Crane Company

Good day and welcome to the Crane Company second quarter 2024 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2 so others can hear your questions clearly We ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jason Feldman, Senior Vice President of Investor Relations, Treasury, and Tax.

Thank you, operator, and good day, everyone. Welcome to our second quarter 2024 earnings release conference call. I'm Jason Feldman, Senior Vice President of Investor Relations, Treasury, and Tax. Before we get started, I'm delighted to introduce Alison Poliniak as our new Vice President of Investor Relations. Many of you know her from her time as an analyst following the industrial technology and transportation sectors. She brings a wealth of experience into the role, and we're happy to bring her on board. I will continue to oversee the Investor Relations function, but over the next few months, as she assumes primary responsibility for investor communications, I'll be spending more of my time with tax, treasury, and M&A. Alison, let me pass it on to you.

Great. Thank you, Jason. So good morning, everyone. I'm excited to be here and look forward to connecting with everybody in the next few weeks. As Jason mentioned, I spent the last 18 years as an analyst at Wells Fargo covering the industrial technology and transportation sectors. That gave me the opportunity to analyze and learn from a lot of great companies, their unique growth strategies, their approaches to drive productivity and sustainable profit improvement, as well as their approach to M&A. A lot were successful, but some were not. All that gave me great insight as I stepped into this role. I have been considering making this move to the corporate side for some time. However, there were three key qualities that the company needed to have for me to join. One, a strong strategic growth vision that I supported that would take the company to the next level. The second is a sound and achievable M&A strategy that would complement that vision. And third, the ability to have a voice as both the inorganic and organic strategies evolved. There were a few opportunities I did walk away from over the years because those companies did not have those qualities. Crane, however, did tick all those boxes for me. Add to that the respect I had for the management team and it was an easy decision for me to join. And with a little over a month into the role, I can tell you that I'm certainly not disappointed. What I have found is a strong culture focused on executing the team's strategic vision with significant opportunity both organic and inorganic to grow Crane and continue to move the earnings profile higher. So in that, let's get started. On our call this morning, we have Max Mitchell, our Chairman, President, and Chief Executive Officer, and Rich Malley, 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. And just a reminder, the comments we make on this call will 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. So now let me turn the call over to Max.

