Greetings. Welcome to Crane Company's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I will now turn the conference over to Jason Feldman, Vice President of Treasury and Investor Relations. Mr. Feldman, you may now begin.

Thank you, operator, and good day, everyone. Welcome to our third 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’ll start off our call with a few prepared remarks, after which we will respond to questions. Just a reminder that the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we 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.

Thank you, Jason, and good morning, everyone. Thanks for joining the call today. Well, we delivered another impressive quarter with results again outperforming expectations. We delivered core sales growth of 9% with a 42% increase in adjusted operating profit and adjusted EPS of $1.03, with strong performance across all of our businesses. Our performance year-to-date along with our market outlook gives us confidence to narrow our guidance range with a midpoint $0.175 higher than our prior guidance updated in July. Our revised adjusted EPS guidance range is $4.05 to $4.20. 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 7% core sales growth driving a 24% increase in adjusted segment profit. Strong core growth, along with very impressive execution on productivity and pricing initiatives deliver more than 50% operating leverage with operating profit increasing more than three times the rate of core sales growth. I want to start off with an update on the M&A front. Since our separation announcement, we described how we expect acquisitions to be a meaningful contributor to our growth story as we move forward since we have an extremely strong balance sheet, providing us significant acquisition capacity. We have a proven track record of successfully integrating acquisitions and over delivering on synergies. We operate in markets with numerous potential small and midsized targets as well as a smaller number of large potential acquisitions. In our current structure, we are entirely focused on our two global strategic growth platforms, aerospace and electronics and process flow technologies. All factors that set us up to be a consistent serial acquirer moving forward, adding value above and beyond our organic growth investments and opportunities and strengthening our business to further accelerate growth. Last quarter, I mentioned three specific transactions we were actively working on each with enterprise values in the $75 million to $200 million range. Of those three transactions, we closed on one acquisition a few weeks ago, I'll address shortly. A second in aerospace is still in progress. While the outcome isn't yet certain, we are cautiously optimistic about our prospects. On one pharmaceutical asset, we lost to another bidder, unfortunate because it was a great asset, but a reminder about how we will remain fiscally disciplined and not chase assets when the pricing is inconsistent with our financial criteria. With that, I'm pleased to announce the successful acquisition of Baum Lined Piping GmbH. This is a business we have respected and followed for many years and is a perfect fit with our existing business. Baum significantly increases our scale, installed base, geographic coverage and breadth of product offerings in the specialized fluoropolymer lined pipe business, where we already are one of the leaders today for highly erosive and corrosive flow handling. Approximately 40% of sales are in the chemical space, a little under 10% to pharmaceutical, about 7% for hydrogen applications with the rest sold for a wide range of general industrial uses with a particular strength in high-purity applications, including those used in high-tech manufacturing, all perfectly aligned with this segment's targeted higher growth end markets. The business adds about $55 million of sales to our process flow technologies business with growth rates nicely above our segment average. Margins are currently slightly below the segment average, but together with expected synergies should be margin accretive within a few years. The purchase price was approximately $91 million, which is about 10 times expected 2023 EBITDA. We expect this acquisition will hit 10.5% ROIC with approximately 15% EPS accretion, excluding amortization, by year three. A small acquisition, but it couldn't be a better fit. We continue to work on our funnel where we expect additional opportunities to become actionable over the next several quarters. My personal thanks to Mr. Markus Baum for entrusting Crane as the stewards of this outstanding second-generation family business to our care and the outstanding Baum team now part of Crane. I'd like to share a few success stories in the quarter as well on core growth and share gains. Within Aerospace & Electronics. In the electric vertical takeoff and landing space, we secured contracts on two new platforms. One was a power conversion application using our DC to DC converters for a demonstrator program and another for proximity switches on the landing gear of another demonstrator. We continue to secure additional content on a number of sixth-generation fighter demonstrator programs, including solutions from our fluid, landing solutions and sensing solutions, with additional proposals recently submitted and pending. We secured key wins in our thermal management business with coolant pumps for two classified programs, and activity remains robust with proposals in process or submitted for additional content on a number of programs across a wide range of our solutions, from power conversion and thermal management to proximity switches and anti-skid brake control systems. At Process Flow Technologies, we had a number of notable developments as well. Over the last two quarters, I highlighted the progress we are making with our new hydrogen initiative where we have qualified a new cryogenic valve for liquid hydrogen applications with a major OEM 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. We have now secured orders for new applications with two OEM customers. Before year-end, we expect to secure our first approval from at least one of the gas majors, which will position us to accelerate order intake as we enter 2024. In the chemical space, we just had our best quarter for orders to date for our FK-TrieX product line with the value proposition of this recent product introduction resonating very well in certain markets, particularly for Chlor-Alkali. Elsewhere in the chemical space, while new project activity has slowed, we were very successful in the quarter, winning a few larger project orders, and we continue to see pockets of active projects, particularly those expanding chemical capacity in the United States and product localization programs in China. In the wastewater space, earlier this month at the WEFTEC tradeshow, we proudly introduced the latest extension of our premium efficient motor platform used in our wastewater pumps, branded Envie. Since it was introduced in 2021, the Envie motor platform has seen explosive growth, and we are on track for a 300% growth in 2023. This latest extension, which increased our horsepower range from 75 to 125 horsepower, will drive further growth in 2024, and we are actively working on additional extension projects that will continue the momentum in 2025 or beyond. My thanks to our global teams for all the hard work and effort and success both with our recent acquisition and our daily execution on our array of growth initiatives. Overall to-date, it's been a year of great performance across our business, and we are increasingly turning our focus and attention to 2024 and beyond. We remain confident in our ability to execute on the strategy and vision we laid out at our March Investor Day event. A long-term core sales growth rate of 4% to 6% 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, and with virtually no debt, the capital deployment opportunity is significant. And a five-year vision to double revenues and get to a scale with $2 billion in sales at each of our strategic 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 some more specifics on the quarter.

