Good morning, and welcome to the Crane Company 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. 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 Maue, 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, 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. 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 15. Suffice it to say, I would not be here at Crane or 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, even in the most difficult circumstances. Eric was someone I learned from and tried to emulate to the best of my ability. Above 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, 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% and a 30% increase in adjusted operating profit and adjusted EPS of $1.10, with great performance across the businesses, 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 $0.20 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 very impressive execution, delivering 50% operating leverage with operating profit increasing 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 in Aerospace & 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 3-point increase in our core sales guidance, but we expect further improvements to be in 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 7% to 9% core sales growth from 2024 through the end of the decade, and we are now working on opportunities to overdrive that target. With operating leverage in this business typically approaching 40%, we expect this business to generate profit growth well into the double digits for the foreseeable future, which 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 is down 25% since 2018. This creates 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 Heart Aerospace for the joint development phase of Heart's hybrid electric ES30 aircraft. We will be collaborating with Heart to define the electrical power distribution system, utilizing Crane's innovative high-voltage power conversion systems and low-voltage control and 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 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 sixth-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 7% to 9% long-term growth with potential upside to that target. We also have a strong growth story in 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 a 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% 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 pushouts in project activity in North America. Notably, if you look 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 is 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 are 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-TORQ sleeved 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 goes through a lengthy evaluation process, reflecting the strength of the product's value proposition. Our recently launched FK-TrieX 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 then Engineered Materials, no change to our view of demand for the year, but margins have outperformed expectations. Despite the sharp declines in the RVM 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 has 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 in 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 average annual core profit growth with potential upside from capital deployment. With virtually no debt, the capital deployment opportunity is significant and a 5-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.

