Crane Company

Good morning and welcome to the Crane Company's 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. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. 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 Maui, 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, 10K, 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 15th. Suffice it to say I would not be here at Crane nor 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 cared deeply for our associates, always upbeat and positive in even the most difficult circumstances. Eric was someone I learned from and tried to emulate to the best of my ability. Above it all, Eric was a deeply loving family man who always emphasized 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%, with a 30% increase in adjusted operating profit and adjusted EPS of $1 and 10 cents. Great performance across the businesses with both of our strategic growth platforms at or above 20% margins in the same quarter for the first time ever. This strong performance gives us confidence to raise our EPS guidance by another 20 cents to a range of $3.80 to $4.10. 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 6% core sales growth, driving an 18% increase in adjusted segment profit. Strong core growth, along with a very impressive execution, delivering 50% operating leverage with operating profit increase three times the rate of sales growth, further evidence of our ongoing execution capabilities. Regarding our end markets, the environment is fairly stable with some improving but continuing persistent supply chain challenges at aerospace and electronics and signs of continued slowing in end markets at process flow technologies, particularly chemical. However, we continue to drive strong results and are confident in our outlook for 23 and our ability to drive significant growth in 2024 and beyond. From a cost and inflation perspective, as you can see, From our continued margin strength, we have been appropriately prudent with pricing actions across all of our businesses, and we continue to fully offset the impact of inflation on both a dollar and margin basis. Starting with aerospace electronics, our revised guidance is for 14% core sales growth, driving operating profit growth at roughly twice that rate. Demand remains very strong with no signs of a slowdown. The supply chain environment has improved slightly, which drove the three-point increase in our core sales guidance, but we expect further improvements to be at a gradual and measured pace. Even with those supply chain constraints, we couldn't be more excited about the growth profile of this business. We remain confident in our ability to deliver 79% core sales growth from 2024 through the end of the decade, and we are now working on opportunities to overdrive that target. And with operating leverage in this business typically approaching 40%, we expect this business to generate profit growth well into the double digits into the foreseeable future. Rich Jason and I attended the Paris Air Show last month with Jay Higgs and the Aerospace team. A great event with over 150 face-to-face meetings with key customers, partners, and peers, not to mention quite a few analysts and investor meetings. Coming out of that show, hearing directly from our industry partners, My confidence in the demand trends and the specific positioning of our business couldn't be higher. Although there are continued industry challenges, from supply chain lead times to labor shortages, demand is extremely strong, and any industry short-term supply constraints will just result in a much longer upcycle this decade and beyond, with some clear benefits for suppliers like Crane. For example, given constraints on OE build rates, The fleet has aged about 15% since 2019, and the number of aircraft in the fleet less than five years old, down 25% since 2018, creating a long-term structural increase in the demand for aftermarket products and services. This is reflected in the unusually strong aftermarket backlog. In addition to strong industry trends, our team continues to perform well and secure new business. For example, Crane was recently selected by Hart Aerospace for the joint development phase of Hart's hybrid electric ES30 aircraft. We will be collaborating with Hart to define the electrical power distribution system, utilizing Crane's innovative high-voltage power conversion systems and low-voltage control distribution equipment. Our selection on this program is a testament to the vision, strategy, and investment we have made in our electrical power capabilities over the last decade. Those power conversion capabilities are also being used in a variety of other next generation applications, including a number of large AESA radar power systems that we have already won, as well as more electric and hybrid electric tactical military vehicles. Also in this area, the U.S. Army recently announced that the optionally manned fighting vehicle competition down-selected to American Rheinmetall and General Dynamics Land Systems, who will split $1.6 billion in funding to develop the M2 Bradley replacement vehicle. Through our strategic investments in high power and bidirectional conversion, we are securing positions on both the demonstrator platforms, which will position us for significant long-term growth in our defense power business. We also continue to be selected to provide content for various six-generation fighter demonstrators and collaborative combat aircraft programs, while continuing to execute on others that were awarded within the past 12 to 18 months. This demonstrates the value Crane is delivering through our strategic investments in advanced brake control, engine lubrication, and thermal management systems. Just an incredibly exciting