Thank you, Max, and good morning, everyone. Another outstanding quarter with 9% core sales growth, driving a 42% adjusted operating profit growth and driven by excellent performance across all businesses despite some end market and continued supply chain challenges. We are confident in both our outlook for 2023 and in our ability to drive significant growth in 2024 and beyond. Getting into the details, I will start off with segment comments that will compare the third quarter of 2023 to 2022, excluding special items, as outlined in our press release and slide presentation. Starting with Aerospace & Electronics, end market conditions remain robust, and that's reflected in both our growth rate in the quarter and on a year-to-date basis. On the commercial side of the business, aircraft retirements remained very low due to high demand and limitations on aircraft deliveries. This results in an aging fleet that requires more aftermarket parts and service and demand for new aircraft continues to exceed what the OEMs can deliver. Air traffic activity is also strong, with global air traffic just a few points below pre-pandemic levels. In the United States, RPKs are 9% above 2019 levels with international travel recovering at a slightly more measured pace. Overall, just a great demand environment. For defense, RDT&E, or Research, Development, Test and Evaluation appropriations growth, along with procurement spending, have been very strong over the last two years, and there is a growing sense of confidence in the industry that geopolitical issues will both result in the passing of the fiscal 2024 budget soon as well as resulting in additional investment reinforcing the broader defense industrial base. Across both Commercial and Defense, we are positioned extremely well in many of the areas seeing the most significant interest and highest rates of growth. That strong demand was reflected in our third quarter growth rates, with sales of $207 million, increasing 24% compared to last year, with some benefit from shipment timing as we did everything possible to accommodate our customers' requirements and some linked quarter shipments that would otherwise have shipped early in the fourth quarter. Even with this high level of sales growth, backlog of $678 million increased 15% year-over-year, with a slight increase sequentially. In the quarter, total aftermarket sales increased 44% with commercial aftermarket sales up 39% and military aftermarket up 60%. OE sales increased 16% in the quarter with 19% growth in Commercial and up 13% in Military. While the demand environment remains as strong as I can ever remember seeing it, our continued challenge is the supply chain. I would like to further expand on what I mean by the supply chain. This is not just related to on-time deliveries from suppliers. At the beginning of this year, we were one of the few that said, we did not expect significant improvements in the supply chain in 2023, but rather, we expected a more gradual recovery. Our position has not changed. Moreover, while demand is generally back to 2019 levels, the broader supply infrastructure is not spanning the gamut from raw materials, components, and labor not only in terms of availability, but also experience levels. Areas of specific shortages continue to shift and evolve. Over the last quarter, we have seen greater stability in the supply of Electronic Components. However, as we see improvements in one area, we are seeing new constraints in others like Machine Components, particularly from smaller suppliers. Our suppliers and sub-suppliers are also managing through shortages of skilled labor. While we have navigated these shortages extremely well, they do introduce added costs. For example, we have had increased costs relating to expediting shipments due to supply chain issues as well as costs associated with qualifying new suppliers and adding second sources. At Crane, we have always prioritized safety, quality, and delivery over cost, and we did that in the quarter doing everything possible to accommodate our customers, as we believe that is the best approach to maximizing value overtime. Segment margins of 19.4% increased significantly, up 250 basis points compared to last year, primarily reflecting leverage on the higher volumes and productivity. Regarding full year 2023 guidance, we raised the core sales outlook from 14% to 16%, reflecting the very strong third quarter. For the fourth quarter specifically, that implies sales down modestly compared to the third quarter, but still well ahead of the first half run rate due to the shipment timing I mentioned earlier. No change to our full year revised margin target of 20.3%, reflecting 200 basis points of improvement compared to last year and implying 33% leverage for the full year, even in the face of all the challenges the industry is facing. We will give detailed guidance when we report fourth quarter results in January. However, based on what we can see today and assuming continued gradual improvement in the supply chain, we expect sales in 2024 to increase above our long-term 7% to 9% sales CAGR forecast with operating leverage in our targeted 35% to 40% range. In the near-term, we remain towards the lower end of that range as we expect these broad inefficiencies to persist into 2024, while continuing to improve gradually. However, we are confident that the actions we are taking today being appropriately assertive on pricing where we still have significant opportunities as we move forward, continuing to drive productivity, expediting and adjusting staffing in our factories to manage the supply chain, and continuing to make investments in new technology position us very well for strong leverage and margin expansion in 2024 and beyond. At Process Flow Technologies, as we have explained previously, we are extremely well-positioned to continue to outgrow our markets even though we have seen some signs of slowing demand as expected and messaging all year and consistent with our full year outlook provided in January. The softness remains largely confined to European chemical, non-residential construction, and industrial markets as well as some project pushouts in North