Thank you, Max. And good morning, everyone. To start, my sincere thanks to the entire corporate team for their continued efforts on all aspects of the separation transaction and to our business teams for delivering another quarter of great results, an outstanding quarter with 5% core sales growth driving 30% adjusted operating profit growth and driven by excellent performance across all businesses. I will start off with segment comments that will compare the second quarter of 2023 to 2022, excluding special items, as outlined in our press release and slide presentation. At Aerospace & Electronics, second quarter sales were very strong, increasing 17% to $189 million. Segment margins of 20.2% increased 270 basis points compared to last year, primarily reflecting strong leverage on the higher volumes and productivity. Sales growth was better than expected, but we, along with the rest of the aerospace industry still remain capacity constrained due to continued supply chain issues. The combination of supply chain constraints and strong demand drove our backlog up another 26% to $675 million. In the quarter, total aftermarket sales increased 29%, with commercial aftermarket sales up 41% and military aftermarket up 7%. Commercial aftermarket demand was broad-based across spares, initial provisioning, and repair and overhaul. OE sales increased 13% in the quarter, with 15% in commercial and 10% in military. We raised our core sales outlook for the year to 14% from 11%, reflecting modest improvements in the supply chain environment. We now expect full-year margins of about 20.3%, reflecting 200 basis points of improvement compared to last year. We expect sales to increase sequentially for each of the next two quarters, with margins slightly lower than the first half due to mix with more OE sales in the second half. Our Process Flow Technologies, sales of $263 million decreased 11%, driven by the 15% impact from the divestiture of Crane Supply in May of last year and a 1% impact from unfavorable foreign exchange. Core growth for Process Flow Technologies was solid at 4%. Adjusted operating margins of 20% increased 440 basis points from last year, primarily reflecting strong pricing and productivity gains, continued excellent execution by our teams in all areas, and supporting another 50 basis point improvement to our full-year margin guidance, which is now a record 18.5% for this year. Compared to the prior year, core FX-neutral backlog increased 1% and core FX-neutral orders decreased 5%. Sequentially, compared to the first quarter, FX-neutral backlog decreased 3% with FX-neutral orders down 5%. Order rates and backlog levels are consistent with the trends we have talked about since the start of the year, reflecting some modest slowing in a few markets as well as the natural impact of shortening lead times as the supply chain continues to improve. For the full year, we continue to expect 6% core sales growth, which implies a slight sequential decline in the second half. Full-year margins of 18.5% do imply lower margins in the second half consistent with our commentary last quarter. On a full-year basis, our guidance of 18.5% again represents a record year, well above last year's record 16.2%. It also reflects continued execution on our stated goal of driving an average of 100 basis points of margin improvement per year. In 2019, just before COVID, margins were 13.6%, and when we hit our 18.5% guidance this year, we will have more than outpaced that 100 basis point average. On track for a really impressive performance in 2023, driven by strong execution and productivity, pricing net of inflation, and most importantly, a continued structural shift in the business to higher-margin, more differentiated products in our target markets of chemical, water, wastewater, pharmaceutical, and industrial automation. The timing of margins within the year has a different set of drivers. Last quarter, I mentioned a few items that shifted some earnings from the second half of this year into the first half. These are just timing items, but the accounting for inventory revaluation helped the first half margins at the expense of the second half, and some investment spending was shifted into the second half of this year given tight labor market conditions in certain geographies, in addition to some unfavorable mix in the second half. To a lesser degree, we will also see a second half margin impact from the slowing markets that we mentioned, consistent with our expectations dating back to our original guidance provided in January. At Engineered Materials, sales of $57 million decreased 21% compared to the prior year as expected. Adjusted operating profit margins increased 180 basis points to a solid 16.6% with lower volumes heavily offset by pricing and productivity, reflecting impressive deleverage rate. For the full year, we continue to expect a sales decline of 14%, but we now expect margins of 12.2%, reflecting the team's great execution. Moving on to total company results. In the second quarter, adjusted free cash flow of $60 million was consistent with normal seasonality as these businesses typically generate the substantial majority of cash flow in the second half of the year, and our balance sheet continues to strengthen. We have started to pay down our term loan with total debt at the end of the quarter of $262 million and with cash of $219 million, a lot of financial flexibility with more than $1 billion in M&A capacity today and reaching as much as $4 billion by 2028. While this is more financial flexibility than we have had historically, our capital allocation strategy is unchanged; we will deploy our capital with the same strict financial and strategic discipline that we have always employed, prioritizing investments internally for growth followed by M&A and returns to shareholders. Now turning to our 2023 guidance. We increased our adjusted EPS guidance range by yet another $0.20 to $3.80 to $4.10 and with adjusted EBITDA guidance now at $350 million or 17.1%. While I have already discussed the segment details, the primary drivers of the increased guidance are higher core growth now in a range of 5% to 7% and up one point from prior guidance; adjusted operating margins of 15.1%, up 60 basis points from prior guidance, and non-operating and interest expense now at $15 million, down slightly from prior guidance. So another great quarter following our separation and demonstrating that we can deliver in any environment and a very strong balance sheet and cash generation to support value-creating capital deployment. Operator, we are now ready to take our first question.

Our first questions come from Matt Summerville with D.A. Davidson. Please proceed with your question.

A couple of questions. First, on PFT, you gave a little bit of end market color. I was hoping you could get a little more granular with what you're seeing from an overall end market standpoint, particularly with respect to the four focus areas you pointed out and add a bit of geographic overlay to that? And then I have a follow-up.

Overall, I see a fairly stable slowdown, as mentioned by Max, particularly in certain markets concerning the longer cycle process. We reported orders down year-over-year in the low single-digit range, which aligns with the guidance provided at the start of the year. The most noticeable slowdown is in the European chemical sector, along with some project delays and pushouts in North America and China, also in the chemical space. MRO activity in the process sector remains generally solid. Additionally, customers are maintaining lean inventory levels, with channel inventory below normal levels, but we do not expect this to significantly impact demand, as there is no major reduction in inventory levels. Looking at project opportunities, we are seeing interest in areas such as lithium efficiency programs and upgrades in Chlor-Alkali. The industrial markets are also experiencing a slight deceleration, as noted. The pharmaceutical sector is still robust, but we anticipate an increase in order activity as we approach the end of the year and move into the next. Overall, the leading indicators reflect a mild downturn, as we forecasted earlier this year. In the shorter-cycle businesses, such as water and wastewater, demand remains very strong, with no signs of a slowdown in our North American operations. In contrast, the U.K. non-residential construction sector has been weak all year and continues to align with our initial guidance.

