Crane Company

Greetings. Welcome to CraneCo First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jason Feldman, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good day, everyone. Welcome to our first quarter 2022 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 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'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 in the accompanying slide presentation, both of which are available on our website at www.craneco.com in the investor relations section. Now let me turn the call over to Max.

Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Another strong quarter with solid results across the board. First quarter adjusted EPS from continuing operations was $1.81, up 15% from last year. We delivered core sales growth of 5% with a number of strong leading indicators reflected in core order growth of 12% and core backlog growth of 16% compared to last year. Further evidence of our ability to drive profitable growth despite persistent inflationary pressures, ongoing supply and logistics issues, and continued COVID disruptions globally. Overall, the environment is similar today to what we saw and described on our last earnings call, generally not improving and not significantly worsening. While issues tend to change and evolve from various disruptions that continue to occur on a regular basis, it's a stable environment of ongoing challenges that are almost predictably unpredictable, if you will. As we watch global events in our operating environment carefully at this point, we still believe that we planned appropriately and that our current guidance is consistent with the demand conditions and supply chain constraints we are seeing today. And we expect a similar set of conditions to persist throughout the year. Building on the strength of our operating results, we also had some other notable developments we announced on March 30th at our annual Investor Day event, which is available for streaming at craneco.com for those that missed it. Specifically, we announced that we are pursuing a planned separation of our business into two independent publicly traded companies. We believe that separation will unlock significant shareholder value and better position both companies for accelerating growth moving forward. The separation work streams are well underway, and we are making significant progress. Given that this is a clean separation along segment lines, there is no disruption in our businesses with nearly all of the necessary work conducted by the corporate team along with our outside advisors. The businesses continue to execute well every day, and their primary focus is growth. And that's where I'm spending most of my time and heavily engaged to help drive accelerating growth, both organically and inorganically, and ensuring these businesses are structured and positioned for that focus. You heard about many of the opportunities we have ahead of us at last month's Investor Day event, but there are many others that we will be in a position to discuss in the quarters ahead, so stay tuned. A couple other items to mention. Earlier this month, we completed our $300 million share repurchase program, buying back a total of 2.9 million shares over the last several months. That program reflects our view that our stock remains significantly undervalued and was a good use of our strong balance sheet, given the relative valuation of our stock compared to potential acquisitions. And last night, we announced that we have signed an agreement to divest our crane supply business. Crane Supply is a leading distributor of pipe valves and fittings for commercial and industrial applications. It's a very strong business with industry-leading margins and returns and an exceptional team. However, as a distribution business and as part of our broader portfolio shaping efforts, it is now not aligned with our core growth strategy as a manufacturer of highly engineered products, nor with our target long-term growth profile. This transaction will further streamline and focus our process flow technologies business on the manufacturing of highly engineered products for its core target markets, chemical, pharmaceutical, water, wastewater, general industrial. I wish to thank our Crane Supply team for their support, dedication, and their understanding regarding this decision, and a personal shout out to our president, Tom Frazier, who celebrated 40 years with Crane April 12th, and who is staying on to lead this business for the DeShane Group, an outstanding distributor in Canada that we're very pleased to have the team become a part of. So for now, a few highlights of what to expect at each of the post-separation businesses. At Crane NXT, the CEO search is underway, evaluating both internal and external candidates. The new CEO will have an incredibly strong base business to work with, one with significant technological differentiation, world-class manufacturing capabilities, and an extremely strong financial profile with substantial free cash flow generation. This is also a business that has a proven track record of growth. Starting with that strong core, remember this is a business with 40% recurring sales, contractually locked in for expected periods or repeating for many years, a sole source relationship with the U.S. government on the currency side for more than 100 years, a service business with annual contracts and a 98% renewal rate, repeat international customers with our technology specified for multi-year printing contracts, and connectivity managed services and cashless processing. and a core business supported by strong secular trends, security throughout NXT's offerings, any counterfeit for cash and consumer products, secure cashless transaction networks, and physical security