America, though we did see some nice project wins in the quarter. As a reminder, 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 in previous cycles, we also tend to recover a few quarters earlier. We continue to focus on what's in our control, namely gaining share to outgrow our end markets. Orders in the third quarter were better than expected and driven by key project wins rather than a fundamental change to our market outlook. We still expect negative orders in the last few months of 2023 and through most of 2024 before we see a positive inflection, likely late next year. In the quarter itself, we delivered sales of $267 million, up 7%, driven by 5% core sales growth and a 2% benefit from favorable foreign exchange. Adjusted operating margins of 19.2% increased 240 basis points from last year, primarily reflecting strong value pricing and productivity gains, partially offset by unfavorable mix. Compared to the prior year, core FX-neutral backlog decreased 2% and core FX-neutral orders increased slightly sequentially compared to the second quarter FX-neutral backlog increased 1% with FX-neutral orders up 7%. Order rates and backlog levels are consistent with or slightly better than 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 with contribution from the Baum acquisition starting in the fourth quarter of about $12 million, adding about a point to the full year. We are raising our full year margin guidance by 90 basis points to 19.4%, more than 300 basis points above last year's record 16.2%, reflecting 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 guidance this year, we will have far more than outpaced that 100 basis point average. Reflecting on the full year guidance as a whole, our 6% core growth is driving an impressive 29% improvement in operating profit or 66% full-year operating leverage. Remember that the operating leverage reflects a number of factors including strong operational execution, value pricing and continued structural change in the business. This 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. These are also the markets where Baum Lined Piping participates today, a perfect addition to the portfolio. We also continue to invest for the future with new product introductions released at record pace and with structurally higher margins. New product vitality metrics continue to improve year-after-year, giving us high confidence in the 3% to 5% growth profile through the cycle and the substantial opportunity to further expand margins. For the fourth quarter, our guidance does imply a step down of margins consistent with our commentary throughout the year. We did outperform expectations in the third quarter driven by strong pricing net of inflation and productivity, along with more favorable mix than expected. In the fourth quarter, as we have discussed previously, we expect a seasonal slowdown, less favorable mix, given the slowdown in our chemical market and some higher investment spending. Remember that some of the significant factors that resulted in stronger first half margins relative to the second half were timing related. When you think about margins for 2024, you should base them off our full-year margin guidance of 19.4%, not the fourth-quarter rate as we exit the year. For 2024 specifically, we are just entering the operating plan review process where we will refine our outlook. At this point for the segment, we expect core sales next year to be relatively flat, perhaps up or down a few points before reaccelerating in 2025. With that sales outlook, we would expect margins to be flat to up modestly next year. The Baum acquisition should contribute approximately $55 million of sales with no material impact on margins. In engineered materials, sales of $56 million decreased 11% compared to the prior year as expected. Adjusted operating profit margins increased 290 basis points to a solid 13.7% with lower volumes heavily offset by lower inflation and strong productivity and reflecting another impressive deleverage rate. For the full year, we continue to expect a sales decline of 14%, but we now expect margins of 14%, up from the prior guidance of 12.2%, reflecting the team's great execution. As a reminder, the fourth quarter is always the seasonally softest of the year for this business given customer shutdowns between Thanksgiving and the New Year. Moving on to total company results. In the third quarter, adjusted free cash flow was $82 million. Total debt at the end of the third quarter was $250 million, with $274 million of cash on hand. At the beginning of October, after the end of the third quarter, we drew $100 million on our revolving credit facility to fund the Baum acquisition. We also increased the size of our revolving credit facility to $800 million from $500 million with the same terms as the original credit facility. The higher limit will give us more flexibility for small to mid-sized acquisitions in the quarters and years ahead. We continue to have substantial financial flexibility with more than $1 billion in M&A capacity today, 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, prioritizing internal investments for growth followed by M&A and returns to shareholders. Now turning to other elements of our guidance for 2023. We increased and narrowed our adjusted EPS guidance range to $4.05 to $4.20 from the prior range of $3.80 to $4.10, with adjusted EBITDA guidance now at $366 million or 17.6%. While I have already discussed the segment details, the primary drivers of the increased guidance are higher core sales growth now in a range of 6% to 8%, up a point from prior guidance, and adjusted operating margins of 15.7%, up 60 basis points from prior guidance. Those items are partially offset by higher non-operating expense, which is primarily interest, up $1 million to $16 million for the year, slightly higher corporate expenses of $72 million, reflecting higher compensation expense due to our outperformance year-to-date and a diluted count of $57.5 million in shares slightly above 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 free cash generation to support value-creating capital deployment. Operator, we are now ready to take our first question.

