Crane Company (CR) Earnings Call Transcript & Summary

Okay. Next up, we're honored to have with us the Crane Corporation. Crane is based in Stamford, Connecticut. It's a diversified manufacturer of engineered products and operates in 3 segments: Aerospace & Electronics, Process Flow Technologies and Engineered Materials. Joining us today are Rich Maue, CFO; Jay Higgs, President of Aerospace & Electronics; and Jason Feldman, Vice president of Treasury and Investor Relations. Crane has 60 million shares outstanding. Recently, obviously, did a tax-free separation of the business trades at $90 for a $5.3 billion market cap, $40 million of net debt for a $5.3 billion total enterprise value. We'll start off today with a presentation and then we'll go into Q&A. Welcome, Rich and team.

Great. Thanks. Good morning, everybody. Thanks, Tony, and nice to see everybody here on your interest level. Hey, before we begin, note the disclaimers posted in SEC filings that we have this -- hope it works, got it, okay, got it. SEC filings and in today's materials, which are located on our website. Hey, after decades of delivering consistent, differentiated execution and building scale across our global platforms. As Tony just mentioned, in April of this past year, we separated into 2 independent public companies. The transaction was very successful. Mario was joking with me earlier that we're at the same exact stock price as we were last year. However, we're obviously half of the company. So we generated about $2.5 billion in value since the separation, just from this past April. Today, Crane is a streamlined organization and focused more than ever, well positioned for substantial growth across our end markets. Two primary businesses, Process Flow Technologies and our focus today will be on Aerospace & Electronics, each again, leaders in their respective end markets. As you can see here, great financial metrics, strong margins, a balance of long and short cycle as well as healthy aftermarket. Two great businesses, each with a set of different and exciting growth opportunities. Both businesses, strong core growth outlooks without questions, solid mid-single-digit together, growth expected across the cycle, and with 35% to 40% of leverage on that sales growth. Jay is going to discuss the aerospace outlook in a minute, where we are confident in the 7% to 9% outlook that you see on the slide here. And our Process Flow Technologies, we have a very strong position in core target markets of chemical, pharmaceutical, general industrial and water and wastewater, where we are gaining share with new products, in particular, and commercial excellence programs that we're executing on. Strong secular drivers for both companies, both businesses and an attractive outlook. In addition to that strong growth outlook, I have a little trouble -- following the separation, Crane has a pristine balance sheet, virtually no debt, giving us financial flexibility for capital deployment. The combination of our capital structure with its very strong balance sheet, together with our strong earnings and free cash flow growth profile supports a substantial amount of potential capital deployment. Through 2028, we believe we have the capacity to deploy as much as $4 billion for acquisition. Of course, the timing of acquisitions isn't predictable. But given the robust pipeline of opportunities along with our solid organic growth profile, our internal goal would roughly double the size of the company, along with the organic growth that we have over the next 5 years. That's our vision and what we will be working hard towards with a focus on high-return acquisitions that create value for our shareholders, improve the strength of our strategic growth platforms and give us optionality potentially for the future. Of course, we will pursue this vision with the same discipline that we always have acquisitions that make us stronger, never bigger for the sake of size and always focused on shareholder returns. With that overview, I will now turn it over to Jay Higgs, who is our President of our Aerospace & Electronics business.