Thank you, Alison. Welcome and thank you again for joining Crane. And we look forward to much improved performance versus the last person in the role. I'm joking, Jason. Good morning, everyone. Thanks for joining the call today. Yet another excellent quarter with results outperforming expectations. Adjusted EPS was $1.30 driven by an impressive 9% core sales growth, reflecting strength across both aerospace electronics and process flow technologies. That growth was paired with strong leading indicators with core orders up 7% and core backlog up 10% compared to last year. And confidence in our outlook for 2024 remains high. Based on the strength in the first half, we are raising the midpoint of our full year guidance by 15 cents and narrowing our outlook to a range of 495 to 515, which reflects 18% EPS growth at the midpoint. have fairly strong direct line of sight to delivering that 18 earnings growth our revised guidance continues to assume somewhat muted industrial activity with aerospace electronics commercial oe sales growth solid but at a slightly lower levels given the changes with oe build rates we also assume that the aerospace electronics supply chain continues with similar issues with only very gradual further improvement as the year progresses but This is also becoming more of the normal state of play, honestly, at this point in time. If those assumptions prove conservative, we are structured to be able to satisfy any unexpected upside demand. We've had a strong first half. Our strategy is working. The team is executing, driving improved earnings through its growth and commercial excellence initiatives. We successfully completed three acquisitions over the last year. And with continued progress on our existing M&A funnel, we expect additional opportunities to become actionable over the next few quarters, primarily smaller and mid-sized transactions. While we are working on a number of transactions at the moment, we see the opportunities weighted towards the end of 24 and the first half of 2025, given the expected timeline for known processes. Longer term, as we reiterated during our annual investor day last quarter, we remain confident in a 4% to 6% long-term core sales growth rate from resilient and durable businesses with solid aftermarket, substantial operating leverage on top of already solid margins today that should lead to double-digit average annual core profit growth with potential upside from capital deployment and with virtually no net debt, the capital deployment opportunity is significant. Let me highlight a few recent wins and continued success in the quarter, starting with aerospace and electronics. We previously highlighted our wins on NGAD's sixth-generation fighter aircraft and our strong position on prototype and demonstrator programs. In the quarter, we also saw significant progress on the CCA, or collaborative combat aircraft portion of this unmanned platform, across a number of our solutions. On another significant UID program unrelated to the CCA, we've also had early success with our landing solutions. Other significant negotiations continue to further solidify our already strong position on the next generation demonstrator programs for military and tactical hybrid electric ground vehicle platforms, where our high-power unidirectional and bidirectional power conversion capabilities are best in class. And we continue to receive significant orders supporting the known and expected ramp-up of the multiple large ground-based radar programs we've been awarded and it will be entering full rate production over the next two years. On the longer-term technology development front, we continue to make great progress on our SmartSTEM long-range wireless advances. We've already deployed this solution on a recent demonstrator program with a large commercial OE, and our latest version of this solution has a new user-friendly app interface that gathers critical tire pressure and temperature measurements quickly and accurately with simplified installation using wireless technology that has significant weight savings by eliminating wiring. In our landing solution, we also continue to move away from bespoke architectures towards more standardized and modular solutions that are easier to adopt and customize quickly based on our customers' needs, significantly cutting development time and costs. The landing team has also made continued progress advancing our technology for electric brake control actuation, moving quickly towards technology readiness level six by 2025 and positioning us extremely well for the next narrowbody platform that will eventually be developed. And on the acquisition integration front with buy-in, we are already seeing sales synergy opportunities. We have a strong existing customer relationships in the aerospace fluid solutions market with our vein pump technology that buy-in did not have to the same level. And we are now leveraging buy-in's G-rotor pump technology capabilities to bid and win on opportunities we couldn't effectively address before the acquisition. Stronger together, combined, and winning already. Overall, another strong quarter for A&E, both in reported results as well as in our activities supporting current and future growth. And just last week, our outstanding A&E team had another very successful air show at Farm Bureau UK, meeting with key customers and suppliers, solidifying alignment on a number of key growth initiatives. And next month, I look forward to spending a few days with the A&E team as we enter our annual strategy review process, looking at new strategic initiatives from the very near term to well into and beyond the next decade. Moving to process flow technologies in the quarter. Great traction in our wastewater pump business with our new high efficiency MV motor platform and new higher horsepower offerings introduced late last year. On track to double sales for that overall product platform this year. We're also gaining share in the hydrogen sensing space with our newest pressure transducer technology. Our solution in this space has superior precision and reliability in hydrogen fuel cell applications where we're seeing significant growth opportunities. And again, on the acquisition integration front with CryoWorks, we're seeing significant early successes working together in driving sales synergies, particularly in cryogenic space launch fueling applications. We've already booked 7 million in orders this quarter with four different customers, primarily for new rocket launch facilities supporting new satellite constellations. With CryoWorks differentiated capabilities and large bore insulated piping, we are leveraging our combined sales and marketing capabilities to pull through our valve portfolio as well. As mentioned on previous calls, we continue to convert customers to our FK Triax product from competitors due to its reliable zero leak capabilities and fugitive emissions compliance. We also continue to win share with pharmaceutical projects given the superior reliability and capabilities and higher operating temperatures with our diaphragm technology. Excellent progress on all fronts by the process flow technology team. And here, too, I'm eager to visit many of our sites next month and review all our exciting strategic growth initiatives. Let me now turn the call over to our CFO, Rich Maui, for more specifics on the quarter and some more details on our guidance.

