Q2 2023 Crane Company Earnings Call
Good morning, and welcome to the Crane Company second 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. If anyone should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I would like to hand, the call over to Jason Feldman, Vice President of Treasury and Investor Relations. Thank you you may begin.
Thank you operator, and good day, everyone and welcome to our second quarter 2023 earnings release Conference call I'm, Jason Feldman, Vice President of Treasury and Investor Relations on our call. This morning, we have Max Mitchell, our President and Chief Executive Officer, and Rich Maue, Our executive Vice President and Chief Financial Officer, We will start off the call with a few prepared remarks.
After which we will respond to questions. Just a reminder, that the comments we make on this call may include some forward looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward looking statements also during the call we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers.
And tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www Dot Crane co dot com in the Investor Relations section now, let me turn the call over to Max.
Thank you, Jason and good morning, everyone. Thanks for joining the call today.
First of all I would like to acknowledge the sad news that my predecessor, and CEO of Crane from 2000 to.
To 2014, Mr. Eric fast past on July 15th.
Suffice it to say I would not be here at crane, nor in my present position if not for Eric.
Eric drove the vision of moving Crane from a holding company to an integrated operating company Eric.
Eric cultivated the beginnings of the Crane business system created larger business units and restructured cream for success all of which helped enable the strategic actions in value creation, we have delivered on over the last several years.
For those who remember Eric It was a wonderful leader and man, who care deeply for our associates always upbeat and positive and even the most difficult circumstances.
Eric with someone I learned from and tried to emulate to the best of my ability.
Above it all Eric was a deeply loving family man, who always emphasized the importance of personal focus and balance for all associates. In addition to a passion for the customer and driving growth and results.
Our deepest condolences go out to his wife, Patti are 43 years of their children and grandchildren.
Eric fast will be greatly missed by so many friends family and work colleagues. Thank you Eric for your leadership and for everything you did to make us better and to make create a better company your legacy lives on forever.
Moving onto the quarter.
We delivered another impressive quarter, our first as a newly independent company following our April separation transaction.
Core sales growth of 5% with a 30% increase in adjusted operating profit and adjusted EPS of $1 10.
Great performance across the businesses with both of our strategic growth platforms at or above 20% margins in the same quarter for the first time ever.
This strong performance gives us confidence to raise our EPS guidance by another 20.
To a range of $3 80 to $4 10.
While the comparison to last year's EPS isn't meaningful given the recent separation.
On an operational basis, our revised full year guidance reflects 6% core sales growth driving an 18% increase in adjusted segment profit.
Strong core growth along with a very impressive execution delivering 50% operating leverage with operating profit increased three times the rate of sales growth further evidence of our ongoing execution capabilities.
Regarding our end markets the environment is fairly stable with some improving but continuing persistent supply chain challenges at aerospace and electronics.
And signs of continued slowing in end markets that process flow technologies, particularly chemical.
However, we continue to drive strong results and are confident in our outlook for 'twenty, three and our ability to drive significant growth in 2024 and beyond.
From a cost inflation perspective, as you can see.
From our continued margin strength.
We've been appropriately prudent with pricing actions across all of our businesses and we continue to fully offset the impact of inflation on both a dollar and margin basis.
Starting with aerospace <unk> electronics, our revised guidance is for 14% core sales growth driving operating profit growth at roughly twice that rate.
Demand remains very strong with no signs of a slowdown the supply chain environment has improved slightly which drove the three point increase in our core sales guidance, but.
But we expect further improvements to be at a gradual and measured pace.
Even with those supply chain constraints, we couldnt be more excited about the growth profile of this business.
We remain confident in our ability to deliver 7%, 9% core sales growth from 2024 through the end of the decade and.
And we are now working on opportunities to overdrive that target.
And with operating leverage in this business typically approaching 40%, we expect this business to generate profit growth well into the double digits into the foreseeable future.
Rich, Jason and I attended the Paris Air show last month, with Jay Hicks and the aerospace team.
A great event with over 150 face to face meetings with key customers partners and peers not to mentioned quite a few analysts and investor meetings.
Coming out of that show hearing directly from our industry partners my confidence in the demand trends in the specific positioning of our business couldnt be higher.
Although there are continued industry challenges from supply chain lead times to labor shortages.
<unk> is extremely strong.
And the industry short term supply constraints will just result in a much longer up cycle this decade and beyond.
With some clear benefits for suppliers like crane.
For example, given constraints on OE build rates the fleet has aged about 15% since 2019 and the number of aircraft in the fleet less than five years old.
Down 25% since 2018.
Creating a long term structural increase in the demand for aftermarket products and services.
This is reflected in the unusually strong aftermarket backlog.