Thank you. And our first question today is from the line of Scott Deuschle with Deutsche Bank. Please proceed with your questions.

Hey, good morning.

Good morning, Scott.

Good morning, Scott.

Rich, why do A&E sales go down sequentially in the fourth quarter?

A&E sales will be down modestly. To your point, it's just largely timing associated with what we were able to deliver here in Q3. So we did have some accelerated shipments. Our expectation is that we won't need to do that in Q4. So really, it was a little bit more than expected here in Q3 at the expense of Q4 slightly.

Okay. And sorry, if I missed it, but can you say what the third quarter price realizations were at both A&E and PFT.

Yeah, I didn't mention it on the prepared remarks, but I would tell you that price cost was quite solid overall for the business. In A&E, I would say it was definitely accretive, but not anywhere near as much as it had historically been in the first half of the year. So we did see some of that sort of close a little bit. It was still modestly accretive, but not as much as historically in the first half. And then I would say at PFT, it was accretive to the overall margin profile.

Okay. And then last question for Max. How would you characterize the ability of the company to benefit from these accelerated shop visits on GTF, I think you'll have some engine content there. So curious how you'd frame the impact to aftermarket sales over the next few years as a result of those accelerated shop visits? Thank you.

Yeah. So on the GTF, when the engines are taken off wing earlier than expected, our products tend to be serviced as well. So we are seeing a modest acceleration relative to what we would have originally expected. Relative to the overall business at this point, I wouldn't say that it's material. But it has been slightly helpful to aftermarket growth rates recently and would expect it to continue to be.

Okay. Got it. Thank you.

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

Good morning, Damian.

Hi, good morning, guys. Congrats on the continued demand momentum you're seeing. So I think the one thing that kind of look out was you saw this aftermarket surge, if you will, but yet you had that kind of some, I guess, lighter incremental margins, if you will, for A&E. Is the right way to interpret what you've said that you basically saw a step backwards in the supply chain conditions or something else to kind of factor in there? And Rich, you highlighted, right, your expectations that in 2024, you'll see much stronger margin expansion. What kind of incrementals should we be thinking?

