, I will start off with segment comments that will compare the third quarter of 2023 to 2022, excluding special items, as outlined in our press release and slide presentation. Starting with Aerospace & Electronics, end market conditions remain robust, and that's reflected in both our growth rate in the quarter and on a year-to-date basis. 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 just a few points below prepandemic levels. In the United States, RPKs are 9% above 2019 levels with international travel recovering at a slightly more measured pace. Overall, just a great demand environment. For Defense, RDT&E, or research, development, test and evaluation appropriations growth, along with procurement spending have been very strong over the last 2 quarters -- sorry, last 2 years, and there is a growing sense of confidence in the industry that geopolitical issues will both result in the passing of the fiscal 2024 budget soon as well as resulting in additional investment reinforcing the broader defense industrial base. And across both Commercial and Defense, we are positioned extremely well in many of the areas seeing the most significant interest and highest…

[Operator Instructions] And our first question today is from the line of Scott Deuschle with Deutsche Bank.

Rich, why do A&E sales go down sequentially in the fourth quarter?

A&E sales will be down modestly. To your point, it's just largely timing associated with what we were able to deliver here in Q3. So we did have some accelerated shipments. So our expectation is that we won't need to do that in Q4. So really, it was a little bit more than expected here in Q3 at the expense of Q4 slightly.

Okay. And sorry if I missed it, but can you say what the third quarter price realizations were at both A&E and PFT?

Yes, I didn't mention it on the prepared remarks, but I would tell you that price cost was quite solid overall for the business. In A&E, I would say it was definitely accretive, but not anywhere near as much as it had historically been in the first half of the year. So we did see some of that sort of close a little bit. It was still modestly accretive, but not as much as historical -- historically in the first half. And then I would say at PFT, it was accretive to the overall margin profile.

Okay. And then last question for Max. How would you characterize the ability of the company to benefit from these accelerated shop visits on GTF. I think you all have some mentioned content there, so curious how you'd frame the impact to aftermarket sales over the next few years as a result of those accelerated shop visits?

So on the GTF, when the engines are taken off-wing earlier than expected, our products tend to be serviced as well, right? So we are seeing a modest acceleration relative to what we would have originally expected. Relative to the overall business, at this point, I wouldn't say that it's material, but it has been slightly helpful to aftermarket growth rates recently and would expect it to continue to be.

But we don't see it, Scott, as a significant impact for us.

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

Congrats on the continued demand momentum you're seeing. So I think the 1 thing that kind of stuck out was you saw this aftermarket surge, if you will, but yet you had that kind of some, I guess, lighter incremental margins, if you will, for A&E. Is the right way to interpret what you've said that you basically saw a step backwards in the supply chain conditions or something else to kind of factor in there? And Rich, you highlighted, right, your expectations that in '24, you'll see much stronger margin expansion. What kind of incrementals should we be thinking?

In 2024?

Yes.

Yes, so I'll answer that portion first. So in 2024, we would expect to see close to a couple of hundred basis points of margin improvement, which, on our guide on the top line would imply somewhere in that 35% to 40% range. We're still got to go through our plan process as you know, Damian, but we would expect it to be somewhere in that range. And just given the supply chain itself, we're thinking that it might be towards the lower end of that range, but in the range.

Damian, I wouldn't suggest that the supply chain took a step backwards. I would say that we took a step forward in addressing some of the challenges we have to try to expedite material and delivery to our customers. I don't know if you want to frame up a little bit how we're thinking about.

Yes, I think [ it impact ] quarter Q3 to Q4.