In addition to strong industry trends our team continues to perform well and secure new business. For example, Crane was recently selected by heart Aerospace for the joint development Phase of Hearts hybrid electric Es 30 aircraft.
We will be collaborating with hard to define the electrical power distribution system utilizing cranes innovative high voltage power conversion systems, and low voltage control and distribution equipment.
Our selection on this program is a testament to the vision strategy and investment we have made in our electrical power capabilities over the last decade.
Those power conversion capabilities are also being used in a variety of other next generation applications, including a number of large Isa radar power systems that we have already won as well as more electric and hybrid electric tactical military vehicles.
Also in this area the U S Army recently announced that the optionally manned fighting vehicle competition down selected to American Ryan Mittal, and General dynamics land systems, who will split $1 6 billion in funding to develop <unk> Bradley replacement vehicles.
Through our strategic investments in high power in bidirectional conversion, we are securing positions on both the demonstrator platforms, which will position us for significant long term growth in our defense power business.
We also continue to be selected to provide content for various sixth generation fighter demonstrators and collaborative combat aircraft programs.
While continuing to execute on others that were awarded within the past 12 to 18 months.
Demonstrates the value crane is delivering through our strategic investments and advanced brake control engine lubrication and thermal management systems.
Just an incredibly exciting range of opportunities reinforcing our confidence in our ability to deliver 7%, 9% long term growth with potential upside to that target.
We also have a strong growth story a process flow technologies, our revised guidance is for 6% core growth driving 22% growth in segment profit.
Nearly 60% operating leverage reflecting a number of factors, including strong operational execution value pricing and continued structural change in the business.
That structural change includes an ongoing mix shift where today nearly two thirds of the business is positioned in our core target markets of chemical pharmaceutical water wastewater and industrial automation.
Those markets, where we have the greatest differentiation of the best ability to create value for our customers.
We also continue to invest for the future with new product introductions released at record pace and was structurally higher margins.
New product vitality metrics continued to improve year after year, giving us high confidence in the 3% to 5% growth profile through the cycle and the substantial opportunity to further expand margins.
A lot of exciting developments in this business as well we.
We are outperforming the markets and gaining share driven by new product innovations.
While we are extremely well positioned to continue to outgrow our markets. We have seen some slides of slowing demand as expected and consistent with our full year guidance provided in January particularly in European chemical nonresidential construction.
In industrial markets as well as some push outs and project activity in North America.
Notably if you looked at prior cycles, given our specific product exposures, we typically see slowing activity a few quarters before many others playing in the broader process markets.
But as displayed in 2021 and previous cycles. We also tend to recover a few quarters earlier.
As always we will continue to focus on what was within our control, namely.
Namely gaining share to outgrow our end markets.
Well positioned to continue doing just that.
For example, last quarter I highlighted the progress, we're making with our new hydrogen initiative, where we qualified our new cryogenic valve for liquid hydrogen applications to be followed by five additional new product lines over the next 12 months all targeting a market that is growing at more than 15% annually during.
During the second quarter, we secured the first firm order for a hydrogen products ahead of our schedule and internal targets.
And wastewater we continue to see great momentum with key growth products are chopper pump is now in its fourth year of commercialization continues to significantly outgrow the market with 20% year over year growth expected. This year, the chopper pump as an innovative solution for the most challenging wastewater applications and we continue to see the solution as a differentiator versus the competition.
Mission for wastewater applications with very high solid content.
In the chemical space, where we have a number of significant growth initiatives. We're also making great progress led by our portfolio of new valve and specialty pipe solutions that are differentiated sealing technology to solve reliability challenges and corrosive abrasive toxic and hazardous environments.
And last quarter I noted the launch of our innovative <unk>.
<unk> torque sleeve plug valve product, which now has three customer installed applications with commitments from six additional customers.
That's incredibly rapid adoption for our new valve, which typically go through a lengthy evaluation process, reflecting the strength of the products value proposition.
And our recently launched FK Tri X valve has also continued to gain traction with quotes year to date now nearly triple last year's level with a growing funnel of opportunities, reflecting the valves unique ability to solve leakage and flow problems in severe service applications.
Just continued progress driving growth and a great business.
And in engineered materials, no change to our view of demand for the year, but margins have outperformed expectations and despite the sharp declines in the RV end market, which we think is approaching a bottom. We are now confident we will keep the deleverage rate to about 25% with segment segment margins for the year north of 12%.
Really great execution by the team.
Briefly on the acquisition front, we continue to work through our deep and extensive funnel of potential deal flow and we expect numerous opportunities will become actionable over the course of the next year.
Today, we are involved in three very active acquisition processes across both aerospace and process flow technologies, and we are cautiously optimistic that one or more will come to fruition by the end of the year.