In 2024? Yes. So I'll answer that portion first. So in 2024, we would expect to see close to a couple of hundred basis points of margin improvement, which, on our guide on the top line would imply somewhere in that 35% to 40% range. We're still going to go through our plan process as you know, Damian, but we would expect it to be somewhere in that range. And just given the supply chain itself, we're thinking that it might be towards the lower end of that range, but in the range.

Damian, I wouldn't suggest that the supply chain took a step backwards. I would say that we took a step forward in addressing some of the challenges we have to try to expedite material and delivery to our customers. I don't know if you want to frame up a little bit how we're thinking about Q3 to Q4.

Yes, I believe it will impact the transition from Q3 to Q4. I agree with you, Damian, regarding the quarter. We made every effort to ensure we were meeting customer demands, which resulted in some increased expedite charges. We've done an excellent job of establishing secondary sources, which involve requalification costs. These costs will ultimately lead to significant paybacks in the future as we build a more diverse supply base to meet our future demand. Therefore, we experienced more of these costs in the third quarter compared to the first half. If I were to summarize the impact from Q3 to Q4 regarding expected revenue growth, we saw higher revenue growth and some favorable trends in aftermarket services. The calculations would indicate about $5 million or $6 million more in operating profit. This is partly attributed to the costs I mentioned, which would account for approximately half of that $5 million or $6 million. We also faced higher material costs during the quarter, with perhaps 20% of that amount linked to price increases, which relates to Scott's question. It hasn't been as favorable as earlier in the year. About 30% is tied to increased program costs due to our recent program wins, but we anticipated most of these costs. The 5% to 6% increase is simply the math from Q3 to Q4. Taking a broader view for the year, the leverage rate we aimed for aligns with our January guidance. We've raised our revenue forecast by $40 million since January and increased operating profit guidance by $12 million. If you do the calculations, our total cost profile might be up by roughly $1.5 million, which is a relatively small amount. To clarify the changes from Q3 to Q4, these are the key factors at play.

Yes. And just remember that part of that is timing elements, right? So the requalification second sourcing has a payback the price cost, which was a little less favorable in the quarter. We got very good pricing in this business. It just comes with a little bit more of a lag than in process flow technologies, right? So these are not structural or permanent. This is a weather-specific transient issue.

Makes sense. Thanks for all that detail. And then I guess, switching to PFT, orders seem to be faring a good bit better than I think you've been expecting. Could you maybe just break down how much positive price uplift you're still getting in orders versus volume levels? And just any color you can maybe give on demand trends you're seeing?

I will begin by addressing the demand trends and then respond to the second question. Overall, I would say the overall profile has not materially changed. We did experience a nice increase this quarter, which was perhaps less anticipated regarding a few projects. We achieved several project wins, particularly in China and North America related to chemicals. This positively impacted our order profile for the quarter, but it does not alter the underlying trend we’ve discussed throughout the year. If anything, it might have shifted slightly later. Therefore, rather than seeing a decline in fundamental orders in September or October, that is likely to occur in December. However, the overall trend is expected to follow our previous indications and then revert to decline next year before recovering towards the end of 2024. So, there hasn’t been any significant change in that respect. Regarding pricing, it varies by business segment. In our water and wastewater division, it's roughly a 50-50 split, while in our process markets, pricing is more dominant given current market conditions. In the smaller segments of our business, I would say there have been no significant shifts in price, volume, or backlog, but that encapsulates my perspective across the segments.

Really helpful. Thanks, guys.

Welcome.

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

Hi, Matt.

Hey, guys. Thank you. I just want to talk about how should we be thinking about the mix for A&E going forward into 2024 between commercial and military? And then I want to be clear, are you still sort of faced with, I think, Rich, coming out of Q2, you indicated $60 million to $65 million of supply chain stranded revenue. Is that still sort of the right figure for where the business sits today? And then I have a follow-up.

We began the year by noting that if we could operate without any supply chain issues at a normal pace, the value currently held up in backlog was $50 million. Today, we would estimate that number to be between $65 million and $70 million. However, I want to clarify to investors that this does not mean that we have $65 million to $70 million stuck. It's merely an estimate indicating what we could potentially ship if there were no constraints. This figure has increased slightly, and it relates to the expedite challenges we are facing in Q3. We are doing everything possible to address these issues and are making some trade-offs to ensure customer satisfaction. Currently, the backlog value stands at approximately $65 million to $70 million.