I would add, Matt, we've called this from January. And just by understanding the cycles and what we've seen historically and how we were trending. That's why we gave the guidance we did starting in January, and it's playing out really as we expected. So from Europe, I think we're starting to see the Americas see delays, not cancellations but some project pushouts and spend, decision-making. Order rates there almost flat to slightly negative in the quarter. So you're seeing that inflection point. As we look at it, as we move forward, this cycle for the broader end markets that we participate in. We'll see this continued order decline through the balance of this year, maybe high single-digit kind of range it bottoms out as we're projecting by, call it, the end of the year, and then you'll start to see slightly improving negative rates going into next year when we inflect positive again by, call it, September, October next year. But that's how we're modeling.

I want to discuss the aerospace supply chain and the goals of several original equipment manufacturers to increase narrowbody production rates. Can you provide more details on what you're observing in the supply chain, particularly if the Crane-specific supply chain can support these elevated production levels? Additionally, in light of the revised guidance for AME, have you made any progress in addressing that $50 million related to the supply chain trended revenue you mentioned earlier this year?

You're likely seeking more detailed information, but we don't have significant titanium, particularly in our flow business castings. We're experiencing some constraints with casting suppliers in the U.S., although it's not affecting us as severely; still, it is somewhat widespread. Generally, things are improving gradually, and many are noting the positive trends. The most significant impact for us is related to electrical components such as semiconductors and active passives. We're seeing fewer shortages and a reduction in SKUs we need to pursue, but there still isn't a substantial improvement in our ability to fulfill orders. This is why we continue to see a gradual, albeit slow, improvement. While it's getting better, it's not sufficient to significantly reduce our backlog quickly. I prefer not to comment broadly on build rates across the entire industry, but we are managing to meet current demand and are not causing any issues for our customers. Regarding the backlog, if we consider the recent sales increase and our revised guidance, it appears to be more in the range of $55 million to $60 million now. This is merely an estimate of what we could potentially ship this year if supply was unconstrained and customers were ready to accept it, which indicates opportunity as we look towards 2024. Hopefully, we will witness continued improvement trends. Would you like to add anything else?

I would like to comment on the $50 million figure mentioned by Max. When we consider our guidance range, it suggests about half of that amount. However, we are not necessarily planning to use the entire $50 million. The important point is that we are seeing growth in that $50 million. Other than that, I have no additional comments; I believe you have covered everything.

Our next questions come from the line of Damian Karas with UBS. Please proceed with your question.

Nice work on the following quarter. Absolutely. So I have a few follow-up questions for you on PFP kind of repeat question that I hear from investors is that regarding your margin guidance. And now that you're running up more than 20% for the first half, I think the implied guide so if that. Rich, I know you talked a little bit about your expectations of some volume declines on the short cycle. But is there any way you might be able to just give us a bridge on that margin for PFP kind of thinking about short-cycle mix, the investment ramp up, anything else that's kind of factoring in there?

Yes. I'll give you some broad strokes that hopefully will be helpful. So when we look at that first half to second half performance, there's a few things that are playing in there, right? It's clearly its sales, call it, price volume, right? It's sales, you have mix elements, you have investments that we had planned to make at the beginning of the year and are flushing through more so in the second half of the year and then some inventory revaluation associated with inflation that we benefited from in the first half. When you look at each of those components, I would think about them as each within a range of 100 basis points to 200 basis points, something like that. And then as I look at all of them in my mind are temporary without a doubt. But for clearly, what will play forward with respect to some of Max's comments on demand which could impact the sales and obviously, mix elements, which we'll get more and more comfortable with as we move through the balance of this year and implications to 2024. So structurally, we are super comfortable with the way we're set up in this business to continue to demonstrate what we've committed to historically around that, on average, 100 basis point margin improvement year after year.

Max, you mentioned being positive on pricing in both dollar and margin terms. Can you discuss the recent price trends and what pricing you expect for the rest of the year? Considering some of the short-cycle demand weakness, do you think this will provide an opportunity for customers to push back against recent price increases? Are you expecting prices to remain stable?