Yes. I think that's right, Damian, in the quarter. We certainly were doing all we could to make sure that we were delivering to our customers. And with that comes a bit more higher expedite charges you might have. We've done -- I think we've done a fantastic job just generally with establishing second sources, which requires requalification costs and so forth. And frankly, those are going to be costs with a fantastic payback in the future as we'll have a more, I guess, diverse supply base from which to satisfy our demand in the future. So we certainly had more of those costs in the third quarter, than I would say we did maybe in the first half. Look, if I was to give you the overall from Q3 to Q4 in terms of what we would otherwise -- what you would otherwise expect on the revenue growth, because we did have the higher revenue growth. We had some favorability in aftermarket, we would have expected or the math would simply suggest $5 million or $6 million more in OP. And it really is a combination of what I just mentioned. That might be maybe half of -- maybe half of those costs that I just mentioned represent that half of that $5 million to $6 million or so. We also had higher material costs in the quarter. I would say maybe 20% of that $5 million to $6 million relates to price cost, getting a little bit of Scott's question. It wasn't as accretive as we saw at the beginning of the year. And then about 30% or so relates to higher program costs generally just because of all the recent program wins. But I would tell you, though, that these are costs that we largely expected. There were some incremental, so that $5 million to $6 million is the simple math from Q3 to Q4. But if you step way back and look at your full year, the leverage rate that we expected to hit this year relative to our January guidance, we raised revenue $40 million since January, and we've raised OP guidance by $12 million, right? And so you do that math on a net basis, our total cost profile, you could argue, is up maybe $1.5 million, right? It's a small amount. But to kind of explain that Q3 to Q4, those would be the elements.

Yes. And just remember that part of that is timing elements, right? So the requalification second sourcing has a payback. The price cost, which was a little less favorable in the quarter, we get very good pricing, have been in this business. It just comes with a little bit more of a lag than in process flow technologies, right? So these are not structural or permanent. This is an order-specific transient issue.

Makes sense. And then I guess, switching to PFT, orders seem to be faring a good bit better than I think you've been expecting. Could you maybe just break down how much positive price uplift you're still getting in orders versus volume levels? And just any color you can maybe give on demand trends you're seeing?

All right. I'll take a stab at the demand trends first and then move to the second question. Just overall, I would say nothing material has changed overall in the profile. We saw some -- a nice uptick in the quarter, which was a good -- maybe less expected to happen in the quarter on a few projects. We had a few nice project wins combination of China and in North America in the chemical space. So that really did inflate the order profile a little bit here in the quarter, which is fantastic, but it doesn't change that underlying trend that we had been talking about all year. If anything, it might have moved slightly to the right, right? And so instead of fundamental orders, I think inflecting negative here in September, October, it's probably going to happen in December, right? But the overall trend is going to happen the way we suggested and then revert, we will go negative next year and then revert back at the end of 2024. So no real significant change there. On price, it really depends on which part of the business that you -- that we talk about. In our water -- wastewater business, it's probably 50-50. In our Process markets, just given where the markets are today, it's more skewed towards price. And our -- and then we have a couple of other pockets where it's probably 50-50 as well in the smaller parts of the business that we have. So I would say no significant trends changing on price and volume and backlog, but that's the way I would think about it across the segment.

Next question comes from the line of Matt Summerville with D.A. Davidson.

I just want to talk about how should we be thinking about the mix for A&E going forward into '24 between commercial and military? And then I want to be clear, are you still sort of faced with, I think, Rich, coming out of Q2, you indicated $60 million to $65 million of "supply chain stranded revenue." Is that still sort of the right figure for where the business sits today? And then I have a follow-up.

Just on the stranded and then you can take the mix. The -- we started off the year saying if we could ship with no supply chain constraints on a normalized level, what's being held up in backlog, and that number was $50 million. I think today, we'd probably say it's probably somewhere between $65 million and $70 million, somewhere in that range, Matt. That's not the same -- I just want to make sure investors understand that it's not like trapped $65 million to $70 million. This is just a rough number. We're just saying if we were completely unconstrained, what could we get out the door. So it has grown slightly. We continue to -- this gets to the Q3 expedite challenges that we have, and we're doing all we can. We're required to drive some efficiencies to make sure our customers are satisfied, but that number is probably $65 million to $70 million right now on the mix.

Yes. And on the mix, what I would say is we're going to continue to see, I think, strong aftermarket as we move through 2024. It's not going to be as strong as we saw this year on a percent basis, but it will still be relatively strong. OEs are going to be, I would say, increasing at a faster pace relative to 2023. So you could have a slight -- it won't be an overwhelming mix differential, if anything, it might be on the negative side, just given OEs have to get their shipments out and up, right? So -- but aftermarket is still solid. I don't know if that helps you. It's a little early for us to give too much guidance on that, Matt, right now. We're definitely going to be providing a lot more in January, but that's the high level.

