Greetings and welcome to the Crane Holdings Company Third Quarter 2022 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Jason Feldman, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good day, everyone. We've been having some technical issues with the provider. If anyone has any issues, please e-mail me directly, and we'll sort them as soon as we can. Welcome to our third 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 Maue, our Senior Vice President and Chief Financial Officer. We'll start our call this morning 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 with 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.

So let me just verify here, Jason, first. We've had some technical issues. Apparently, Darryl, if you're still there, the webcast is not being... Well, we will and it's being recorded, Jason. So at least we'll have a live. Good morning, everyone. Thanks for joining the call today. I want to lead off with a thank you to our global Crane team for another strong quarter with solid results across the board. Third quarter adjusted EPS was $1.86, consistent with our expectations in our prior guidance commentary. Adjusted EPS declined $0.12 compared to last year. But operationally, we had a very strong quarter as the EPS decline was due to the known $0.16 impact from the May divestiture of Crane Supply and a $0.19 impact from comparison against an unusually low tax rate last year. Adjusting for those items, adjusted EPS increased 14% compared to last year. Core sales growth of 2% was impacted both by supply chain constraints and the extremely challenging comparisons for the Payment & Merchandising Technologies segment. Remember that the third quarter of last year was an all-time record for sales at Payment & Merchandising. Notably, general demand indicators remain very strong. Core year-over-year orders increased 10% and core year-over-year backlog increased 26%. Demand remains strong in nearly all of our core markets with continuing strong trends even in these uncertain global macroeconomic times. The overall message regarding operations and the market environment is really unchanged from last quarter: continued momentum with yet another quarter of strong results; continued differentiated execution in a challenging environment; and continued success driving accelerating growth despite supply chain constraints. The environment is similar to what we saw three months ago with continued robust demand across our end markets. As always, we continue to carefully watch for any signs of softening, but the order rates in backlog I cited earlier point to continued strength without any notable signs of slowing from our industrial customers and suppliers. The supply chain, including material and component availability, remains most challenging but stabilizing in our Aerospace & Electronics segment with general signs of modest improvement in all other segments, while still consistent with the outlook we provided since the start of the year. From a cost and inflation perspective, as you can see from our continued margin strength, we have been appropriately assertive 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. Overall, we planned appropriately when we entered 2022 and we are confident in our narrowed guidance range. In addition to excellent execution in 2022, we remain intensely focused on all of our strategic initiatives: driving growth, advancing technology to position our businesses for the future, and preparing for the separation into Crane Company and Crane NXT. Regarding the separation, everything is on track and progressing toward our targeted early April 2023 separation date and we continue to firmly believe that the separation will unlock shareholder value and permit each post-separation company to optimize investment in capital allocation and further accelerate growth. Notable progress has been made on several fronts. We have already responded to the first round of comments from the SEC on our initial Form 10 submission. We expect that the Form 10 should be publicly available for the first time in December. We are making significant progress on the mechanics of the separation, organizational design for both companies, and filling key roles. We are continuing to work on our capital structure plans, now substantially simplified following the elimination of our asbestos liability. Both companies will have significant financial flexibility after the separation with more than $1 billion of M&A capacity at each Crane NXT and Crane Company from day one.

Thank you, Max and good morning, everyone. My thanks as well to our teams and all of our associates globally for delivering another quarter of strong results. I will start off with segment comments that will compare the third quarter of 2022 to 2021 excluding special items, as outlined in our press release and slide presentation. At Aerospace & Electronics, sales of $167 million decreased 1% compared to last year. Segment margins of 16.9% were lower compared to 19.3% last year, primarily reflecting less favorable mix and lower absorption on reduced volumes, partially offset by strong productivity. Pricing offset fully the impact of inflation in the quarter. Core orders increased an impressive 30% compared to last year and backlog increased 24% but sales remain constrained by material availability, consistent with conditions across the aerospace industry and supply chain. Sales improved sequentially from last quarter by 4% and we expect further sequential improvement in the fourth quarter as the supply chain constraints slowly improve. And we expect continued but gradual improvement throughout 2023. In the quarter, total aftermarket sales declined 3%. Commercial aftermarket sales increased 16%, led by growth in spares and repair and overhaul. Commercial aftermarket demand is very strong, reflecting continued improvement in flight hours and high utilization of an aging fleet, as new aircraft deliveries are not ramping up as quickly as the demand due to the supply chain environment. Military aftermarket declined due largely to timing and supply chain constraints, although orders for military spares were very strong in the quarter. OE sales were flat year-over-year, with 2% commercial growth offset by a slight decline in military OE sales. While sales were flat, demand is very strong and will be a tailwind as the supply chain eases throughout 2023. Looking ahead, we expect a sequential increase in both sales and margins for the fourth quarter. To put the present supply chain constraints relative to demand in perspective, in an unconstrained environment, there is demand in our current backlog and order patterns to support mid- to high-teens sales growth in 2023. Based on the incremental content we have won on current and new platforms, that type of growth in 2023 would be followed by high single-digit growth for the remainder of the decade.

Maybe first start with the Payments segment and the backlog growth there, Rich, I think you mentioned 40% year-on-year. Can you parse out a little bit? Maybe a little bit more detail around how much of that is being driven by CPI versus Crane Currency? And obviously, that backlog is well, well above prior peak. How much of that is market versus market share? And then I have a follow-up on that business.

Yes. First, Matt, on the split and I'll let Rich go from there. It was somewhat more on the CPI side than the currency side but they were both up well into the double digits.