Each of these active opportunities have enterprise values that would probably be in the $75 million to $200 million range.
So again off to a fantastic start post separation and we remain confident in our ability to execute on the strategy and vision, we laid out at our March Investor Day event.
Our 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 annual average annual core profit growth with potential upside from capital deployment and with virtually no debt the capital deployment opportunity is significant.
And our five year vision to get to a scale with $2 billion in sales at each of our strategy growth platforms with adjusted EBIT margins above 20%.
Giving us the optionality for future strategic portfolio decisions.
Now, let me turn the call over to rich for more specifics on the quarter.
Thank you Max and good morning, everyone to start my sincere thanks to the entire corporate team for their continued efforts on all aspects of the separation transaction.
And to our business teams for delivering another quarter of great results.
An outstanding quarter with 5% core sales growth driving 30% adjusted operating profit growth.
And driven by excellent performance across all businesses.
I will start off with segment comments that will compare the second quarter of 2023 to 2022, excluding special items as outlined in our press release and slide presentation.
At Aerospace and electronics second quarter sales were very strong increasing 17% to $189 million segment margins of 22% increased 270 basis points compared to last year, primarily reflecting strong leverage on the higher volumes and productivity.
Sales growth was better than expected, but we along with the rest of the aerospace industry still remain capacity constrained due to continued supply chain issues. The.
The combination of supply chain constraints and strong demand drove our backlog up another 26% to $675 million.
In the quarter total aftermarket sales increased 29% with commercial aftermarket sales up 41% and military aftermarket up 7%.
Commercial aftermarket demand was broad based across spares initial provisioning and repair and overhaul.
And OE sales increased 13% in the quarter with 15% in commercial and 10% and military.
We raised our core sales outlook for the year to 14% from 11%, reflecting modest improvements in the supply chain environment.
We now expect full year margins of about 23%, reflecting 200 basis points of improvement compared to last year, we expect sales to increase sequentially for each of the next two quarters with margins slightly lower than the first half due to mix with more OE sales in the second half.
Our process flow technologies sales of $263 million decreased 11% driven by the 15% impact from the divestiture of Crane supply in may of last year, and a 1% impact from unfavorable foreign exchange.
Core growth for process flow technologies was solid at 4%.
Adjusted operating margins of 20% increased 440 basis points from last year, primarily reflecting strong pricing and productivity gains continued excellent execution by our teams in all areas and supporting another 50 basis point improvement to our full year margin guidance, which is now.
A record 18, 5% for this year.
Compared to the prior year core FX neutral backlog increased 1% and core FX neutral orders decreased 5%.
Sequentially compared to the first quarter FX neutral backlog decreased 3% with FX neutral orders down 5%.
Order rates and backlog levels are consistent with the trends we have talked about since the start of the year, reflecting some modest slowing in a few markets as well as the natural impact of shortening lead times as the supply chain continues to improve.
For the full year, we continue to expect 6% core sales growth, which implies a slight sequential decline in the second half.
Full year margins of 18, 5% do imply lower margins in the second half.
Insistent with our commentary last quarter on a full year basis, our guidance of 18, 5% again represents a record year well above last year's record 16, 2%.
It also reflects continued execution on our stated goal of driving an average of 100 basis points of margin improvement per year.
In 2019, just before Covid margins were 13, 6%.
And when we hit our 18, 5% guidance this year.
We'll have more than outpaced that 100 basis point average.
On track for a really impressive performance in 2023, driven by strong execution and productivity pricing net of inflation and most importantly, a continued structural shift in the business to higher margin more differentiated products in our target markets of chemical water wastewater pharmaceutical and industrial automation.
The timing of margins within the year has a different set of drivers last quarter I mentioned, a few items that shifted some earnings from the second half of this year into the first half.
Or just timing items, but the accounting for inventory revaluation helped the first half margins at the expense of the second half and some investment spending was shifted into the second half of this year given tight labor market conditions in certain geographies. In addition, some unfavorable mix in the second half.
To a lesser degree we will also see a second half margin impact from the slowing markets that we mentioned consistent with our expectations dating back to our original guidance provided in January .
Engineered materials sales of $57 million decreased 21% compared to the prior year as expected.
Adjusted operating profit margins increased 180 basis points to a solid 16, 6% with lower volumes heavily offset by pricing and productivity and reflecting impressive deleverage rate.
For the full year, we continue to expect a sales decline of 14%, but we now expect margins of 12, 2%, reflecting the team's great execution.
Moving on to total company results.
In the second quarter, adjusted free cash flow of $60 million.
Was consistent with normal seasonality as these businesses typically generate the substantial majority of cash flow in the second half of the year and our balance sheet continues to strengthen.