Thank you, Max, and good morning, everyone. We drove 9% core sales growth in the quarter with strength across both primary businesses, delivered with strong core operating leverage. Adjusted operating profit increased 22%, driven by volume, productivity, and strong net price. And adjusted EPS also beat our expectations. Leading indicators were also strong, with core FX mutual backlog up 10% and core orders up 7% compared to last year. notably better than expected, particularly at process-slow technologies. Another strong quarter reflecting our focus on accelerating core growth, along with our consistently differentiated execution. Hey, I shared my excitement over the last several quarters over how far we have come at Crane. But from the wise words of Jeff Daniels, as Harry Dunn in the classic emotional drama, Dumb and Dumber, according to the map we've on only four inches a lot of opportunity and excitement ahead for crane as we head to aspen getting into the details i will start off with second comments that will compare the second quarter of 2024 to 2023 excluding special items as outlined in our press release and slide presentation and then i will comment on our 2024 outlook for each segment and for our overall p l starting with aerospace and electronics Despite the headlines, no material change in the end market conditions relative to our expectations. Again, no material change relative to our expectations. On the commercial side of the business, aircraft retirements remain very low due to high demand and limitations on aircraft deliveries, resulting from an aging fleet that requires more aftermarket parts and service. On the defense side, we continue to see solid procurement spending and a continued focus on reinforcing the broader defense industrial base given heightened global uncertainty today. Overall, just a continuing solid demand environment. That strong demand was reflected in our second quarter growth rates with sales of $231 million, increasing 22% compared to last year, with 16% core growth and a 6% benefit from the buy-on acquisition. Despite the continued high level of sales growth, our record backlog of 815 million increased even further, up 21% year-over-year, including 12% core growth and a 9% contribution from the Vyon acquisition. Sequentially core FX neutral backlog increased 2%. In the quarter, total aftermarket sales increased 33%, with commercial aftermarket sales up 28% and military aftermarket up 47%. OEM sales increased 17% in the quarter with 27% growth in commercial and up 6% in military. Adjusted segment margins of 23.8% increased 360 basis points from 20.2% last year, primarily reflecting higher volumes and productivity. Looking ahead to the remainder of 2024, we are maintaining our sales guidance with core sales growth at 12% for the full year, in addition to a 4.5% favorable benefit from the VION acquisition. That guidance assumes continued strong sales levels consistent with Q2, albeit at a decelerating year-over-year growth rate, as the comparisons are more challenging in the second half. While comparisons can create some noise on quarterly growth rates, as we outlined in our May Investor Day event, We expect this year's 12% core sales growth rate to be followed by continued strong core growth in 2025 and for the remainder of this decade. We are, however, raising our full-year margin guidance slightly to 22.2%, up 20 basis points from our prior view. That does assume a moderation in margin rates in the second half, driven primarily by mix, which we don't expect will be quite as favorable as it was in the first half as OE deliveries continue to increase. Margin guidance reflects core leverage excluding buy-on of just about 40%, a little higher than prior guidance, and overall on track for another outstanding year. At Process Flow Technologies, we remain well-positioned to continue to outgrow our markets, and our market outlook is now a little more positive than it has been over the last several quarters. While we continue to see some softness in the European chemical and general industrial markets, we see continued strength in North America and China projects, particularly in chemical, and we expect this trend to continue. Given the improved performance, we are raising our sales and margin guidance for the year to reflect better than expected strength in our orders and backlog year-to-date. In the quarter itself, we delivered sales of $298 million, up 13%. driven by strong core sales growth of 7% in the quarter, along with a 7% benefit from the Bound and CryoWorks acquisitions, with