Yes. Regarding the mix, I anticipate that the aftermarket will remain strong as we progress through 2024. Although it may not be as robust as this year in percentage terms, it will still be relatively solid. Original Equipment manufacturers will likely see an increase at a faster rate compared to 2023. Therefore, there may be a slight negative mix impact, as OEs will need to fulfill their shipment obligations. Nonetheless, the aftermarket remains strong. It's a bit early for us to provide detailed guidance on this matter at the moment. We will offer more information in January, but that’s the overview for now.

Yes, the fact that you provided commentary for 2024 is definitely a positive. Sticking with A&E for my follow-up, considering all the programmatic wins you’ve mentioned, particularly those that you may not be able to disclose, when can we expect to see an increase in revenue contribution from these wins? Given that you have consistently announced new wins over several quarters, do you think it may be necessary to revisit the 7% to 9% target? Thank you.

Yes. That's a great question. A lot of the wins are fantastic demonstrator platforms that are a little bit later, but we would expect to see some significant movement in 2025, I would say. It will –

That will have significant move in 2025 programs that are…

Yes. One program we have is the retrofit upgrade for the F-16 brake control, which is set to launch in 2025 along with several other defense projects that utilize high-power platforms. These projects will begin around the same time. We may see some limited initial production on a couple of these towards the end of next year, but I don't anticipate it will be significant next year.

But to your point, Matt, the team is doing a phenomenal job. We continue this multi-year investment in technology. We're on exciting programs to continue to ramp up. We've won and executed on programs that are reading through today and into 2024, and then the content that we have secured ramping up both in our Burbank facility and Fort Walton Beach facility. There's some significant investment in growth and readiness, and our teams are all over it. We're ahead of schedule. So I feel really good about it. We keep painting this picture of all the demonstrators and all the future programs that we're on, which goes out even a decade out and more. So just incredibly well positioned.

Great. Thank you, guys.

Thanks, Matt.

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

Good morning, Nathan.

Good morning, everyone. Very well. Thanks, Max. How are you?

Good.

I have a question regarding A&E. If we take a step back from the questions about the third and fourth quarters, Rich, you mentioned several sources of expenses and inefficiencies related to expedited shipping, qualifying second sources, and higher development costs. While some of these issues are positive as they help establish you as a trusted supplier for your customers, can you quantify some of the inefficiencies in the system, particularly concerning supply chain costs? It seems like you're not anticipating these issues to resolve in 2024. Will this contribute to further margin expansion as we move into 2025 and 2026, once things start to normalize?

Yeah. I think we would agree with you to try to quantify that would be a bit of a challenge, or I'd be hesitant to do that now. We can think about how we might try to frame that up when we give guidance in January or at Investor Day certainly. But there definitely is cost in the system that's related to the supply chain here that's been happening all year. Even the numbers I called out. These were not necessarily all unexpected, and they were existing as we move through the year. They're a little bit higher here in Q3, but not really a lot more.

I think you framed it up 50% of what the expected leverage was. But I just want to make sure that this isn't worsening. I do believe, we clearly see improvement in the supply chain that continues. It's gradual, and it's slow and it's moving. That's what we continue to see. It's broader than just on-time delivery. It's everything from a smaller sub-supplier that all of a sudden decides they're going out of business. You've got to put a second source in short order or there's labor challenges. There are retirements post-COVID both internally as well as third-party that has led to lost talent. There's the hiring process. It is not worsening. It continues to gradually improve. We've communicated that from the beginning of the year consistently. I think we've been spot on. It's going to continue into 2024, and it will continue to improve over time. So I fully expect them to lessen over time and that margin to read through.

Yes. I guess that is not worsening, but I also want to just make sure everyone understands that there are temporary cost inefficiencies in the system here in A&E and structurally, the margin profile is higher than where it's sitting right now.

Yes. Without a doubt.

Without a doubt, yeah.

And then, I guess, my follow-up question on PFT. If we're expecting orders to be negative for the next few quarters, why would the initial outlook for revenue – core revenue growth to be roughly flat next year? Why wouldn't we expect that to be down a little bit?

The market is down, but we will continue to do our best to offset it through a mix of share and price strategies. Overall, we anticipate the market will show a more significant improvement next year, so we're starting to recover some of that.