We have started to pay down our term loan with total debt at the end of the quarter of $262 million with cash of $219 million a lot of financial flexibility with more than $1 billion in M&A capacity today, and reaching as much as 4 billion by 2028.
While this is more financial flexibility than we've had historically our capital allocation strategy is unchanged, we will deploy our capital with the same strict financial and strategic discipline that we have always employed prioritizing investments internally for growth followed by M&A and returns to shareholders.
Now turning to our 2023 guidance, we increased our adjusted EPS guidance range by yet another 20.
To $3 80 to $4 10.
With adjusted EBITDA guidance, now at $350 million or 17, 1%.
While I have already discussed the segment details the primary drivers of the increased guidance are higher core growth now in a range of 5% to 7% up one point from prior guidance adjusts.
Adjusted operating margins of 15, 1% up 60 basis points from prior guidance.
Non operating and interest expense now at $15 million down slightly from prior guidance. So another great quarter, following our separation and demonstrating that we can deliver in any environment.
And a very strong balance sheet and cash generation to support value, creating capital deployment.
Operator, we are now ready to take our first question.
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Matt Summerville with D. A Davidson. Please proceed with your questions.
Yes.
Yeah.
Good morning.
Couple of questions first on <unk>, you gave a little bit of end market color I was hoping you could get a little more granular granular with what youre seeing from an overall end market standpoint, particularly with respect to the four focus areas you pointed out and add a bit of geographic overlay to that and then I have a follow up.
Sure.
Thanks.
Well overall, I think fairly stable slowing as Max mentioned and I alluded to in certain markets in the the.
The longer cycle process side.
We mentioned orders down year over year.
In the low single digit range all of that consistent with the guidance that we gave at the beginning of the year. So what we're seeing is slowing most notably in European chemical.
I would say a handful of project delays and push outs in North America, and China also in the chemical space.
MRO MRO activity and processes generally solid I would say.
And what I would add to that is that we are seeing customers keeping inventory levels fairly fairly lean.
So channel inventory below normal levels, we don't see that having much impact here in terms of demand, there's not sort of an exit of some inventory levels.
From a project point of view, we're seeing opportunities in.
Different areas lithium.
Efficiency programs and upgrades in certain areas chlor alkali and so forth.
In general industrial.
Markets were also decelerating slightly as we pointed out.
Pharmaceutical remains strong I would say that there is some timing on order activity. There that we expect to see pick up actually as we exit the year and move into next year.
And generally just leading indicators continue to reflect this mild downturn.
We predicted in the beginning of the year here and starting.
Again, as we started to speak to speak about earlier in.
In the shorter and the shorter cycle businesses water wastewater demand continues to be really strong no slide no signs of a slowdown there.
North American business, and then on UK non residential construction.
Weak all year continues to be weak.
And consistent with our original guidance, yes, I would add.
Matt.
Called this from January .
And just.
Just by.
Understanding the cycles and what we've seen historically and how we how we were trending thats why we gave the guidance we did starting in January and it's playing out as we expected so from Europe .
I think we're starting to see the Americas.
Delays not cancellations, but some project push outs and spend.
Decision, making.
Order rates there.
Almost flat to slightly negative in the quarter, so youre seeing that inflection point.
As we as we look at it as we move forward this cycle.
For the broader.
And markets that we participate in.
See this continue.
<unk> declined through the balance of this year maybe.
High single digit.
Kind of range it bottoms out as we're projecting.
I call. It the end of the year and then you'll start to see slightly improving negative rates going into next year. When we reflect inflect positive again by call. It.
September October next year, but that's how we're modeling.
Great that was very good color. Thank you guys for the detail.
Talk a little bit about the.
Aerospace supply chain and the aspiration that some of the Oes have to dry narrow body build rates higher can you talk in a little bit more detail around what youre seeing in supply chain, whether the crane specific supply chain, you feel can support those higher production rates and whether or not.
In the context of the revised guide the upwardly revised guidance for A&D, whether or not you've been able to eat into any of that $50 million of I think you've kind of referred to the supply chain branded revenue that you highlighted earlier in the year, you're probably looking for broader color then.
We don't have titanium significant titanium for example, our castings.
Related to our flow business, so we see a little bit.
There the casting suppliers in the U S are somewhat constrained I understand it.
Impacting us to the same degree although a little.
It remains broad based its improving generally.
Methodically.
Many are calling out the improving trends.
Where it's impacting us the most is on the electrical components Semiconductors Act as passives.
Were tracking less shortages were tracking less.
Skus that we're having to chase, but theres still enough.
That we're not seeing a material improvement in what we're able to.
Get out the door. So that's why we just continue to see this trend.