a slight offset from the unfavorable foreign exchange we saw. Compared to the prior year, core FX neutral backlog increased 9%, and core FX neutral orders increased 10%, both driven primarily by North American markets, followed by China. Sequentially, core FX neutral backlog decreased 1%, with FX neutral orders down 4%, reflecting the strong project orders booked in the first quarter. Adjusted operating margins of 20.5% expanded 50 basis points, better than we expected with strong core operating leverage in the quarter, driven by productivity, strong net price, and higher volumes, offset mainly by the expected dilutive impact of our recent acquisitions. Turning to full-year guidance for process flow technologies, we now expect 2024 sales growth of approximately 10%, up from our prior expectation of 7%, with the increase in our growth view coming from our core operations, which are now expected to be up 4% versus our prior 1% view, reflecting year-to-date results and, again, continued order strength. As we discussed last quarter, acquisitions, including both Bauman and CryoWorks, will add about six points to our full-year growth rate. We are also raising our margin guidance for the full year to 20.6% of 20 basis points from prior guidance, considering our revised sales outlook. For context, remember that in 2019, just before COVID, margins at process flow technologies were 13.6%. As we noted before, this is a significant step function change in margins, which is reflective of our efforts to structurally shift the business to higher growth, and higher margin and markets. We continue to see opportunity on this journey through the contribution from accretive new product introductions, pricing that is both disciplined and appropriately assertive given the inflationary environment, our continued investments in technology-driven product differentiation, and continued productivity. From a cadence perspective, we still expect third quarter to be the strongest of the year for sales, with fourth quarter seasonally a little softer. Margins in the second half should be very similar to the first half of the year. At Engineered Materials, sales at 53 million decreased 8% compared to last year as expected. Operating profit margin decreased 270 basis points to 13.9% on the lower volumes. For the full year, we continue to expect both sales and margins to be flat compared to 2023. Moving on to total company results. In the second quarter, adjusted free cash flow was 57 million. roughly in line with last year. For the full year, we now expect free cash flow in a range of $255 to $275 million, up $5 million at the low end compared to our prior range. We continue to expect free cash conversion of greater than 90%. Total debt at the end of the first quarter was approximately $377 million. With $229 million of cash on hand, we continue to have substantial financial flexibility. With more than a billion in M&A capacity today, and reaching as much as $4 billion by 2028. While this is more financial flexibility than we have historically had, our capital allocation strategy is unchanged. We will deploy our capital with the same strict financial and strategic discipline that we always have employed, prioritizing internal investments for growth, followed by M&A and returns to shareholders. Now turning to our 2024 guidance. As Max mentioned, We are raising the midpoint of our full-year guidance by 15 cents and narrowed our outlook to a range of $4.95 to $5.15, which reflects 18% EPS growth at the midpoint. Guidance assumes total core growth of 5% to 7%, up a point from our prior guidance due to the outperformance of process flow technologies, and a 5% benefit from acquisitions. That 5% to 7% core growth will drive approximately 18% growth in adjusted segment operating profit, about three times the core sales growth. Turning to the other elements of our full-year guidance, we did raise guidance for corporate expense by $5 million to $80 million, primarily reflecting higher compensation expense given our performance to date and outlook, but this impact was roughly offset by lower net non-operating expense, now at $20 million, $3 million lower than prior, guidance and expectation for a slightly lower tax rate at 23% compared to our prior guidance of 23.5%. Overall, a very strong first half with excellent momentum as we enter the second half. Operator, we are now ready to take our first question. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question will come from Damian Karras with UBS. Please go ahead. Damian Karras with UBS.