All right. Good morning, everyone. Pleasure to be with you here again today. Again, my name is Jay Higgs. I'm the President for the Aerospace & Electronics Group. So yes, I got to go backwards, lookout, there we go, okay -- Aerospace & Electronics, we employ about 2,400 employees working out at 8 manufacturing sites in the U.S., Europe and Asia. We have very unique technologies and capabilities, which include high accuracy sensing, a wide range of power conversion products, microwave signal processing assemblies, fluid management products and brake control systems. Our capabilities allow us to create product solutions that are highly valued by our customers and critical to the success of their end applications. We market our capabilities within 5 market-leading business solutions. Most of which hold the #1, 2 or 3 position in their respective market segments. They represent a good balance between commercial and military sales with more than 1/4 of our sales in the aftermarket, all sold into large, growing and attractive end markets. And we're generating very strong margins with upside despite significant R&D investment, which supports development of our sole-sourced proprietary products being sold into large and growing markets. A strong core business and exciting new products give us confidence in our forecast of a 7% to 9% sales CAGR over the next decade. Nearly double the rate of the market growth of roughly 5% over that same period. There are 3 main factors to this growth. First, we have an excellent base of business and with reliable products, unique technology, great customer relationships, which provide a stable position as the market continues to recover and grow. This is shown in the dark blue on the graph. We have substantial content on virtually every major commercial and military aerospace program with sole-source proprietary content and high switching costs, supporting a large high-margin annuity-like revenue stream that includes spares and repairs and services. Secondly, we see regular opportunities to capture new business within the core businesses as represented on the green in the graph. I'll discuss some of the many wins we've already secured in that category in a bit. And our final and most exciting growth driver is breakthrough innovation that our R&D teams are driving. This is represented in light blue on the graph. This innovation will position us to win as the military converts to more electric systems and vehicles aircraft decarbonization, electrification proliferate and as our core customers pivot to the technology of tomorrow. Our base commercial business is built along strong positions on high-volume programs. You see some of the programs here that we support, and we have substantial content on virtually every major commercial aircraft platform, including both in production and out-of-production aircraft. But we have an even stronger position on current generation of in-production aircraft driving revenue today and creating an aftermarket stream for tomorrow. For the years ahead, we'll have particularly level -- a heavy level of content on single-aisle aircraft that represent over 70% of the aircraft produced on an annual basis. For example, we have substantially more content on 737 MAX than the prior generation of 737. And we have nearly doubled the content on the Airbus A320neo compared to the prior aircraft. Our installed position ensures that our commercial business will benefit as aircraft production continues to rebound with each new plane generating revenue today and growing our installed base for a long tail of aftermarket activity over the next few decades. Similarly here, our backlog position is equally robust in the defense market. The aircraft market here by volume is currently dominated by F-35 Joint Strike Fighter which utilizes a derivative of our proven landing gear brake control system as well as various fluid management products. In the space market, we have a very strong position, including power conversion on projects such as the SDA Tranche 1, a program critical to the nations long-term defense strategy and one of the largest base programs over the next few years. On the ground, our defense power and microwave businesses have new products which support platforms such as the lower-tier air and missile defense sensor, or LTAMDS and TPY4 radar. Nearly every new AESA radar system developed in the past 5 years is using our integrated microwave assemblies and our high power converters. In short, we have substantial content on virtually every major military platform and a growing presence on ground-based radar systems and new space programs. As we look at expanding our core markets, we are focused on capturing positions on next-generation of aircraft, land vehicles, radar, satellites and weapon systems. In the commercial aerospace market, we continue to see new opportunities from engine suppliers and airframers looking to create solutions to reduce carbon emissions. We've been working with many of these customers for years and our support of their developments and demonstrator programs is starting to convert to important production opportunities. In defense, the Army is looking to replace traditional vehicles with hybrid and electric ground vehicles. We expect to see increased demand for both unidirectional and bidirectional power conversion and thermal management systems. The military is also transforming their radar capabilities, developing a new arsenal, electronic warfare devices, and developing a new and improved sixth-gen fighter with complementary unmanned aircraft. All these developments are forecasting significant production volumes for which our products are currently on demonstrators and virtually designed in. And finally, additional growth comes from commercial space. There is a lot of activity, creating new markets, using lower cost, shorter life cycle, low-orbit satellites in quantities, as you heard earlier, on orders of magnitude greater than traditional space customers. Our Microwave and Modular Power teams that developed technologies were directly aimed at the unique requirements of this market. A key piece of developing our strategy is understanding future needs of our customers and prime contractors. We work with these teams early and often to ensure technology will be at the necessary maturity level when they need it. Across all major developments from the government's desire to upgrade the fighter fleet to their goals for creating entirely new technologies to support ground forces and the many commercial ventures working to provide more accessible air travel and improve sustainability requirements and expectations have common themes that are materially unchanged since many of our business started over 100 years ago. To conclude, we are extremely well positioned for long-term growth. Crane Aerospace & Electronics provides an enviable level of technology excellence to leading platforms in a strong industry. And our core base business will continue to grow with the market. We see continued growth from selling similar technology with our core markets to new and emerging customers. We have a long history of success and will continue to grow with new customers and new platforms as the industry evolves. Our R&D teams are hard at work developing the technology that will be required to win in the future with solutions such as high-power conversion and more capable heat dissipation or advanced sensing. Finally, the entire Crane A&E team practices the Crane business system every single day, reducing our cost base and providing reliable results. This combination of technology and execution positions Crane Aerospace & Electronics for the 7% to 9% sales growth paired with substantial margin expansion. Appreciate your time today, and now we'll open up for questions.

Thank you, Jay, and Rich. That was a great overview. Maybe I thought we have a couple -- a few minutes for some Q&A. I think you've covered a lot of it. Maybe we could talk about probably on the top of most investors' minds of the supply chain. Where do you see it most challenging? Is it getting better or worse? And maybe what is your time line of when things do get better?

