Greetings. Welcome to Crane Company's Third Quarter 2023 Earnings Call. Please note, this conference is being recorded. At this time, I'll 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 will 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 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. 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 impressive execution on productivity and pricing initiatives, delivered more than 50% operating leverage with operating profit increasing more than 3x the rate of core sales growth. Hey, I want to start off with an update on the M&A front. Since our separation announcement, we have described how we expect acquisitions to be a meaningful contributor to our growth story as we move forward. 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. A second in Aerospace is still in progress, and while the outcome isn't yet certain, we are cautiously optimistic about our prospects. On one pharmaceutical asset, we lost to another bidder, which is 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 fluoro-polymer 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 10x 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. And 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 demonstrated 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. 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, and 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 core 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 WesTech Trade Show, we proudly introduced the latest extension of our premium efficient motor platform used in our wastewater pumps called the brand named Envie. Since it was introduced in 2021, the Envie motor platform has seen explosive growth, and we are on track for 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 additional extension projects that will continue the momentum in 2025 and beyond. My thanks to our global teams for all the hard work and effort and success both with our recent acquisition as well as on daily execution and 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 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 and with virtually no debt, the capital deployment opportunity is significant. 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 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 prepandemic 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 result in the passing of the fiscal 2024 budget soon, as well as 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 late-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 13% growth 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 additional 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 before costs, 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 over time. 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 may 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 to move forward, continuing to drive productivity, expediting and adjusting staffing in our factories to manage the supply chain and continuing to invest 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 one 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. 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. These are also the markets where Baum lined piping participates today, making it a perfect addition to the portfolio. We also continue to invest for the future with new product introductions released at record pace and structurally higher margins. New product vitality metrics continue to improve year after year, giving us high confidence in a 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 in 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 do expect a seasonal slowdown, less favorable mix due to 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. At 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, 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 midsized 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 one 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 expenses, 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.

We are now ready to take our first question.

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. So 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?

Yes, I didn't mention it in 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 all have some mentioned 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?

So on the GTF, when the engines are taken off-wing earlier than expected, our products tend to be serviced as well, right? 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.

But we don't see it, Scott, as a significant impact for us.

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

Congrats on the continued demand momentum you're seeing. So I think the one thing that kind of stuck 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 your expectations that in '24, 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 got 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.

Yes, I think it will impact the transition from quarter Q3 to Q4.

Yes, I think that's right, Damian, for the quarter. We were certainly doing everything possible to ensure we delivered to our customers. Along with that, we incurred some higher expedite charges. I believe we have done an excellent job in establishing second sources, which involves requalification costs and similar expenses. In the long run, those costs will yield significant benefits as we will have a more diverse supply base to meet our future demand. Thus, we had more of those costs in the third quarter compared to the first half. If I were to summarize the expected revenue growth from Q3 to Q4, we did see higher revenue growth and some positive trends in aftermarket. The math would suggest that we might expect an increase of $5 million to $6 million in operating profit. This increase is tied to the factors I just mentioned, with perhaps half of those costs contributing to the expected increase. We also experienced higher material costs during the quarter, with around 20% of the $5 million to $6 million increase related to price costs, reflecting a less favorable margin than at the start of the year. Additionally, about 30% of the increase is due to higher program costs linked to our recent program wins. However, these costs were largely anticipated, with some incremental increases. Overall, from Q3 to Q4, the net change in our cost profile could be seen as an increase of about $1.5 million, which is relatively small. To clarify the transition from Q3 to Q4, those are the main elements.

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 get very good pricing, have been 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 an order-specific transient issue.

Makes sense. 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 give on demand trends you're seeing?

I’ll start by discussing the demand trends and then address the second question. Overall, there haven’t been any major changes in the overall profile. We experienced a nice uptick during the quarter, with some unexpected wins in projects, particularly in China and North America within the chemical sector. This has positively impacted our order profile for the quarter, which is great, but it doesn't alter the underlying trend we’ve been discussing all year. If anything, it might have slightly shifted to the right, indicating that instead of seeing a decline in fundamental orders in September and October, that may now occur in December. The overall trend appears to be on track as we suggested, with a downturn expected next year, followed by a recovery at the end of 2024. There haven’t been any significant changes in this regard. Regarding pricing, it varies depending on the segment. In our water-wastewater business, it’s roughly balanced. In our process markets, due to current market conditions, it leans more towards price. We also have some smaller segments where the balance is about the same. Overall, there are no significant changes in trends regarding price, volume, or backlog; that’s how I would view it across the segments.

Next question comes from the line of Matt Summerville with D.A. Davidson.

I just want to talk about how should we be thinking about the mix for A&E going forward into '24 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 initially projected that if we operated without any supply chain issues, the backlog would be around $50 million. Now, I believe we would estimate it to be between $65 million and $70 million. I want to clarify that this isn't a fixed amount of $65 million to $70 million that's just waiting; it's more of an approximation. We're indicating how much we could potentially ship if there were no constraints. This figure has increased slightly. We are actively addressing the challenges we faced in Q3 and are committed to driving efficiencies to ensure customer satisfaction. Currently, that estimated number is between $65 million and $70 million.

Yes. Regarding the mix, I believe we will continue to see strong aftermarket performance as we progress through 2024. While it may not be as robust as this year in percentage terms, it will still remain relatively strong. Original equipment manufacturers are likely to increase their output at a quicker rate compared to 2023. As a result, there may be a slight mix differential, which could lean negative since OEs need to ensure their shipments are on track. However, the aftermarket remains solid. It’s a bit early for us to provide extensive guidance on this, but we will offer more details in January. That's the overview.