Yes. No, I mean the fact that you gave '24 commentary in general, I think, is absolutely a positive. Sticking with A&E then for my follow-up. As we think about all of the programmatic wins you've been calling out specifically those that you're probably not able to call out. When do we start to see an upward inflection in revenue contribution start to kick in from some of those wins. And based on -- again, this is several quarters in a row, you guys keep calling out new wins you've had. At some point, do you need to revisit that 7% to 9%?

Yes, that's a great question. And a lot of the wins are fantastic, demonstrate our platforms that are a little bit later, but we would expect to see some significant movement in '25, I would say.

It will. It will have significant move in '25 programs that are...

Yes. I mean -- I mean with the 1 program in particular, we have the retrofit upgrade for the F-16 brake control, right? And that's absolutely going to be hitting in '25 as well as a number of other defense -- exactly defense, high-power platform. So they'll start in that period as well. We might have a little bit of low rate initial production on a couple at the end of next year, but I don't think it's going to be overly meaningful next year.

But to your point, Matt, I mean, the team is doing a phenomenal job. We continue this multiyear investment in technology. We're on exciting programs to continue to ramp up. We've won and executed on programs that are leading through today and into '24 and then the content that we have on secured ramping up both in our Burbank facility, Fort Walton Beach facility. I mean, there's some significant investment in growth in readiness and our teams are all over it. We're ahead of schedule. So I feel really good about it. And we keep pinning this picture of all the demonstrators and all the future programs that we're on, which goes out even a decade out and more. So just incredibly well positioned.

Our next question is from the line of Nathan Jones with Stifel.

A question on A&E. And zooming out a little bit from the 3Q, 4Q kind of questions. Rich, you talked about several -- I guess, there are sources of expenses and inefficiencies around expedited shipping, qualifying second sources, higher development expenses, these kinds of things, which are obviously, some of these are good, but you're continuing to make yourself a trusted supplier with your customers. Development expenses are always good because they're future revenue. Is there a way you can quantify some of the inefficiencies that are in the system around especially things like the supply chain costs? Doesn't sound like you're thinking they're going away in 2024. Does that then build in some more margin expansion as we get out into '25 and '26 as those things normalize?

Yes, it's -- yes, I think we would agree with you. To try to quantify that would be a bit of a challenge or I'd be hesitant to do that now, we can think about how we might try to frame that up when we give guidance in January or at our Investor Day certainly. But there definitely is cost in the system that's related to the supply chain here that's been happening all year. Even the numbers I called out, right? These were not necessarily all unexpected, and they were existing as we move through the year. They're a little bit higher here in Q3, but not really a lot more.

But I think you framed it up 50% of what the expected leverage was. But I just want to make sure that this isn't a worsening. I do believe -- I mean we clearly see improvement in the supply chain that continues. It's gradual, and it's slow and it's moving. And so that's what we continue to see. And it's broader than just on-time delivery. It's everything from a smaller subsupplier that all of a sudden decides they're going out of business. And you've got a second source in short order or there's labor challenges. There's retirements post COVID that you're -- both internal as well as third-party that has lost talent and there's the hiring process. So it's just it is not worsening. It continues to gradually improve. We've communicated that from the beginning of the year consistently. I think we're 1 of the few that openly has discussed this, and I think we've been spot on. It's going to continue into 2024, and it will continue to improve over time. So these will -- I fully expect them to lessen over time and that margin to read through.

I guess that is not worse, not worsening, but I also want to just make sure everyone understands that there are temporary cost inefficiencies in the system here in A&E and structurally, the margin profile is higher than where it's sitting right now.

SP-2 Without a doubt.

Without a doubt, yes.

And then I guess my follow-up question on PFT. If we're expecting orders to be negative for the next few quarters, why would the initial outlook for revenue -- core revenue growth to be roughly flat next year, why wouldn't we expect that to be down a little bit?

Yes. So I mean -- so the market -- we see the market being down, right? We're going to continue to do what we need to do to help offset to the best that we can. So a combination of share and price. So -- but market overall is expected to be inflecting next year in a more significant way is what I would say. So we're making some of that back, and then you have...

This is the positive news of the investments that we've had. The new product rollouts that we're having great success with, the investment for growth. So we're taking share. So it's a combination of share and price.