Okay. Great. Thank you. Yes, I remember last year when I answered that same question, and I almost got laughed out of the room because I said we didn't see it improving at least for the next 12 months, whereas many of our peer companies were saying we were really going to see some significant improvement at the end of -- at the end of the year. And quite frankly, at least for us, that played true. I think, through the majority of this year, it's kind of been more of the same. We put a lot of work though into designing ourselves out of some of the supply chain situations we have, whether it's just complete redesign or dual sourcing of products, starting to bear fruit now. So I'd say that significantly the second half of the year, we are starting to see improvements. It's still struggle every single day. But -- and we do have -- a large proportion of our supply base is small business that has their own struggles in terms of labor and other capital investment things they need to do. But we are seeing improvement, we're seeing improving our ability to take products and deliver to our OEM customers and start to build safety stocks. And we're optimistic that we'll continue to see that marginal improvement through the rest of this year and into 2024.

If you were to quantify the amount that is just unmet demand based on what you just can't supply or can't have supply to you. Maybe you could just sort of give us a broad stroke of what are you missing out on "with your growth based on the supply chain?"

I'd say right now, I think slightly better positioned than we're last year. We're probably still around the $40 million mark of unmet demand. Why I would say is that in the last year, our backlog has increased tremendously. There's a lot of demand for our products, both at the OEM and the aftermarket level. And while we obviously have much higher sales this year, a much better rate of being able to convert our backlog into sales. Probably that $40 million mark is kind of where we sit right now in terms of -- if our customers could get it right now, they would take it. But we feel good that we're startlingly starting to build buffer stocks at our OEM customers, and we're starting to build some of those internal for our runner program. So we continue to see us working that down over the next 12 months.

I just -- I think just to add there, the positive -- on the supply chain, too, we did raise our guidance. So as Jay mentioned, the supply chain started to improve just a bit here during the second half of the year as we see it. And we did raise our guidance from a revenue perspective in Jay's segment by 3 points. So to reflect the fact that, that improvement is, in fact, happening to Jay's point, absolutely [ challenged ] without a doubt. With respect to the unmet demand, I think, the positive -- good takeaway, obviously, is the tailwind that it is for us as we look at next year and even the year after as supply chain continues to improve.

Maybe to continue with that, Rich or Jay or Jason. You put out some pretty strong target like you talked about rise 7% to 9% overall growth. Is there -- what gives you the confidence for that? And maybe has it been lower or expect the market to grow at or below this level?

Yes, I can start there. I mean we feel very confident. I mean we made a lot of investments over the last 10 years, really targeted at increasing our positions on narrow-body aircraft, which we've done, and we see those rates coming back, which is going to be very helpful for us in the future growth. With almost like doubling those positions from where we were before, plus the amount of content we have out there, you got that annuity-like revenue stream from the aftermarket that a lot of our products, every 5 years are coming off wing. They're coming back to us, they're getting repaired. So you kind of get that doubling effect every 5 years of that base of business. So that's really helping the growth as well. And then just things where investments we made like high-power conversion, where we have a wide range of power conversion products and now for hybrid military vehicles and such for that market is just starting to get going now. Lot of opportunities to put products in there. AESA radars has been huge for us, kind of clean sweeping those in terms of our power conversion products. That's almost going to have a doubling effect in that defense power business in the next 10 years. So just well positioned with the investments we've made with increasing our positions in the high-volume aircraft and all that's going to combine to really, I mean, set us up for that 7% to 9% growth.

Just to add a little bit. If it's a confidence level, I completely agree with Jay. And when we put this guidance out, just how long ago was is it now? In 2021, you can imagine the level of detail we go into it and make sure we are comfortable with 7% to 9%. Since that time, we've had a number of incremental wins, right, to that if anything, bolster us up maybe to the higher end. And then the second thing that I would say is price itself. We've been really successful. Jay has been doing an amazing job with the team on driving price and value through all of our businesses within the Aero & Electronics groups. And so if anything, we see potential opportunity there to continue that value pricing that we really started to drive in earnest over the last 18 months in a different way.

You definitely put that out in some challenging times guidance and holding true. What is changing with your technology readiness model? And what are some examples of identifying and entering additional markets based on your existing technology and your competencies?