Yes, I think it's definitely a positive that you provided commentary on 2024. Following up on A&E, with all the programmatic wins you've mentioned, when can we expect to see an increase in revenue contribution from those wins? You've noted several new wins over the last few quarters. At some point, should you reconsider the 7% to 9% target?

Yes, that's a great question. And a lot of the wins are fantastic, demonstrating our platforms that are a little bit later, but we would expect to see some significant movement in '25, I would say.

It will. It will have significant movement in '25 programs that are...

Yes, we have a retrofit upgrade for the F-16 brake control that is scheduled for '25, along with several other defense high-power platforms starting around that time. We might see some low-rate initial production on a few units towards the end of next year, but I don't expect it to be very significant next year.

But to your point, Matt, I mean, the team is doing a phenomenal job. We continue this multiyear investment in technology. We're on exciting programs to continue to ramp up. We've won and executed on programs that are leading through today and into '24, and then the content that we have on secured ramping up both in our Burbank facility, Fort Walton Beach facility. I mean, there's some significant investment in growth in readiness, and our teams are all over it. We're ahead of schedule. So I feel really good about it. And we keep pinning 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.

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

I have a question regarding A&E. Looking beyond the 3Q and 4Q questions, Rich, you mentioned several sources of expenses and inefficiencies such as expedited shipping, qualifying second sources, and increased development expenses. While some of these are positive, indicating you're building trust with your customers, can you quantify some of the inefficiencies in the system, particularly regarding supply chain costs? It seems like you're not expecting these issues to resolve in 2024. Will this lead to more margin expansion as we move into '25 and '26 when things begin to normalize?

Yes, I think we agree with you. Quantifying that would be challenging, so I'm hesitant to do that at this moment. We can consider how to address it when we provide guidance in January or during our Investor Day. There are definitely costs in the system related to the supply chain that have persisted throughout the year. The numbers I mentioned were not entirely unexpected and have been present as we progressed through the year. They are somewhat higher in Q3, but not significantly so.

I believe you are suggesting that we are at 50% of the expected leverage. I want to emphasize that this situation is not deteriorating. We have observed a steady improvement in the supply chain, albeit gradually and slowly. The issues extend beyond just timely deliveries; they include challenges such as smaller suppliers going out of business, which necessitates quickly establishing alternative sources, as well as labor issues stemming from retirements post-COVID affecting both our internal teams and third-party providers, resulting in lost talent and a lengthy hiring process. The situation is not worsening; it continues to show gradual improvement, which we have consistently communicated since the start of the year. We are among the few who have addressed this openly, and I believe we have accurately assessed the situation. This improvement is expected to carry into 2024 and will continue over time. I anticipate that these challenges will diminish and that margins will reflect this progress.

I guess that is not worse, 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.

SP-2 Without a doubt.

Without a doubt, yes.

If we expect orders to decline over the next few quarters, why is the initial outlook for core revenue growth projected to be roughly flat next year? Shouldn't we anticipate it to be somewhat lower?

Yes, the market is down. We will continue to take the necessary steps to mitigate the impact as much as possible, through a combination of market share and pricing strategies. However, overall, the market is anticipated to improve significantly next year. We are starting to regain some of that, and then you have...

This is the positive news of the investments that we've had. The new product rollouts that we're having great success with, the investment for growth. So we're taking share. So it's a combination of share and price.

The two other factors, Nathan, just to be clear, right? One is there is the mathematical effect of shortening lead times, reducing the backlog, right? 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, right? Water, wastewater in particular, it tends to be a very short cycle business, and that's going to do...

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

So just a couple of follow-up questions here on actually the Baum 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 your question. We use lined fluoro-polymer as part of our Resistoflex brand. You can find more information about Resistoflex on our website. We integrate it into our overall solutions involving lined pipes and valves under the XOMOX brand, where we hold a significant share globally. When bidding for chemical packages, the pipe and valves are closely linked in the process. Our presence in North America is strong, making us a leading player in this region. Baum has been a notable competitor for many years, particularly strong in the European DIN standard category, and they have a wide size range along with a dominant position in Europe and some other markets. We frequently compete against each other. Integrating Baum into Crane while keeping it strategically separate will help us minimize overlap in our focus areas. This positioning significantly enhances our market strategy for global end customers and distribution channels. The deal is relatively modest but aligns perfectly with our core business, allowing us to provide excellent service to our customers moving forward. The overall market for line piping is approximately $1.4 billion, while the fluoro-polymer segment is around $300 million. We face competition from products like epoxy-lined and aplastic-lined options. Fluoro-polymers offer unique performance characteristics, including chemical resistance, pressure ratings, and temperature ratings. In North America, we hold about a 40% share, while Baum has a similar share in Europe. We all compete in the rest of the world, which enables us to serve our customers more effectively with our complete line product offering.

Yes, no, very interesting. And I guess on the M&A front, so you closed this deal. You mentioned you lost a 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?

Active is on A&E.

There have been additional developments since we mentioned three a quarter ago. To clarify, there are now others that are active which weren't included in that initial three. Just yesterday, there are currently three or four live initiatives, one of which is the former A&E deal that we discussed, which has not been completely resolved yet, along with a couple of new ones that are now gaining significant 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 how the current live project performs, particularly the one related to A&E. If we are successful there, we should be able to close this year.

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

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, war, 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 continue 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.