I mean I think overall, we're seeing prices stick without a doubt. I would say that the price cost relationship in the first half was very favorable. It's still going to be favorable in the balance in terms of margin and so forth, but it does close a little bit in the second half. So not as accretive but still positive. So that's sort of the dynamic first half to second half. As it relates to customers, I think it's about the value of the products, and we'll continue to do all that we should be doing to make sure that those prices stick.

Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your question.

Just follow up follow-up there on Damian's question about the margin, the impact from first half to second half. Obviously, those makes a fair amount of sense, right? Not going to get inventory valuation all the time at one time. I just wanted to follow up on the investment side of it. Can you give us some more color on what these investments are these kind of onetime in nature? Or it's more hiring engineers that are going to be continuing? Just any color on those investments?

The majority of our current investments are focused on the hydrogen sector and expanding our team. We are actively launching new products and increasing our investment in this area. We had initially planned our spending to be consistent across each quarter, but we've only utilized about 20% of that budget in the first half, so we expect the remaining funds to be deployed in the second half. This strategic decision reflects our belief in a promising market with substantial growth potential and products that align well with our objectives. Looking ahead, we anticipate changes to our spending in the coming year due to other investments concluding, so I don't foresee this as a major challenge for 2024. Instead, I believe we can stabilize as we progress through the year.

Yes, I was going to follow on with just that point.

I was going to follow on with a question about that. So I guess that takes care of that one. I wanted to follow up on a couple of comments that you made during your prepared remarks, Max. Firstly, on the unusually strong aftermarket backlog, is that something that's constrained by supply? Or is there something else driving that unusually strong aftermarket backlog? And what are your thoughts on when you can convert that?

Yes, that's a good question. We're making every effort to meet our customers' needs effectively. However, aftermarket sales could be higher if we weren't facing some constraints. There is a mix and margin impact that isn't being fully realized. There's no risk of loss or cancellation; it's solely dependent on an improving supply chain that will help us address those issues.

If we were not constrained and could ship all the aftermarket that we are capable of, we could approach the sales levels seen in 2019. The margin profile from those aftermarket sales would likely bring us back to where we were in 2019. This definitely provides a positive outlook as we consider future years. Additionally, airlines are starting to purchase a bit more and are shifting away from just-in-time inventory practices, keeping some stock on hand. However, we don't believe this indicates any kind of inventory buildup; rather, there remains strong demand that we are optimistic about for 2024 and 2025.

Go ahead. I was going to say that the inventory position, I think everybody would like more, not less at this point. We're still at that stage in every part of the channel.

So that $55 million, $60 million you're talking about being able to ship if you're unconstrained is primarily aftermarket subs, so very rich margin as well as a constraining some of the revenue growth.

Yes. Predominantly it's weighted towards aftermarket for sure. I don't know, predominantly.

Yes. What I'd say is that it's more weighted to the aftermarket than our overall mix, that's about 70-30, right? But I don't know that I'd say predominantly.

I wanted to follow up on some of the PFP questions. You mentioned the significant end market weakness. I'm curious about how the decreasing lead times are affecting your customers' order rates. It seems you believe there isn't any excess inventory in the market, indicating a genuine underlying softness in certain areas, particularly in Europe and chemicals, which aligns with some of the PMI numbers. Would you describe this situation more as end market weakening rather than just a normalization of inventory at the customer level?

Everything we see here feels like it's entirely related to the end market with no inventory correction. However, with lean inventory in the channels and among our customers, we believe this reduces the typical multiplier effect seen during declines. Additionally, the recovery process flows through much more swiftly. No one is attempting to clear out excess stock, so the impact is more direct and occurs faster. Right now, we are not observing any issues linked to inventory. And you mentioned lead times, Nathan. And the lead times have been more normalized here for the entire year. It's been nowhere near what we're seeing or continue to have to battle with in A&E. That's I would say, almost 12 months now or more of back to normalized levels. I'm not hearing any issues with lead times. So that really hasn't impacted the kind of dramatic reductions in people than canceling or seeing none of that.

Our next question has come from Ron Epstein with Bank of America. Please proceed with your question.