Yes. So as we kind of talked a little bit about last year, Crane kind of changed its philosophy, at least in the Aerospace & Electronics group on how we develop products. We're always a very successful company, but we tended to chase programs with very specific technology, right? If you're going to make a new aircraft, we're going to design that thing for that aircraft. And while that's good for winning business on aircraft, it's not very good in terms of leveraging our NRE costs across a broader base of products. And really, we changed our position to really look forward and try to develop platform products, whether it's in our Modular Power business or it's our Defense Power business, or even our Fluid Management business for thermal management where we kind of created a family of thermal management systems, we can use in many different applications. Leveraging our NRE better, predicting what our customers are going to need, we did a very good job of that, working closely with our customers. And now we're really positioned with portfolio products as I call them, or families of products that with minor modification, we can fit into many different applications. And that's really the change that's led to where we are today and why we're so confident in that 7% to 9% growth because we're well positioned on existing programs. And we really have the products that our customers want, whether it's like I said, high and low power conversion, wireless sensors, thermal management systems, we're all at that TRL-level 6, right? The technology is ready to go for what we see as the platforms for right now through probably the end of the decade.

On your investor calls and analyst days, a lot of talk about margins and expectations returned to those historic margins of that 21% to 24%. Rich, how do you see you getting to that? Or Jay, how do you see you getting to that level? And when do you expect to see that?

Yes. I think the way -- I think we're going to get back there, no question about it. We feel good about the mix of what we're delivering over the next several years. There'll be a little bit of ebbs and flows, but we feel like next year, we should clearly be in that 21% range without a doubt. And then I think the way to think about it at Crane is on the growth in the A&E business, we're leveraging anywhere from 38% to 40%, right? So 40% is our objective. So for every dollar of sales, we're going to lever $0.40 on the bottom line. You do that math and that accretion happens. You start to see that march towards that 24% again. And we're not going to just seek the margin target for seeking the margin target, right, if there's opportunities to win new business and continue to grow earnings as well, and we want to invest. We'll go ahead and do that. The beautiful thing about this business is the amount that we do invest and still yield the margin profile that we do. I think our gross costs are around $100 million a year in investments in this business for R&D. So but that has lent itself to a really proprietary base of business, very hard to compete with us, and it commands price and margin. So I think the way to think about it again is that 40% leverage on incremental sales.

Pretty powerful stuff. What is your outlook? You talked about some M&A, what you can do sort of the firepower you have? What's your pipeline look at -- look like and opportunities maybe in the near to medium term?

Yes. Maybe I'll give some broader comments and then Jay can comment on sort of what we're looking for in Aerospace & Defense. But just generally speaking, we're very excited about deploying capital for M&A, right, to the -- our position on the balance sheet today, we're effectively net 0 leverage if you look at our cash and our existing debt on the balance sheet. So we absolutely want to deploy that capital. M&A is our priority right now. We want to continue to grow the business profitably. We have a bottoms-up approach across all the business units where we have funnels of activities across the specific strategies that we're trying to execute on in each business, whether it's in Process Flow Technologies or Aerospace & Defense. And that's business unit led. At the top down, we have corporate and a BD team that we have continued to staff up. We're looking to become a more serial acquirer now as a Crane Company. Again, we're a little bit leaner, a little bit more focused, excellent capacity and firepower, and we want to grow. Right now, we're actually working on 3 transactions. We have 3 that are in play right now. One of them is in Aerospace & Defense, 2 of them are in Process Flow Technologies. So we don't rest. We separate and we go and acquire. We're real busy at Crane, but very excited about those opportunities. Maybe, Jay, you can provide some color on what we're looking at specifically in A&E.

So specifically for A&E, I mean, we really like all our businesses. They're very niche, they're all incredibly profitable. We like where we're positioned. In terms of looking at the future and where we really focused our acquisition activity around, it's really anything around power conversion, power distribution certainly with the decarbonization of the aerospace market, the more electric type aircraft, electric propulsion and then the related technologies. That's a strong area of our technology and a strong area we want to grow. Thermal management goes along with that, right, where there's power, you got to take heat out. So we see that in anything that we can bolt on to existing thermal management applications is exciting for us. And then sensing. I mean we're a sensing company, proximity sensing, pressure sensing, fuel flow measurement sensing, fuel gauging, but again, we have some really great wireless technology that we're deploying on our existing products. Anything we can [ marry ] that wireless with other sensing technologies, higher end stuff, vibration, acceleration, multi-sensors where we combine all those functions on the 1 sensor, either technology or companies that support that is also part of our acquisition strategy.

That's very interesting. Maybe talking back to supply chain. You talked about the issues you're having, but Boeing and -- we talked about earlier, Boeing and Airbus has put out some pretty hefty targets for their narrow-bodies and the new widebodies. Do you think you can meet those ramp rates as they come up here in the next, probably, what, 18, 24 months?