Hi. Good morning, everyone, and welcome, Allison. Thanks. Good morning. Yeah, I've got to say those are some pretty big shoes to fill with Mr. Feldman there. I'll do my best. I wanted to ask you guys about PFT. That's a pretty notable increase in your sales outlook for the year. Could you just maybe talk about that a little bit more, what's really changed in the business versus a few months ago? Do you feel like it's got pretty good visibility, or is there maybe still some choppiness on the short cycle side of the business?

Yeah, Damian, I think we've been consistent in this, too, and we tried to explain it even in giving the guidance for the full year. We've looked at historic trends in the cycle coming out of post-COVID. We predicted a little softer market dynamics than what really has played out, and particularly in the Americas. So as the quarters have moved on, I wouldn't say it's been a great growth or any specific momentum. It's just the market overall has been much stronger than we had anticipated where we planned for, where we guided for, particularly in the U.S. Projects seem to be, from our assumptions now, from our original assumptions, projects coming back a little stronger than we had anticipated, particularly in the chemical space. So it's been more of an alignment to what we're really seeing play out versus our assumptions based on the historical view of the forecast. Do you have anything different?

The only thing I would add just in terms of the last three months, again, I would just reiterate, not so much changing, just that continued momentum, so that one more quarter under our belt. coming out of the first quarter really just allowed us to say, hey, there's no reason why we shouldn't be able to hit this revived guide. So we feel pretty confident here, Damian, as we close out the year and as we think about 2025, frankly.

Understood. That's helpful. And I think it was slide nine. You know, there's a comment in there that, you know, you're well positioned to ramp if you know, macro environment from this. Could you just elaborate a little bit on your thinking there?

I think we've got, you know, in general balance in terms of capacity from a facility standpoint, our ability to leverage our existing resources from an efficiency standpoint, as well as being able to ramp up if required. Some of the supply chain dynamics that we see. As we see continued improvement, we feel well positioned to leverage any demand.

Okay, terrific. Thanks, guys. Pass it along. Best of luck.

Thanks, Damian. Thank you.

Thank you. Our next question will come from Scott Duschel with Deutsche Bank. Please go ahead. Morning, Scott.

Hi, this is Megan on for Scott. Sorry.

Megan, how are you? Yep.

Good. My question is for Max. Can you characterize where you're seeing the most growth in commercial aftermarket right now? Is it mostly on the engine side, like on the ETF, or is it more well-balanced across platforms? Or is it more balanced across airframe versus engines? Anyhow, that would be helpful.

Yeah, we're seeing it. It's broad. It's not necessarily just engine. So from our point of view and how we, our solutions, right, our fluid management is seeing a nice uptick given, you know, what's happening with engines, certainly. But it's pretty equally spread across our brake control solutions as well as sensing. So it's fairly widespread is the way we're thinking about it and the way we're seeing it, if that helps.

I appreciate it. And then one more question, if I can. Rich, can you characterize the price realizations at both segments?

Sure. So in the quarter, not too much different from what we were experiencing in the first quarter for aerospace and defense. A little bit more than a third of the growth in the quarter came from price. And on the process flow technology side, it's about mid-single digit in the quarter. Again, fairly consistent with the first quarter and I would say even consistent with how we're thinking about things moving through the balance of the year.

Got it. Very helpful. Okay. I can pass it on. Thank you.

Thank you. Thank you. Thank you. Our next question will come from Matt Somerville with DA Davidson. Please go ahead.

Thanks. A couple questions. First, maybe just to piggyback off of that last one, the price capture you're seeing in PFT is, And putting that in the context of where you're at with deploying 80-20 in that business, I guess I'm trying to understand, maybe using a baseball analogy, what inning are we in in terms of Crane realizing, at least relative to historical standards, this above-trend level of price capture? And can that same level of price capture continue down the road? Help me understand that a little bit more.

Well, to try to answer it using that context, Matt, in terms of innings, from our CBS standpoint, I think it's just important to start off with what do we drive? We drive a balance of crane business system, which starts with strategy, execution, technology, commercial excellence. We drive, I think we're pretty darn good from a lean deployment standpoint on so many fronts. And so 80-20 is just one of many approaches and tools that we use across the business to drive outstanding customer satisfaction growth holistically. Within 80-20, within deploying a more focused approach at analyzing product lines, analyzing customer segmentation with a view towards over-serving customers as well as making conscious decisions about pricing for value, so forth. You know, I think we're very good. I think we continue to get better. I would probably say, you know, the game's never over. So probably baseball is not the best analogy. It's a game that continues. But let's say we're in the third, fourth inning kind of a framing, which, you know, is going to play. And we've been at it for a good three to four years now. So there's – significant contribution as I think about it moving forward in balance, in concert with everything else that we drive, where others may just myopically drive a very, very laser focus on only 80-20. So hopefully that puts things in context a little bit.

Yeah, no, that's very helpful. And then as a follow-up, I think, Max, you mentioned, you know, maybe the commercial OEM outlook is a little bit lower. I was hoping you could put a little bit of a finer point on that comment you made in your prepared remarks while also maybe providing an assessment in terms of what you see from an inventory standpoint in the channel and just overall what your view is go forward on supply chain and where OE build rates go from here. Thank you.