This is Jordan asking on behalf of Ron. I have a quick question about the industrial segment. In the event of a downturn or slowdown in the U.S., you mentioned that orders are being delayed. How should we assess the potential impact on the pricing initiatives you are implementing, and how resilient do you believe the aftermarket will be?

You're speaking specifically to Process Flow Technologies?

Yes, yes.

Yes, I think right now, we believe that we are not experiencing a significant impact. As Max mentioned earlier, the nature of the declines indicates that we will maintain our pricing strategy. We may need to make some adjustments in certain situations, but overall, we plan to uphold the price discipline we have practiced over the past few years.

I think price won't be because of competitive issues as I see it. It's going to be because there's real continued deflation that we're still staying ahead of and passing some on to the customer. That's something we would normally do anyway. But I don't see that as a significant challenge for us at this time.

Our next questions come from the line of Damian Karas. Please proceed with your question.

I just have a few follow-up questions here. First, could you just clarify on the PFP guidance? Are you assuming that it's really just chemicals where you kind of take a hit as we progress through the year? Or are you kind of expecting a broader spanning impact across your short-cycle markets?

Yes. So it's chemical. It's a little bit of the industrial markets. And I would rope into that also the non-residential construction in particular, in the U.K. and Europe. The rest is more yes, delayed projects and such, but those would be the categories, one of the areas.

And then you talked a little bit about the sequential improvement in A&E on the top line, but margin sort of being negative mix. Could you remind us sort of where on average, your commercial aerospace margins are relative to the segment?

You're talking about commercial versus defense. I mean on a blended basis, they're very similar. There's a different aftermarket profile on the commercial side, right? But as a result, where we have less aftermarket or OE pricing tends to be stronger. There's not a material difference.

And then one last question for you here. So there has been some deal activity in those markets. The long got acquired, obviously, CIRCOR in the process of likely going private here. Just any thoughts on what these transactions could mean for the industry? Any potential impacts on your business? And do you think that this recent deal activity is going to have any effect impact on your ability to kind of land an attractive deal in that space, whether for better or worse?

I don't notice anything out of the ordinary. None of the particular deals we predict will affect us negatively or positively. Generally, the trends among those that have consolidated the industry, whether in technology or Aerospace & Electronics, involve examining our portfolio and making strategic choices about what matters. This is likely to create more opportunities for us, and we are keenly interested in several. We are monitoring a range of them that we expect to emerge. I won’t comment on our participation in specific deals, but we are certainly active and make informed decisions about where we want to engage. I believe we will be very competitive in the areas we choose to pursue. Currently, we are evaluating attractive bolt-on opportunities that would integrate well with our business, and I believe shareholders would quickly recognize and value the potential growth from these. Activity levels are high, and I anticipate this trend will continue. The market will likely present ongoing opportunities, and I think some of our competitors are facing constraints for various reasons, such as debt or previous commitments, which may work to our advantage. We are well positioned with no debt and ready to act, which is beneficial. Is there anything else you would like to add?

Our next questions come from the line of Matt Summerville with D.A. Davidson. Please proceed with your questions.

I have just one or two quick follow-up questions. If some of these defense opportunities come through, what could the 7% to 9% growth look like for A&E in a more optimistic scenario throughout the rest of the decade?

Taking the Heart example, if you look at the projections, there are a lot of assumptions involved. However, even though Heart Aerospace is still years away, it could contribute 5 points of growth annually based on the current projections and orders. We're also considering some other opportunities on the defense side.

Yes, they are similar in size to the recent contracts we've secured in our high-power defense business. These are nine-figure programs that span multiple years—some lasting 10, 15, or even 20 years. The Heart Aerospace project that Max mentioned is particularly exciting and aligns well with our objectives. Currently, it's a development program set to conclude around 2027, with potential sales starting then for about 10 to 15 years, assuming success. This aircraft is a smaller 30-seat regional model, but it is very promising.

Optionally manned vehicle you're probably looking at a double-digit. The 7% to 9% would move to low double-digit potential. All in a lot of assumptions in that though. And it's early days.