I think specific to the question, can we do it? Yes, we absolutely can do it. I mean we feel really good about where our supply chain is now positioned and the changes we've made in terms of design, so that we can get multiple sources of supply on many of those narrow-body platforms. We're starting to build safety stocks in some of those key positions and really positioning ourselves, our factories, our supply chain to be able to do that. And certainly, Boeing and Airbus have their own challenges, and we'll see what this engine situation is to keep up with that, which is probably the long pole in the tent for them. But in terms of our preparations and where we're at to support that, we would be certainly welcome those kind of volumes.

Boeing and Airbus sort of shied away from introducing a new model in the near term. What other opportunities do you have that could give you sort of above-market growth on the commercial aerospace business this decade?

Yes. So there's quite a few -- I mean if you set Boeing and Airbus aside and what they're going to do, obviously, they've talked about next decade is kind of where they're positioning for the narrow body replacement. What's not talked about is they're all -- they continuously look at all the systems of those aircraft. In terms of where they might want to do, in cycle upgrades on those. So both with Boeing and Airbus were involved with them on some of the technologies we have that can take cost out of that or improve their manufacturing methods. So we see technology insertion opportunities even on existing aircraft regardless of whether there's going to be a new aircraft in the next decade. And then we're really excited about some of these alternate propulsion type, but more like fixed wing like your Heart ES-30s [indiscernible] I mean we're very well positioned to provide systems for those aircraft. They're not going to be huge volumes, but it's going to allow us to insert some of the technology that we have, provide some growth opportunity mid-decade and beyond. And that is the military platforms as well. Besides we're being very well positioned on F-35, we have some really big M&U opportunities, modernization-upgrade opportunities specific to F-16 which we've announced, which is a very big program. We're doing a whole brake control retrofit for the F-16 fleet, all told that could be a $200 million program for us over the next decade plus. As well as other military aircraft that need similar type of system upgrades. There's a lot of content out there, and we're working those modernization upgrade programs pretty hard. So regardless of what happens with the narrow bodies, we see being able to support the kind of growth that we're talking about with some of those other opportunities.

I would just add when you talk -- when Jay talks about M&U opportunities like the F-16, $200 million, these are the margin profile. You don't think of defense as being sort of one of those accretive margin profiles. But when you're talking about M&U, it's an area where you can command quite a bit of price and value.

Yes, I'm sure those are nice businesses programs. For -- you talked about Jay already about M&A and some of the things that are potentially out there for you. You talked about electric propulsion, some sensing stuff. Maybe you can go in -- and then I saw there. I saw the open rotor technology with the next engine, maybe get a little more in depth on what are those M&A opportunities -- I just I guess, I haven't thought through that with you guys. What are you looking to do on that in that space?

Specific to the engine?

Into the engines or just -- or the sensing and maybe a little more color on that.

Yes, somehow -- yes, we didn't really talk a little bit, but in our Fluid Management business, we have a very unique pumping technology. We're the only people who do vein pumps for lube and scavenge. When you talk open rotor, when you talk about the geared fan, they use a lot more oil than traditional engines. A lot more things need to be lubricated and cooled, et cetera. And so the technology is of a form factor that pretty much all the big 3 Rolls-Royce, GE, Pratt are all using our products and our technology on their demonstrated programs because they see it as an advantage for accomplishing what they need to accomplish with those new engine platforms. So I'm really confident that regardless of where the technology goes, we'll be doing that. The only thing that became really interesting as you think about alternate propulsion and the fact that you got basic on an electric motor as your propulsion mechanism, it needs to be cooled and lubricated just like a jet engine does. And so while we're doing -- we're not pumping oil, pumping coolant in some cases. We're doing that on a lot of different applications, whether it be directly with the electric motor itself, like magniX where we have a position with them to do that and/or there's also an offer underway to use hydrogen fuel cells to provide that electrical energy to those motors. And we have several new opportunities we're working presently with that same pumping technology to provide lubrication and cooling for those. So no matter the engine technology that's required in the future, we're going to have a fluid management product that supports that. And then just all the sensing technology that is necessary to have these -- the aircraft work. We have this core of wireless that we think we can deploy to any kind of sensor that we develop or we might acquire. And so again, we're really excited about the fact that we could take that technology and roll it into recurrent sensors or any sensors we might acquire through M&A.

Those sound like very exciting opportunities. You've done a magnificent job. Congratulations on all the -- recently what's occurred at Crane. And hope to have you guys back next year. Thank you, Jay, Rich and Jason. I appreciate it.

Great. Thank you very much.

Thank you very much.

Thanks for having us.