Yes, I was also planning to address that. I have nothing to add to what Jason mentioned. On the currency front, we are experiencing strong gains internationally and are making significant progress. I can't recall the exact number of new denominations we expect to introduce this year, but we will share that in January during our year-end recap. Regarding payments, we're achieving excellent progress with all our retail initiatives. Our North American gaming sector continues to perform well, and we are also gaining market share in that area. As noted in our prepared remarks, we are also seeing positive growth in the vending segment with year-over-year increases in our backlog. This progress is consistent across all sectors and aligns with our focus on payment solutions, where productivity and labor shortages are currently driving demand in the market.

Yes, Matt, Max here. So we don't have an official order yet from the Fed but I think it's going to be in a similar range. We'll probably expect to see a range and a lot of uncertainty. The desire is for more. I think it's going to be similar to this year's story which is BEP somewhat constrained not only with manufacturing capacity but also ongoing trials. So there’s tremendous work being done that we are helping to support on the next series and that’s cutting into some of the capacity as well. So the best we can say right now is similar to ‘22, probably with a range, desire for more all good news long term, though is what I directionally say also. On successes, yes, our team is doing a great job on product authentication. I think there’s some new opportunities. I look forward to chatting about that. We continue to have trials, approvals, look to double that business again next year, some significant wins here coming up. So I’m very excited.

Wanted to ask you first about the PFT segment. I think you had implied in your prior guidance that volumes would be moderating, maybe down slightly in the second half of this year. Could you just elaborate on whether that – to what extent that’s faring better than you had expected? And when I look at the 13% order growth which is pretty strong, could you possibly break that out between volumes and price?

We are definitely seeing better overall sales progression this year. The teams are making excellent progress with new product launches and pricing initiatives. Most of what we are experiencing at this stage is related to price. The backlog looks really good as we prepare for 2023, and this positive trend is evident across all areas in PFT, including municipal, chemical, pharmaceutical, and industrial demand in the process side of the business.

Okay, great. I want to follow up on the backlog discussion. For PMT, you mentioned it's up 40%. I understand there's good visibility there regarding currency. However, I'm curious about the payment side, which has historically been more sensitive to macro conditions. How confident are you that if we enter a recession next year, the backlog and orders in the payment area will remain stable? Is there a possibility of deferment or cancellation?

Well, there’s always risk, Damian. But the strength that we see in gaming continues – people continuing to enjoy getting back out, travel continues. On the retail side, I think – even in a recessionary environment, I think the pressure is – this is a very unique cycle with numerous pressures. I think productivity drivers, wage inflation, the difficulty of finding labor is driving a productivity trend that we believe retailers will continue to invest in globally for the long term, including through a down cycle, now depending on how severe and significant that is. But we think that trend continues.

Maybe on the A&E business, obviously some uncertainty there in ‘23 with supply chains. But I think, Rich, you said there’s demand there for mid-teens growth or better next year and then high singles from there. If we look at that maybe over a 2-year period, we should anticipate 20% to 25% growth by ‘24 over ‘22. And then did you say you anticipate high 30s incremental on that growth?

Yes, I did. Yes, I believe your calculations are correct. It might be slightly off, but it’s probably accurate overall.

We will not pursue any significant opportunities before the separation. Our priority is to maintain focus on our current initiatives. While there may be some minor strategic opportunities, they are uncertain. However, our pipeline remains strong on both the Crane and NXT sides, with extensive planning and ongoing efforts. Any potential scale from mergers and acquisitions would occur post-separation.

Yes. Nathan, I'll begin with the overall net debt to EBITDA targets we previously discussed—just under 1x net debt to EBITDA for Crane Company and about 1.5x for Crane NXT. There's been no change in that regard. As for our progress towards these targets by April, we believe we have good clarity on the nature of that debt.

Yes, it's primarily our supply chain that is affecting existing orders and deliveries rather than the customers. A&E entered this situation later than others due to supply chain challenges, resulting in delayed outcomes. We're observing some stabilization, yet we're still facing very extended lead times that we're working through. The environment remains similar, with new challenges arising each quarter, and our team is doing an excellent job managing these issues, which is consistent with the broader industry trends.

Max, you mentioned that the search for the I for Crane NXT was very competitive. Now I know it’s a little early and Aaron hasn’t fully onboarded yet but can you provide some color on what you and the Board liked about Aaron’s vision for the business?

What we appreciated is his remarkable educational background with a PhD in Material Science, which is highly relevant to the micro-optics business, a field centered around material science. Additionally, his extensive experience across various product solutions and his tenure with top-tier organizations contribute to a strong overall background. From an operational perspective, his experience with Danaher, Fortive, and Vontier aligns well with the mindset of our Crane Business System, ensuring consistency in cadence, discipline, and execution. Furthermore, we were particularly impressed with Aaron's ability to navigate the current environment to propel our core business forward, leveraging our impressive growth potential for years to come, while also identifying adjacencies that could lead Crane NXT into exciting new growth avenues. This will be a key focus for Aaron and the Board over the next five months as we work to solidify that vision. Super. Thank you, operator. Another quarter with solid performance and further steps on our path to separation to drive further shareholder value, pushing ourselves forward into the future while driving excellent results in the present. As the late and respected Mikhail Gorbachev once said, "If you do not move forward, sooner or later, you begin to move backward." This is the essence of our culture at Crane and the Crane Business System, celebrating our progress to date while constantly pushing ourselves for new growth vectors and improvement. And what progress we have made just in the last year, simplifying and strengthening our portfolio, driven by our firm commitment to shareholder value creation. It remains an exciting story, and I look forward to sharing updates with all of you over the next several quarters along with Aaron as both companies continue to drive progress, profitable growth, and shareholder value post separation. Thank you for your interest in Crane. Have a great day.