You know, I think we're moving to, you know, when you start talking about supply chain related issues year after year, we reach a point where I believe we're at a new normal, if you will. Post-COVID, it's now 2024. There's been some dynamics that have changed that we're all dealing with that I think we're all dealing with well. We're meeting demand. We're adjusting lead times as necessary. We're satisfying our customers' demand. Is there still a bit of an unmet demand? Yes, but I think it means less today. I think there's a new normal about meeting demand expectations. I don't believe that there's a concern for us related to inventory in the channel. We've always triangulated demand. the best we can on a multitude of factors, not just OEM build rates, but all of our customers and, you know, forecasted effectively in terms of what that means for us in being able to deliver. So it gives us high confidence as we're thinking about this moving forward in our growth rates also. Would you?

Yeah, no, I would reiterate that or agree with that. I think, you know, part of the comment was geared towards, you know, Matt, one of the OEs taking down their build rates slightly, and so that was the source of the comment. I would just say that it's not going to have an impact on us here in the year, and frankly, our view is that it will not next year or the years after in a material way when you think about the growth profile coming from Crane. So as you, I think, know, much of our growth in the, I don't know, 2020, into next year, year after, is coming through military as well. So there's a nice, you know, mixed benefit, if you want to call it that, with respect to any challenges that folks might have as a result of the supply chain in commercial. Thank you, guys. Thanks, Grant. Thank you. Our next question will come from Jeff Sprague with Vertical Research. Please go ahead. Hey, good morning. This is Nick on for Jeff. I just wanted to ask about the deal pipeline. It sounds like some things may be actionable later in the year. But are you guys seeing any competition sort of heating up, maybe putting pressure on multiples? Or how are you thinking about that?

Thanks, Nick. Very active. A lot of opportunities, both, you know, things that we've been cultivating for years as well as what's coming out from PE. Got some opportunities. conglomerates that are looking at what no longer makes strategic sense. Some are highly competitive. Some are more cultivated relationships. So we're seeing all the above. It's very balanced. I'm very encouraged, very encouraged as we're moving forward. In terms of multiples, you know, there's still some upward pressure. Some things are competitive, but We're going to stay disciplined. We're going to make sure that return on invested capital meets our goals. We, you know, have a good line of sight to the synergies that we can bring if the deal makes sense. And we're not afraid to walk away if it doesn't make sense. So I think we feel pretty good overall.

Great. Thanks for that.

And maybe just one more on flow. You probably need more additional color on individual end markets relative to your expectations and how they're trending. projects versus MRO? Sure. So, yeah, some of this in the prepared remarks, but I'll give a little bit more color here. Certainly doing a little bit better than we had anticipated as we moved through the year. This is, I think, now the fourth quarter in a row of positive order activity for us, primarily in the project business, largely confined to North America and China and mainly in chemicals and pharmaceuticals, just to give you a little geography, and then market. Sets us up nicely for the second half, and as we think about 2025 in particular. European chemicals still quite slow. I would say both projects, NMRO, but we think also largely stabilized, right? So we don't think there's further momentum downward. It's stabilized at a level where we see it today. A handful of project push-outs here and there in North America and China, but we've seen other projects accelerate faster, and that's been a source of some of our confidence overall. So, stronger than expected on the project side. And, again, largely in the pharmaceutical area, Asia, China for localization, and LNG. And then in North America, China. You know, we think some of that activity that's been stronger has been related to reshoring and bringing some manufacturing activities back to the U.S., some of that in semiconductor related to data centers and so forth. So some nice strength there. So hopefully that gives you some context. I mean, we do have outside of process, our water-wastewater business remains solid, and then non-residential construction in the U.K. remains soft, but we are starting to see that lift up a little bit more. you know, as we move through the year here. Appreciate the call. Thanks very much. You're welcome. Thank you. Our next question will come from Justin Ages with CGS Securities. Please go ahead. Morning, Justin.

Morning. How are you doing? Good. Just on PFT, I was hoping you could give us an update, you know, on those kind of five focus areas that you've called out before, how much of the how much of margin is related to those?