Just slowly methodically getting better it is getting better, but not allowing us to have a significant inflection point on.
Working the backlog down in an accelerated manner I cant I don't think I want to speak more broadly for the entire industry on the build rates for the.
For the ramp up other than we're keeping up with current demand for sure and not.
Causing any of our customers.
Problems at this point the backlog that $50 million. If you look at the increase in sales overall based on revised guidance and when you look at the increase in the backlog, which we predict is going to continue to grow it's probably closer to $55 to 60 million may be in that range now just but that's just a plug number that just we kind of look.
At.
What what technically we could get out the door, if we had unconstrained supply through the balance of the year that customers would accept.
It means.
Opportunity as we head into 2024, hopefully we will see continued improving trends that you guys anything else.
The only thing I would say just on that just on that point with the $50 million.
Max mentioned that and if you look at our.
Our guidance range. It implies roughly I don't know half of that number but.
Not necessarily consuming that 50, we're continuing to see that 50 grow I think is the point there so.
Beyond that I don't know.
No other comments I think I think you captured it all it's not the same 50 right. So it's not as if there is perhaps shifting perhaps 50 million that we can't ship, it's just backing into.
An ideal number that we could have shipped unconstrained.
Understood. Thank you guys. Thanks.
Thanks, Matt.
Thank you our next questions come from the line of Damian Harris with UBS. Please proceed with your questions.
Hey, good morning, gentlemen, nice work on another solid quarter.
Thank you morning.
Absolutely. So I'll, let you follow up follow up questions for you on PSP.
One kind of a repeat question that I hear from investors is is regarding your margin guidance and now that you're running up more than 20% for the first half I think the implied guide.
16% or Sally if that Richard I know you talked a little bit about your expectations of some volume declines on the short cycle, but is there any way you might be able to just give us a bridge on that margin for PFC kind of thinking about short cycle mix.
The investment ramp up.
Anything else, that's kind of factoring in there.
Yes.
I'll give you some.
The broad strokes that hopefully will be helpful. So when we look at that first half to second half.
Performance.
There's a few things that are playing in there right its clearly its sales.
Call it.
Price volume Ryan its sales you have mix elements you have investments that we had planned to make at the beginning of the year and are flushing through more so in the second half of the year and then some inventory revaluation associated with inflation that we benefited from in the first half.
When you look at each of those components.
I would think about them as each within a range of 100 to 200 basis points something like that.
And then as I.
As I look at.
All of them in my mind are temporary.
Without a doubt but for.
Clearly what will play play forward with respect to some of Max's comments on demand.
Which could impact the sales and obviously mix elements, which will get more and more comfortable with as we move through the balance of this year and implications to 2024.
<unk>.
Structurally we are super comfortable with the way we are set up in this business to.
To continue to demonstrate what we've committed to historically around that.
On average 100 basis point margin improvement year after year.
Great that's helpful.
And at Max You mentioned.
Being positive price cost on both a dollar and margin basis could you just talk about the price trends more recently and what kind of pricing you are anticipating through the rest of the year and just kind of thinking about some of that short cycle demand weakness now is that going to present, an opportunity, perhaps where customers may be Jack back at some of the price inflation.
In recent years are you kind of expecting prices there to remain sticky.
I think I think I think overall, we're seeing price.
Stick with stick.
<unk>.
No doubt I would say that the price cost relationship in the first half was.
Very favorable it's still going to be favorable in the balanced in terms of margin and so forth, but it does it does close a little bit in the second half.
So not as accretive.
But still positive so that's sort of a dynamic first half to second half.
As it relates to customers.
I think it's about the value of the products and we'll continue to do all that we should be doing to make to make sure that those prices stick.
Understood. Thanks, I'll hop back in the queue.
Thanks, Jamie.
Thank you. Our next question is come from the line of Nathan Jones with Stifel. Please proceed with your questions.
Morning, Nathan morning, everyone.
Good morning, Good morning, Nathan I follow up follow up there on Damon's question did that.
The margin impact from first off in the second half.
Obviously knows.
Make a fair amount of sense right.
Kind of getting good Jerry evaluation, all the time, it's a one timer.
Wanted to follow up on the investment thought of it.
Can you give us some more color on.
What these investments.
Are these kind of onetime in nature or its more hiring engineers that are going to be continuing just any color on.
Those investments.
The bulk of it is related to the hydrogen investment and building up this team. So we've got investment that we have product we're launching we're accelerating that investment we had.
The spend that we had identified.
Fairly.
Land standpoint equal in each quarter, and probably only 20% of it's been spent in the first half. So we've got a balance that is ramping up into the second half. So that's a little bit of the overweight there, but this is a very conscious decision investing in a market that we.
Bob.