range of opportunities. reinforcing our confidence in our ability to deliver 79% long-term growth with potential upside to that target. We also have a strong growth story at Process Flow Technologies. Our revised guidance is for 6% core growth, driving 22% growth in segment profit. That's nearly 60% operating leverage, reflecting a number of factors, including strong operational execution, value pricing, and continued structural change in the business. That structural change includes an ongoing mix shift, where today nearly two-thirds of the business is positioned in our core target markets of chemical, pharmaceutical, water, wastewater, and industrial automation. It's those markets where we have the greatest differentiation and the best ability to create value for our customers. We also continue to invest for the future with new product introductions released at record pace and with structurally higher margins. New product vitality metrics continue to improve year after year. giving us high confidence in the 3 to 5 percent growth profile through the cycle and the substantial opportunity to further expand margins. A lot of exciting developments in this business as well. We are outperforming the markets and gaining share driven by new product innovations. While we are extremely well positioned to continue to outgrow our markets, we have seen some signs of slowing demand as expected and consistent with our full-year guidance provided in January, particularly in European chemical, non-residential construction, and industrial markets, as well as some push-outs in project activity in North America. Notably, if you looked at prior cycles, given our specific product exposures, we typically see slowing activity a few quarters before many others playing in the broader process markets. But as displayed in 2021 and previous cycles, we also tend to recover a few quarters earlier. As always, we will continue to focus on what was within our control namely gaining share to outgrow our end markets, and we are well positioned to continue doing just that. For example, last quarter, I highlighted the progress we were making with our new hydrogen initiative, where we qualified a new cryogenic valve for liquid hydrogen applications to be followed by five additional new product lines over the next 12 months, all targeting a market that is growing at more than 15% annually. During the second quarter, we secured the first firm order for our hydrogen products ahead of our schedule and internal targets. In wastewater, we continue to see great momentum with key growth products. Our chopper pump is now in its fourth year of commercialization, continues to significantly outgrow the market with 20% year-over-year growth expected this year. The chopper pump is an innovative solution for the most challenging wastewater applications, and we continue to see this solution as a differentiator versus the competition for wastewater applications with very high solid content. In the chemical space, where we have a number of significant growth initiatives, we are also making great progress, led by our portfolio of new valve and specialty pipe solutions that have differentiated sealing technology to solve reliability challenges in corrosive, abrasive, toxic, and hazardous environments. And last quarter, I noted the launch of our innovative L-torque sleeve plug valve product, which now has three customer-installed applications with commitments from six additional customers. That's incredibly rapid adoption for a new valve, which typically go through a lengthy evaluation process, reflecting the strength of the product's value proposition. And our recently launched FK Tri-X valve has also continued to gain traction with quotes year-to-date, now nearly triple last year's level, with a growing funnel of opportunities, reflecting the valve's unique ability to solve leakage and flow problems in severe service applications. Just continued progress driving growth in a great business. And in engineered materials, no change to our view of demand for the year, but margins have outperformed expectations. And despite the sharp declines in the RVN market, which we think is approaching a bottom, we are now confident we will keep the deleverage rate to about 25% with segment margins for the year north of 12%. Really great execution by the team. Briefly on the acquisition front, we continue to work through our deep and extensive funnel of potential deal flow, and we expect numerous opportunities will become actionable over the course of the next year. Today, we are involved in three very active acquisition processes across both aerospace and process flow technologies, and we are cautiously optimistic that one or more will come to fruition by the end of the year. Each of these active opportunities have enterprise values that would probably be in the $75 million to $200 million range. So again, off to a fantastic start post-separation, and we remain confident in our ability to execute on the strategy and vision we laid out at our March Investor Day event. A 4% to 6% long-term core sales growth rate from resilient and durable businesses that derive about 40% of strategic growth platform sales from the aftermarket with substantial operating leverage on top of already solid margins today, that should lead to double-digit annual and average annual core profit growth with potential upside from capital deployment. And with virtually no debt, the capital deployment opportunity is significant. And a five-year vision to get to a scale with $2 billion in sales at each of our strategy growth platforms with adjusted EBITDA margins above 20%, giving us the optionality for future strategic portfolio decisions. Now, let me turn the call over to Rich for more specifics on the quarter.