The five focus areas being chemical, water, wastewater, pharma, industrial automation, and hydrogen. Yes, exactly. From a revenue perspective, it's ballpark, a little bit above 60%. From a margin perspective, I don't know that we have exact numbers, but it's higher than that because of profitability of those businesses is above the segment average. I don't know, Max, or Rich, do you want to comment specifically about? No, I mean, I think that's right.

I think if those, you know, if you think about what the component of that 60%, right, most of it, most of it, a large portion of it is in the chemical space. I think a lot of the momentum that we've been seeing through this year has been in chemical, so that would be the largest contributor. I would say from a margin point of view, I wouldn't differentiate so much across any of them. I think all the profiles are, you know, around the margin across themselves, right? There's not one that is an outlier. Pharmaceutical also a key driver for us from a growth point of view as well as margin. And we are seeing nice project orders in cryo, frankly, as Max mentioned in his prepared remarks. So it's a little bit widespread across that two-thirds of the portfolio that's driving both the growth and the margin profile, if that helps.

That's a good question, Justin. We'll sharpen the pencil on that specifically. We haven't done that, so it's an excellent question. But I agree with the comments that were just mentioned. It is in all of those five segments. When we think of, to further clarify, when we think of hydrogen, the investment for the long term, We continue to march on that technology development. At the same time, it's more around cryogenics more broadly that we're winning with immediately outside of just hydrogen but also other liquefied natural gases. So that's been very successful. Water, wastewater, continuing to see phenomenal success from the team. in the space there through some of the things that I've just highlighted, even in terms of the NV product line and others that were satisfying. Pharma, the diaphragm that's continuing to win on new projects. Chemical, you know, we're continuing to get some nice share gains as well with some specific actions we're taking and winning with in the channel that I feel really good about. So, you know, continue to see momentum in all the focused areas that I owe you an answer on the specifics of the breakdown.

No, that's helpful. Thanks. And then one more, if I could just, you know, on the prepared remarks on the M&A pipeline, you know, back later, 2024 may then be into 2025. So just on capital allocation, are you thinking about any changes in priorities given, you know, kind of the amount of capacity you have and maybe the lack of deals this year?

There's so much – the funnel is so large and so rich that it would take another 12 to 18 months, honestly, before I would dramatically change. At this point in time, that's the view. I think we have a significant line of sight to some really interesting opportunities that are either in play now or coming soon that we're going to hold back on that firepower. Now, if for some reason we have a lazy balance sheet and – You know, no opportunities exist. Believe me, we're going to be looking at other options. We continue to, as we have proven in the past.

All right, that's great. Thanks for taking the question.

Thank you. Thank you. Our next question comes from Jordan Leone with Bank of America. Please go ahead.

Hey, good morning. You talked about NGAD. At the investor, you put a $300 million electric program tag to it. With the down select delayed for the actual fighter, but CCA continuing, does it change your view on what that program could be for incremental for crane?

I think in the short term, meaning the next few years, nothing. I think we're a minimal impact. I think we feel pretty solid about that. our position. Longer term, if there's significant changes in the platform, of course, it could have an impact.

Yeah, I would say if I was just to add, yeah, in the near term, as Max mentioned, right, any work we're doing here is funded. So there's not going to be a gap in the P&L. And then on that long term, you know, we're on most, if not all, of the major fighter platforms. So to the extent that there's a reallocation or whatever, you know, however else they try to address any potential, you know, shift away. And we feel like we're really well positioned regardless.

So we feel that if that were to be canceled, other things would increase.

Yeah. And we would see that benefit as well. Yeah, whether that's aftermarket and modernization upgrade programs in the existing fleet will be a great position, or whether it's incremental sales of whether it's the F-35 or the F-15EX or whatnot.

Got it. And then also, too, for the work that you're doing with CCA, do you see the opportunity for technology transfer for EUEs? We're seeing a lot of that market starting to actually come forward now.

Definitely. And our teams are chasing those opportunities today.

Okay.

Thanks. Thank you. Thank you.

Thank you. Our next question comes from Nathan Jones with Steeple.

Please go ahead.