Like it has significant growth and the products that are right in our sweet spot. So we've told that story.
Yes.
So I think.
As we look forward, though in terms of spend into next year.
There's other investments that we've talked about that are rolling off so I think I wouldn't look at this as necessarily a headwind even into 'twenty four.
I think we can normalize into 'twenty four as we.
Move forward, yes.
It was going to follow on with just that point.
I was going to follow on <unk> question about that.
That takes care of that one.
I wanted to follow up on a couple.
Couple of comments that you made.
During your.
Your prepared remarks, Max firstly on the unusually strong after market backlog is that.
Is that something that's constrained by supply or is there something else driving that unusually strong aftermarket backlog and what are your thoughts on when you think about that yes.
Yes, good question and yes.
We're balancing our customers' needs to the best of our ability.
And doing a really good job, but aftermarket sales would be stronger if we were unconstrained.
So theres a mix and a margin impact that we're not seeing read through.
No risk of loss no risk of cancellation no risk, it's just a matter of.
The improving supply chain that allows us to clear that we've talked about I think we kind of.
Yes, I mean, if you if you were to if you if we were unconstrained and we were able to ship.
The aftermarket that we.
Otherwise could you could see us almost reaching 22019 levels in sales and you come close to that.
And the margin profile on those on those sales and aftermarket would essentially bring us back to where we were in 2019, if I'm not mistaken. So yes, it's definitely a nice tailwind as the way I think we think about it as we look at future years future periods.
The other thing I would add is.
Some of it is you have airlines that are they.
They are buying a little bit more.
Sort of moving away from.
Just in time, a little bit in having in keeping some on the shelf, but by no means in our view and based on all of the discussions. We're having is there any sort of inventory building Theres just continued solid demand here that.
We are again pretty pretty bullish on in terms of its impact to us as we look at 24 and 'twenty five.
Yes, I mean I think that.
I would say that the inventory position I think everybody would like more not less at this point, we're still at that stay on every part of the channel.
So that $55 $60 million Youre talking about.
Being able to ship if you our unconstrained is primarily off the market stops very rich biogen as well as.
Constraining some of the revenue growth.
Yes predominantly.
It's weighted towards aftermarket for sure I don't know predominantly what I'd say is that it's more weighted to the aftermarket than our overall mix. That's about 70 30, right, but I don't know that I'd say predominantly.
Okay makes sense.
Then I just wanted to follow up on some of the pay up to your questions.
You talked that you talked about and gave some great color on the end market weakness.
I was I was wondering with lead times coming down how that's impacting the order rates of your customers.
Like you don't think there's any excess inventory in no.
Adding the market.
Really what you are looking at <unk>.
The underlying fundamental softness in some of these markets I mean, Europe and chemicals, particularly surprising given some of the PMI numbers out there, but this is.
You would characterize this more end market weakening or totally as end market weakening rather than some normalization of the inventory at the customer level.
Everything we continue to.
See here feel is end market completely no inventory correction.
But with lean inventory in the channels right in and our customers.
That we think reduces what you often see as kind of a multiplier magnifying effect.
Any sort of decline.
And also recovery flow through much more quickly right now and still trying to clear things right. So it's much more direct much faster.
<unk>, but we're not seeing any of this being related inventory right now and you mentioned lead times Nathan the lead times have been more normalized here for the entire year, it's been a it's been.
Nowhere near what we're seeing are continuing to have to battle with them.
That's I would say almost 12 months now or more of back to normalized levels I'm not hearing any issues with.
With lead time, so that really hasnt impacted.
The kind of <unk>.
Dramatic.
Reductions in people, then canceling or seeing none of that.
Okay. That's helpful. Thanks for taking my questions I'll get back into queue.
Thanks Nathan.
Operator, operator.
Okay.
Okay.
Okay.
Thank you. Our next question is come from Ron Epstein with Bank of America. Please proceed with your questions.
Good morning, Ron.
Good morning, Hey, this is Jordan on for Ron.
Just had a quick question.
For the industrial segments.
If there is.
The downturn in the U S or.
More of a slowdown I know you said you guys are seeing orders get delayed.
But how should we think about.
How that would impact pricing.
That you guys are pushing through or even for aftermarket how resilient that would be.
Speaking specifically to process flow technologies.
Yes, yes.
Yes, I mean, I think I think look right now our view is that we're not seeing.
Our view is that we're not seeing a large impact.
Impact here. This is as Max pointed out a little bit earlier, the nature of the declines.
Such that we're going to continue.
Hold price.
Do you have to give a little bit in some cases, maybe but our view is that we're going to continue the price discipline that we have been exercising for the last.
A couple of years for sure.
I think price wont be because of.
The competitive.
