Crane Company

Greetings and welcome to Quainco 4th Quarter 2021 Earnings Conference Call. At this time, all participants are in a lesson-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jason Feldman, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good day, everyone. Welcome to our fourth quarter 2021 earnings release conference call. I'm Jason Feldman, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer, and Rich Maui, our Senior 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 will 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. Please also mark your calendars for our March 30th Investor Day event. We expect to host this event in person in New York City. Please contact me directly if you would like details. Now let me turn the call over to Max.

Thank you, Jason. 2021 was yet another year with an extremely difficult operating environment, but one in which we drove phenomenal results. I want to start by thanking our teams globally across Crane that drove these results through another year with COVID-related uncertainty, supply chain challenges, rapid inflation, among other difficulties. We have worked along with the full management team to protect our associates, both physically and financially, as well as possible. And 2021 was the second year in a row where our teams had to work through numerous personal sacrifices and challenges while still protecting our customers and creating value for all our stakeholders. Despite all of these challenges, Our combined efforts drove impressive results. Record adjusted EPS of $6.55 increased 87% compared to 2020. Record operating margin of 15.8%, and record free cash flow of $415 million, which was 107% of adjusted net income. For the fourth quarter specifically, adjusted EPS was $1.25 compared to the $0.92 in the fourth quarter of last year. Let me put our performance into perspective a few different ways. First, our original 2021 guidance midpoint was $5. That guidance included 44 cents of earnings contribution from engineered materials. So, we delivered approximately $2 in EPS better than our original guidance on a comparable basis. our 2021 results were better than prior pre-COVID peak in 2019. Again, results in 21 better than prior pre-COVID peak in 2019. Excluding engineered materials in both periods, 2021 adjusted EPS of 655 was 15% or about 86% higher than the prior peak, even though many end markets remain below 2019 demand levels. Remember, our aerospace and electronics business in 2021 was still approximately $150 million in sales and $80 million in operating profit below 2019 levels. That's about a dollar of EPS to be realized over the next two to three years on top of the strong long-term growth profile of our defense business. At Payment and Merchandising Technologies, after adjusting for the Cummins Allison acquisition, Crane Payment Innovations was still almost 200 million below pre-COVID levels, with more than half of that amount in our high margin payment solutions business. This business continues to benefit from very favorable long-term macro drivers that are accelerating given global labor constraints and wage inflation. This business also has a strong growth path from both cyclical and secular drivers. And at Process Flow Technologies, while total acquisition adjusted sales were similar to pre-COVID levels last year, the recent strength has been driven by the commercial portion of our business, with the high leverage process valve business still in the early stages of a recovery. So bottom line, performance already better than pre-COVID with a cyclical recovery still to come, along with our accelerating results from our growth initiatives, driven by a combination of strong execution on productivity while continuing to invest across the business. Our currency business certainly helped our performance last year, partly driven by COVID-related demand, but also critically by the enormous improvements we have made across this business in the four years since the acquisition. Huge improvements in consistency of execution, quality, waste reduction, and productivity, but also a fundamental shift in the commercial focus of the business, being very intentional about what business to pursue, customer segmentation, and more clearly articulating our extremely powerful value proposition and pricing accordingly. And third, we achieved this record performance during a difficult period with numerous challenges. I won't enumerate them again right now, but the key message is that we have proven our ability to execute and grow even in this challenging environment. And we have not cut any growth investments to achieve our strong financial results. You can see that in our gross margin reaching record levels despite significant inflation. Solid quality of earnings as EPS growth did not come from lower ES&A. Building on our record 2021 performance, our initial 22 adjusted EPS guidance is $7 to $7.40, which reflects 10% EPS growth at the midpoint with core sales growth of 4% to 6%. We have been extremely transparent over the last two years, giving granular guidance in 2020 when few others were willing to do so, and we have consistently shared updates and changes to our guidance as the environment has evolved. This guidance is still being issued in a period of heightened uncertainty, but we have demonstrated our ability to execute and grow even with unexpected developments and challenges. Our guidance does not assume any material change in the operating environment, Just a continuation of the same challenges related to COVID, variants, infection waves, sporadic supply chain constraints, inflation. We believe that underlying demand across most of our businesses could support a higher level of sales but will be constrained by the supply chain. It's very early in the year and this is the guidance range that we have line of sight of today. Our excellent performance in 2021 and our newly issued solid outlook provides all of you further evidence of our differentiated execution and the strength of our underlying businesses. And while some investors are starting to notice, as you can see in our near record stock price, we see much further upside in multiple expansion as we continue to execute on our full strategy. So let me reiterate again the message that we have been consistently communicating to For the last many years, we are executing on our long-term new product and technology roadmaps, innovating, developing new products and solutions to provide value for our customers. We are also executing on numerous growth initiatives across our businesses focused on commercial excellence, and we operate with the consistent cadence and discipline of the Crane business system to drive growth, productivity, and cost savings. We have demonstrated an ability to balance those objectives extremely well. delivering on margins and free cash flow while maintaining 100% of our investments in strategic growth initiatives throughout the entirety of the pandemic. We have driven and we will continue to drive above market growth. Paired with the market recovery and our consistent execution, we are very excited about our growth prospects and solid operating leverage driving substantial growth in free cash flow. Credibly delivering on expectations. I've discussed how Crane was at an inflection point for accelerating growth after years of organic investments and consistently excellent execution. Over that time, you have seen more and more evidence supporting this view. We will continue to execute on our investor thesis. We are well positioned for accelerating organic growth as our end markets continue to recover. We are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development, and commercial excellence. Solid execution continues to leverage that growth into strong earnings and free cash generation, which provides substantial flexibility for capital deployment from acquisitions and portfolio shaping to repurchases and dividends. Continued evidence of the value we create through acquisitions with stellar performance at Crane Currency, Cummins Allison, and instrumentation and sampling, and all supported by the cadence and discipline foundation of the Crane business system, as well as our holistic commitment to ethics, philanthropy, sustainability, and equality. Management and the Board's confidence in this thesis is reflected in the $300 million share repurchase authorization we announced last quarter, as well as yesterday's announcement that we are increasing the dividend rate by 9%. Inflection. We have clear momentum with increasing traction from our growth initiatives, and we will continue to generate substantial and sustainable value for all of our stakeholders. At this point, I'll turn it over to Rich for some additional financial commentary. Rich.