But the other key takeaway, I think, is not just that there's upside to the 7%, but that 7% to 9% sustainable, right? I mean when we originally put this out in May of 2021, I believe, it was for this decade. Right? And some of these are extending well beyond that. And so I think that part of the takeaway is, yes, there's upside to 7% to 9%, but also at that 7% to 9% is really structurally how we position the business to continue to have new wins following on some that we've already announced, right? There's a huge portfolio of the next set of wins after the ones that we've already kind of announced ramp up fully to sustain that growth rate well into the 2030s and beyond.

And then I apologize if you touched on this, but just a little bit more deal color in terms of the multiples you're seeing between the two businesses and if you were a betting man where you see the higher probability, you closed the deal between A&E and PFP?

I'm optimistic about both areas and believe we will remain competitive. The average multiples for the flow business are around 13 times, but this can vary depending on the specific business and the synergies that the acquirer can provide. For any deals, we would say they are likely averaging in the range of 15 to the high teens.

When considering our current multiple compared to where we stood 12 months ago, it's clear that our currency situation has changed as well.

For sure. Totally agree.

Thank you. Our next questions come from the line of Nathan Jones with Stifel. Please proceed with your question.

I have a couple more follow-ups, starting with capital allocation. Our multiples are currently higher than flow multiples, and the aerospace markets are quite active for deals. Do you believe this provides more flexibility in considering acquisitions, such as acquiring PFP today versus Aero later on? Are there specific deals where you can capitalize on synergies or leverage existing assets? I'd appreciate any additional insights on how you're evaluating the differences in multiples and how this might influence your short-term capital allocation strategy for the coming year.

Absolutely, thank you. It all begins with the strategic alignment and the appeal of the market along with its potential for growth. There are certain technologies and extensions that fit exceptionally well within our portfolio. While we prefer not to factor in sales synergies when valuing opportunities, we recognize the significant synergies we can achieve through CBS and the integration of consolidations. The key factor is attractiveness. When considering timing, the right opportunities can emerge unexpectedly, whether it’s from private equity, a family business undergoing changes, or a large industrial company divesting non-core assets. We need to be ready to act because those chances may not come again. We will exercise discipline, avoiding overpayment while maximizing the synergies we can offer. I believe we will be very competitive and achieve substantial progress toward our accelerated growth strategy, positioning ourselves as more frequent acquirers after the separation.

Yes. I would just add that our objective here is to grow both businesses, right, through organic and inorganic means. And with both of these businesses at $2 billion plus, as we've alluded to, that enables other optionality for us to consider. So trying to decide on multiples and pricing and does it make sense today versus tomorrow or to wait and considering everything that Max just mentioned as well, what I just said sort of plays into our calculus as well.

And then just one on Aero with the supply chain constraints. Are there any opportunities on pricing that, that creates for you?

Not specifically for Aero. I mean we're always value pricing depending on the opportunity and whenever contracts up renegotiating and having those discussions standing up for our value prop. The technology that we drive, whether that's in microwave, whether that's on the defense power side. So not necessarily due to supply chain constraints. I don't see that.

Yes, I would agree with that. The team is doing a very good job with pricing in Aero, similar to the rest of the business. I would suggest that if there is an area for potential upside in our projections, it is our continued success with pricing, which could help increase confidence in reaching the high end of our 7% to 9% target.

Because of the technology, because of the technology we're driving and the differentiation and the value to the customer.

These additional opportunities we've been discussing on the last few questions on upside to the 7% to 9% would you expect those to be accretive to the margin profile or decretive to the margin profile?

Yes, we would expect them to be consistent with our margin profile, not necessarily something that will continue to drive them up. I would say consistent, Nathan, at this point.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Max Mitchell for any closing comments.

Thank you, operator. A great first half of 2023 with excellent results and a strong outlook ahead. On the broader macroeconomic front, I have no predictions, soft landing, minor recession, no recession, inflation came inflation persistent, global tensions, elections, as the late great Tina Turner, once said, reflecting on life's journey, it's not about what happens, but how you deal with it. And at Crane, as always, we are ready for anything with proven ability to execute under any set of circumstances responding by being nimble and quick to adjust while driving execution and results. That's what gives us such high confidence in our ability to create value in the years ahead. I look forward to speaking to you next on our Q3 call in October. Thank you all for your interest in Crane. Have a great day. Thanks, everyone.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.