Issues as I see it it's going to be because there's real continued deflation that we're still staying ahead of and passing some onto the customer thats something we would normally do anyway.
But I don't see that as a significant challenge for us at this time.
Alright, thank you.
Youre welcome.
Okay.
Our next question is coming from the line of next day Ma'am Caris. Please proceed with your question.
Yes, David.
Hi, again, guys just have a few follow.
Follow up questions here.
Could you just clarify on the PSP guidance are you assuming that it's really just chemicals, but what are you kind of take a hit.
As we progress through the year are you kind of expecting a broader spanning impact across.
Short cycle markets.
Yes, so its chemical it's a little bit of the industrial markets.
We're open to that also the non res.
Construction in particular in the U K.
In Europe .
The rest is more delayed.
Delayed delayed projects and such but those would be the categories one of the areas.
Okay got it and then you talked a little bit about the sequential improvement in any on the topline but.
Margins sort of being negative mix could you remind us sort of where on average your commercial aerospace margins are relative to the segment.
You're talking about commercial versus defense I mean on a blended basis, they're very very similar.
There is a different aftermarket profile on the commercial side right, but as a result.
Where we have less aftermarket or OE pricing tends to be stronger.
There's not a material difference.
Okay. Okay.
And then one last question for you here. So there has been some deal activity and in those markets.
<unk> got acquired obviously Saar core ops in the process of likely going private here just any thoughts on.
What these transactions could mean.
For the industry any potential impacts on your business.
And do you think that this recent deal activity is going to have.
Any.
<unk> impact on your ability to kind of.
When an attractive deal in that space, whether for better or worse.
Don't see anything unusual.
The thing that we predict out of those particular deals that would impact us either negatively or positively I think the trends are generally.
Those in the.
Consolidated the space, whether it's in the process flow technology side or aerospace <unk> electronics.
Looking at the portfolio and making strategic decisions about what strategic and what's not I think that's going to provide more opportunities for us some of which were very much interested in we're tracking a number of them that we expect to continue to.
Come out.
I am not going to.
Discuss whether we participate or not I can say that we're absolutely active in each and make conscious decisions about what we want to choose to play in and what we don't I think it will be very competitive to those that we.
Do you want to play in the ones, we're looking at right now or some nice bolt ons that just.
Would be.
Clear fits within the business I think the shareholders would.
But immediately.
Understand.
Appreciate the value creation that we would drive so right down the middle of the fairway on those but certainly.
Activity is high and I think it's going to continue I think this is a market that will continue to see.
Lots of opportunities and I think in some cases some of our peers for various reasons are constrained whether it's leverage whether it's.
Deals that they've already done it actually helps us so we're <unk>.
Properly position no debt ready to move and.
I think that helps us and be able to do that.
Alright, well thanks for all the color guys best of luck.
Thanks, David Thanks Damian.
Thank you our next questions come from the line of Matt Summerville with D. A Davidson. Please proceed with your questions.
Thanks, just one or two quick.
Just one or two quick follow ups. If some of these defense opportunities are matched.
As you went through quite a few if some of these break in your favor.
Ultimately what can that seven to nine look like in more of a.
Bullish scenario for <unk> through the course of the remainder of the decade.
Hello.
<unk>.
The heart, let's take the example, I mean, if you take the projections.
It going to hit is it going to there's a lot of assumptions right now, but even the hard aerospace which is years away.
Just on the projections and orders that are out there.
<unk>.
Could add five.
5% five points of growth alone just from that that opportunity on an annual basis on the defense side some of the others that we're looking at.
Yes, there are similar size to sort of the.
The ones that were that we've recently won an art high power defense business. So these are nine figure programs over multiple years 10 years 15 years, some cases 20 years.
So.
The the.
The one that Max.
Highlighted on the call the heart.
The heart aerospace one.
Really exciting technology, and really a nice fit for us.
It's very successful and that program is a development program today that finishes around 2027, and so the sales that that could come would be out there will be in the 2027 timeframe and starting there for about a 10% to 15 year period provided that they are successful. This is a smaller 30 seat regional aircraft sub regional aircraft.
But if it is pretty exciting.
Optionally manned vehicle.
You're probably looking at a double digit the seven to nine would move too.
The low double digit potential all of them.
A lot of assumptions in that though and it's early days.
But the other key takeaway I think is not just that there's upside to the seven nine but at that seven to nine sustainable right. I mean, when we originally put this out in may of 2020.
One I believe it was for the for this decade right and some of these are extending well beyond that and so I think that part of the takeaway is yes, there is upside to 79.
But also that seven to nine as really.
Structurally how we position the business to continue to have new wins following on some that we've already announced right that there's a huge portfolio of the next set of wins after the ones that we've already kind of announced ramp up fully to.