The 2 other factors, Nathan, just to be clear, right? One is there is the mathematical effect of shortening lead times, reducing the backlog, right? So you're shipping more of the backlog above and beyond whatever the incoming orders are. That's just kind of a natural process as the supply chain continues to improve and lead times normalize. The second is that the short cycle piece of the business, which doesn't really flow through the orders for next year specifically, is going to be growing faster than the longer cycle part of the business, right water, wastewater in particular, it tends to be a very short cycle business, and that's going to do...

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

Yes, Damian?

So just a couple of follow-up questions here on actually the Baum deal. So what could you tell us about line piping? I mean that's not an area that I don't think you've highlighted much in the past. So maybe just tell us a little bit about that? Any sense for the total addressable market? And maybe what kind of synergies are you expecting with this deal?

Yes, you bet. Thank you for the question. I appreciate it. So look, lined fluoro-polymer, we play with our Resistoflex brand. If you go to the website, you can check out Resistoflex. We don't talk about necessarily individually as the brand but it's -- as a part of a complete solution with line pipe and valves, the XOMOX brand, we have significant global share. So when you go into a bit of chemical package and you're bidding the pipe -- 1 follows the other in terms of the valves as well. So they're part and parcel. So we have a significant presence in North America. We're one of the #1 -- we are the #1 player in North America. Baum has been a worthy competitor for many years. Baum has their strength in the DIN category of standards, European standard. They have an extended size range and they've a dominant position in Europe as well as some other countries. And then we always run into each other and butt heads. Having the opportunity to fold Baum into Crane, continue to keep it strategically separate as a brand allows us to avoid unnecessary overlap of where we're focused. We're really strategically positioned in terms of where we want to be with our end customers as well as the channels on a global basis. It has enhanced our positioning significantly. It's a smaller deal, and it's one that just fits perfectly into our core business and is going to allow us to do some great things here for our customer base as we're moving forward. Sort of market size. If I think of line pipe overall, about $1.4 billion, the fluoro-polymer space is probably closer to $300 million, but you're always up against others. You're trying to compete with -- could be epoxy line, some aplastic line. There are very specific performance characteristics that fluoro-polymers allow you to have that are very unique in terms of their chemical resistance, pressure ratings, temperature ratings and so forth. So that gives you a bit of insight in terms of the market size. We probably have, call it, 40% share in North America, Baum probably has 40% share in Europe. Rest of world, we all compete. It just allows us to really serve our customers better holistically with the line product offering. And so hopefully, that gives you a nice overview.

Yes. No, very interesting. And I guess on the M&A front, so you closed this deal. You mentioned you lost a deal. So I guess that suggests you still have on active. Is that on the PFT or A&E side, if you don't mind?

Active is on A&E.

And there have been other -- we talked about those 3 a quarter ago. Just to be clear, there are others that are now active that weren't part of that 3, right. I mean, yesterday, we -- so 3 or 4 are live at this point, one of which is the former A&E deal, which we talked about, which hasn't been resolved yet fully and then a couple of new ones that kind of are now getting a lot of activity.

Got it. Okay. So any expectations for incremental capital deployment before year-end? You've got that $1 billion of capacity, and I mean whether we're talking deals or otherwise?

Well, it's going to depend on how we -- how this one that's live in particular then when that's been live in A&E. If that -- if we're successful there, it should close this year.

The others that are now active realistically would probably be more first quarter.

At this time, we have reached the end of the question-and-answer session. And I'll turn the call over to Max Mitchell for closing remarks.

Super. Thank you very much. Hey, another great quarter and an exciting outlook for the rest of the year and into 2024 for Crane. So many opportunities in so many areas, so many good things happening. However, even with all the positives at Crane, it is hard not to comment on the continued uncertainty globally, rising global tensions, war, economic uncertainty, political turmoil. It can be truly overwhelming at times, but we continue to focus on what's within our control. In addition, I'm proud of Crane's place in the world and our global team's efforts. Our philanthropy and volunteerism continues to make a difference in so many areas. As the late great Jimmy Buffett once said, "I can't change the direction of the wind, but I can adjust my sails to always reach my destination." At Crane, we continue to focus on what's within our control while being nimble and flexible to adjust quickly and always keeping our site set on delivering our goals. Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

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