Good morning. This is Adam Farley on for Nathan. Good morning, Adam. Good morning. I wanted to follow up on PFT. You know, it sounds really good, continuing momentum, and markets look good. So maybe if you look at orders, you know, would you expect higher orders in the second half relative to the first half?

Yeah, so I think you've got to be careful about how you look at orders in PFT, just given the project nature of a good portion of that business. So in the first quarter, if you go back, one of the things that we did talk about, we had an outstanding – this quarter was outstanding as well, but in Q1 it was particularly strong because of some pretty large projects that we booked. So, you know, that was the highest quarter we've had in several quarters, but the shipments related to a lot of those orders are going to be for the benefit of future periods, right, not necessarily in the current year. So if you normalize for that and you look at our order rate here in the second quarter, it was fairly consistent. And then as you look out into Q3 and Q4, I would say Q3 will be similar. And then Q4, we always have a little bit of a seasonal decline. So nothing really to call out specifically other than, you know, abnormal, very strong first quarter that we had.

I appreciate the color. And then on margins, for both segments, looking at the second half, I mean, should we expect incremental margins in that 35% to 40% range? And if not, what are the variances and what's driving them?

Yeah, we will definitely, definitely hit that range.

Thank you for taking my questions.

You got it, Tim. Thank you. Our next question will come from Tony Bancroft with Gabelli Funds. Please go ahead.

Hey, thanks for taking my question. And I remember a lot of people had changed their garage codes after that movie came out. So regarding Farnborough, it was great seeing you there. Just maybe could you give me a quick overview of Your feedback from Farnborough, just speaking with customers and, you know, obviously investors and just anything different than you were expecting. Obviously, there's probably a lot of dynamics going on with international fence demand, reaction to the commercial orders rate versus on a year-over-year basis. And, you know, particularly Paris last year, I know there's a lot of stuff going on with the production rates. But maybe just give me your overall view and what you saw differently than you were expecting.

I would say it met our expectations. I think the feedback, it's around key relationships and engineer-to-engineer selling. And the opportunity at FarmBorrow is not just top-to-top relationships, but also meeting with the teams that are working on technology roadmaps today, as well as Moving forward, you know, longer-term discussions, getting insights, continuing to highlight our full portfolio of solutions. So we had a, I forget how many, 150. Yeah, 150 or so. Meetings that we've had, top, bottom down, top to top. some supply chain related, many looking at future opportunities, understanding customers' needs, helping us develop our strategy and strategic roadmaps, technology development. So I would say that it was very positive and met and exceeded expectations from that standpoint. But no significant surprises, Tony, and no dramatic other insights other than that, I would say.

All right. Well, you've done a fabulous job. Great work, team, and thanks so much.

Thanks, Tony. Thanks, Tony.

Thank you. This concludes the quick Q&A portion of today's call. I would now like to turn the floor over to Max Mitchell for closing remarks.

Thank you, Operator. Again, yet another very solid quarter with results outperforming expectations. Our strategy is working. The team is executing, driving improved earnings through its growth and commercial excellence initiatives. Our M&A pipeline is full. We have the balance sheet capacity to execute. You know, during the Olympics right now and the athleticism that's on display, I want to leave you with this thought from the late, great San Francisco Giants baseball star Willie Mays. One of the hardest parts of practice is the criticism a player takes from his coaches. Some players think a coach has it in for them when a flaw in style is pointed out. I know that when things start going wrong, for one, I get the coach to keep his eye on me to see what I'm suddenly doing wrong. I can't see it or I wouldn't be doing it in the first place. At Crane, our leadership constantly practices with detailed, hands-on coaching. Our culture thrives on raising the bar of excellence and driving improved customer satisfaction through the solutions we provide. We practice repetition every day with cadence and discipline, always with an eye towards driving profitable growth for our customers first, our associates, our communities, and our shareholders. On to the second half of 2024. We look forward to seeing many of you in Q3 at conferences and on the road, and look forward to updating you again in October. Thank you all for your interest in crane and your time and attention this morning. Have a great day.

Thank you. This does conclude crane company second quarter 2024 earnings conference call. Please disconnect your line at this time.