To sustain that growth rate well into the 2000 <unk> and beyond.
Yeah.
Got it that's helpful and then I apologize if you touched on this but just a little bit more deal color in terms of the multiples youre seeing.
The two businesses.
If you were.
A betting man, where you see the higher probability you closed the deal between <unk> and PMT.
<unk>.
Actually I am bullish on both spaces.
I think we are going to be competitive.
The multiples are for the flow business is probably still averaging averaging in that 13 times.
But it depends on the business it depends on the specifics of course, north south of that in the synergies.
<unk> can bring.
Any deals.
Maybe still averaging 15, plus high teens, we'd say.
Which is when you think about where our multiple is today relative to where we were.
12 months ago, obviously are our currency is a little bit different today as well.
For sure totally agree thanks, guys. Thanks.
Thanks, Matt Thanks, Matt.
Thank you our next questions come from the line of Nathan Jones with Stifel. Please proceed with your questions.
Nathan Yes, a couple a couple more follow ups.
On the capital allocation side.
Obviously, our multiples are high multiples at the biomet.
The aerospace market is pretty hot for deals.
Is that do you.
Think more about flexibility from that perspective, maybe it's okay to today to be acquiring <unk> it might be better later on to acquire <unk>.
Do you think deals out there where you have an advantage in terms of being able to generate synergies being able to leverage those assets just any more color you can give us on.
Just how you're thinking about the differences in multiples and how that maybe changes your approach to allocating capital here shortly.
A short job mix.
Well, yes, you bet. Thank you it always starts with the strategic fit the attractiveness of the space and extend ability.
In some cases, there are some technology and some extensions that are just really nice fits for the portfolio. So we don't we don't like to value and pay for any sales synergies, but there are significant synergies that we can bring through <unk>.
CBS and in.
And integration of some consolidation.
It all starts with attractiveness.
As we think about it there might be an ideal timing that you can wish for but the reality is.
When these opportunities come up.
It could be in private equity that's coming out it could be a family run business that all of a sudden the owner decides to make a life change decision.
Or a large industrial decides to carve out something thats no longer strategic you've got to be prepared to move and that opportunity is not going to come back around and so.
Yes.
We're not we're going to stay disciplined we're not going to overpay, but we're going to bring the full synergies that we can bring I think we are going to be very competitive and I think we're going to get some things.
Accomplished towards our accelerated.
Our growth strategy, and becoming more of a serial acquirer post separation.
I would just I would just add that.
Our objective here is to grow both businesses through organic and inorganic means.
With both of these businesses at $2 billion plus as we've alluded to that enables other optionality for us to consider so.
Yeah.
China decide on multiples and pricing does it makes sense today versus tomorrow or to wait and considering everything that Max just mentioned as well.
What I, just said sort of plays into our calculus as well.
And then just one on the supply chain constraints are there any opportunities on pricing does that create for you.
Not specifically for Aero I mean, we're always value pricing.
Depending on the opportunity and one of our contracts up renegotiating and having those those discussions standing up for our value prop the technology that we drive whether that's in microwave whether that's on the defense power side.
<unk>.
So not necessarily due to supply chain constraints I don't see that.
Yes I.
I would agree with that and.
The team does is doing I would say.
Very good job with price and Aero just like across the rest of the business.
I would I would offer up that.
There is an area of potential upside in the future to our or to really just increase the confidence level of the high side of our seven to nine it's it's our successes that we think we're going to continue to see in price.
Because of the technology because of the technology, we are driving and the differentiation and the value to the customer.
Additional opportunities.
The last few questions on upside to the seven to nine would you expect those to be accretive to the margin profile or a day, creating the margin profile.
Yeah.
Yes, we would expect them to be I would say.
Consistent with our margin profile.
Necessarily something that's going to continue to drive them up I mean, the volume so I would say consistent Nathan at this point.
Fair enough. Thanks for taking all the follow up.
Hi, Thank you Nathan Thanks, I appreciate it.
Thank you we have reached the end of our question and answer session I would now like to hand, the call back over to Max Mitchell for any closing comments.
Thank you operator, a great first half of 2023 with excellent results and a strong outlook ahead on the broader macroeconomic front I have no predictions soft landing minor recession, no recession inflation tame inflation persistent global tensions elections.
As the late Great Tina Turner, one said, reflecting on life's journey, it's not about what happens, but how you deal with it and at Crane as always we are ready for anything with a proven ability to execute under any set of circumstances responding by being nimble and quick to adjust while driving execution of results. That's what gives us such.
High confidence in our ability to create value in the years ahead.
I look forward to speaking to you next on our Q3 call in October . Thank you all for your interest in Crane and have a great day.
Everyone.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.