This is the positive news of the investments that we've had.

Right.

New product rollouts that we're having great success with the investment for growth. So we're taking share. It's a combination of share and price. The two other factors.

Okay.

Nathan, just to be clear, right? One is there is the mathematical effect of shortening lead times, reducing the backlog. So you're shipping more of the backlog above and beyond whatever the incoming orders are. That's just kind of a natural process as the supply chain continues to improve and lead times normalize. The second is that the short cycle piece of the business, which doesn't really flow through the orders for next year specifically is going to be growing faster than the longer cycle part of the business. Wastewater in particular tends to be a very short cycle business, and that's going to do mostly.

Makes perfect sense. Thanks for taking the questions.

Thanks, Nathan.

Thanks, Nathan.

Thank you. Our next question is from the line of Damian Karas with UBS. Please proceed with your question.

Yes, Damian.

Hey, Max. Just a couple of follow-up questions here on the BAM deal. So what could you tell us about line piping? I mean that's not an area that I don't think you've highlighted much in the past. So maybe just tell us a little bit about that? Any sense for the total addressable market? And maybe what kind of synergies are you expecting with this deal?

Thank you for the question. I appreciate it. We utilize our Resistoflex brand for line fluoropolymer. You can visit our website for more details on Resistoflex. While we don't emphasize the brand individually, it forms part of a complete solution alongside line pipe and valves under the Xomox brand, where we hold a significant share globally. In chemical applications, the pipe and valves tend to complement each other. We have a strong presence in North America, ranking as one of the top players. BAM has been a strong competitor for many years, excelling in the DIN category and holding a dominant position in Europe and other regions. We frequently compete against each other. Integrating BAM into Crane while keeping it strategically distinct will help us avoid unnecessary overlaps in our focus areas. We are well-positioned to cater to our end customers and channels on a global scale, significantly enhancing our market position. This acquisition fits seamlessly into our core business and will allow us to provide great service to our customers moving forward. In terms of market size, line pipe overall is approximately $1.4 billion, and the fluoropolymer sector is likely around $300 million. We're always facing competition, whether from epoxy-lined or plastic-lined options. The unique performance characteristics of fluoropolymers provide specific advantages in chemical resistance, pressure ratings, and temperature ratings. Regarding market share, we estimate that we hold about 40% in North America, while BAM holds 40% in Europe. We all compete in the rest of the world, enabling us to better serve our customers with a comprehensive line product offering. I hope this gives you a good overview.

Yeah, no, very interesting. I guess on the M&A front, so you closed this deal, you mentioned you lost the deal. So I guess that suggests you still have on active. Is that on the PFT or A&E side, if you don't mind? You're not getting a.

Actives on A&E.

There have been other discussions about those three we mentioned a quarter ago. To clarify, there are additional deals that are currently active which were not included in the previous three. Just yesterday, I would estimate that there are three or four now active, one of which is the former A&E deal we discussed that is not yet fully resolved, along with a couple of new ones that are starting to gain considerable activity.

Got it. Okay. So any expectations for incremental capital deployment before year-end? You've got that $1 billion of capacity, and I mean whether we're talking deals or otherwise?

It will depend on the current initiative we have active, particularly regarding our previous A&E deal. If we find success there, we expect it to be finalized this year.

The others that are now active realistically would probably be more first quarter.

Okay. Terrific. Thanks a lot, guys. That's a lot.

Thanks, Damian.

Thank you.

Thank you. At this time, we have reached the end of the question-and-answer session. And I'll turn the call over to Max Mitchell for closing remarks.

Super. Thank you very much. Hey, another great quarter and an exciting outlook for the rest of the year and into 2024 for Crane. So many opportunities in so many areas, so many good things happening. However, even with all the positives at Crane, it is hard not to comment on the continued uncertainty globally, rising global tensions or economic uncertainty, political turmoil. It can be truly overwhelming at times, but we continue to focus on what's within our control. In addition, I'm proud of Crane's place in the world and our global team's efforts. Our philanthropy and volunteerism continues to make a difference in so many areas. As the late great Jimmy Buffett once said, I can't change the direction of the wind, but I can adjust my sails to always reach my destination. At Crane, we continue to focus on what's within our control while being nimble and flexible to adjust quickly and always keeping our sights set on delivering our goals. Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.