of currency, and automation and productivity solutions to address labor costs and availability. Across the business, the organic growth opportunities are enormous, and we compete in a fast-moving and dynamic market with new opportunities emerging frequently. In retail, We're seeing a proliferation of self-checkout solutions, from expansion of traditional self-checkout systems, where we are a critical provider of components, to the largest OEMs, to customized customer-facing solutions optimized for specific retailers' needs and requirements. We also have our own expanding line of customer-facing systems and solutions. And we are seeing entirely new categories of retailers look for automation. As long as the solution involves a payment transaction, we play a potential role, and this part of the business continues to grow rapidly. Service has been a major growth area for us since the 2019 acquisition of Cummins Allison, where we are expanding our capabilities with a 400-person strong U.S. technician base and offering a turnkey solution with a strong recurring revenue model for customers across retail, gaming, and financial services. Cashless payments. where we have a strong and growing presence in both vending and gaming, and increasingly seeing opportunities across new markets, including EV charging, where we are gaining significant traction, as well as next-generation vending, service pay kiosks, and various other unattended payment locations. At Currency, we see continued opportunities for banknote growth, leveraging our micro-optic security technology, which is unparalleled. This differentiator continues to win us new business, both for standalone security products but also for banknote printing and product authentication. Leveraging that micro-optic technology for consumer product authentication, we continue to make significant progress signing new partners and converting customers. There are also additional opportunities where we have begun preliminary work but aren't yet in a position to discuss further, involving data analytics, broader plays across the authentication space, digital payments leveraging our existing technology, and other areas as well. In addition to organic opportunities, this is a business with a long and successful track record with M&A, a robust pipeline of acquisition opportunities to strengthen the core, and a growing list of potential acquisitions across a number of adjacencies. And we'll continue to share more developments at Crane NXT as we can over the course of the year. At Crane Co., where Rich and I will continue to be part of the business post-separation, there are equally exciting opportunities. This is a business that should deliver solid mid-single-digit core sales growth across the cycle, with strong operating leverage driving double-digit core EPS growth before capital deployment, paired with a strong balance sheet to create additional value through acquisitions and capital return. Two strong technology-driven industrial businesses with large, attractive end markets. At Aerospace Electronics, we have a clear line of sight to 7% to 9% sales compound average growth rate for the next decade. Driven by a continued post-COVID commercial aerospace recovery where we have substantial content on all of the high-volume in-production aircraft platforms, as well as significant growth from multi-year defense contracts we have already won that will be ramping up over the next several years. and with many new emerging opportunities given our technology readiness and key growth areas, including high power conversion and sensing, as well as thermal and fluid management. Well positioned with the right technology for the solutions that are still in the early stages of development and adoption, hybrid and all electric military vehicles, alternative propulsion aircraft, urban vertical takeoff and landing aircraft, low earth orbit, satellite constellations, next generation radar applications, an incredibly strong business well positioned for accelerating growth. In process flow technologies, years of realigning the portfolio and manufacturing footprint, this business is well positioned for growth and very focused on manufacturing highly engineered solutions for the most demanding applications in chemical, pharmaceutical, water, wastewater, and general industrial applications. For an industry that is typically slow to adopt new technologies and solutions, it's been amazing to see the success this team has had. rapidly increasing new product vitality, new-to-the-world product designs for chemical applications, continued expansion of the product portfolio, both organically and through acquisitions, and increasingly dynamic business driving accelerating growth with margins at record levels and position for further expansion. I'm getting goosebumps just thinking about this. Rich, you? A tingly feeling? I've got to take a breath. Overall, we have a very exciting story with continued appreciation in the market, and we believe that all of our actions confirm our unwavering commitment to driving shareholder value. While we work towards a separation over the next year, you can expect us to operate the business as we always have, but with an even more pronounced focus on driving growth, we will continue to deliver differentiated and consistent, excellent execution. We are investing in driving growth more effectively than ever before. We remain fiscally disciplined and have a rigorous process for all capital allocation decisions, and all of these efforts are supported and enabled by the cadence and discipline of the Crane business system. An exciting set of opportunities for these businesses both before and after the separation. At this point, I'll turn it over to Rich for some additional financial commentary.