Q3 2023 Crane Company Earnings Call

Greetings welcome to Crane companies third quarter 2023 earnings call.

At this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

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.

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, who 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 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.

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.

Well, we delivered another impressive quarter with results again outperforming expectations we.

We delivered core sales growth of 9% with a 42% increase in adjusted operating profit and.

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 $17 five higher than our prior guidance updated in July .

Our revised adjusted EPS guidance range is $4.05 to $4 20.

While the comparison to last year's EPS isn't meaningful given the recent separation on an operational basis, our revised full year guidance reflects 7% core sales growth driving a 24% increase in adjusted segment profit.

Strong core growth along with very impressive execution on productivity and pricing initiatives deliver more than 50% operating leverage with operating profit increasing more than three times the rate of core sales growth.

Hey, I wanted 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.

As 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.

A number of large potential acquisitions.

And our current structure, we are entirely focused on our two global strategic growth platforms Aerospace and electronics.

<unk> technologies.

All factors that set us up to be a consistent serial acquire 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 of $75 million to $200 million range.

Those three transactions, we closed on one acquisition a few weeks ago I'll address shortly.

Second in aerospace is still in progress and while the outcome isn't yet certain we are cautiously optimistic about our prospects.

And on one pharmaceutical asset we lost to another bidder.

Unfortunate because it was a great asset, but a reminder, about how we will remain fiscally disciplined and not chase assets when the pricing is in consistent with our financial criteria.

Operator: Greetings. Welcome to Crane Company's third quarter, 2023 Earnings Call. At this time, all participants are in listenily mode.

With that I'm pleased to announce the successful acquisition of bound line piping <unk> ph.

Operator: A question and answer session will follow the follow-up presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded.

This is a business we are respected and followed for many years and is a perfect fit with our existing business.

Bounced 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 corrosive flow handling.

Jason Feldman: At this time, we'll now turn the conference over to Jason Feldman, Vice President of Treasury and Invest Relations. Mr Feldman, you may now begin. Thank you operator and good day everyone.

Jason Feldman: Welcome to our third quarter, 2023 Earnings Release Conference call. I'm Jason Feldman, Vice President of Treasury and Invest Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer, and Rich Maui, 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 line which at the bottom of our earnings release and also in our annual report 10K and subsequent filings pertaining to forward-looking statements.

Approximately 40% of sales are in the chemical space, a little under 10% to pharmaceuticals above 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.

Jason Feldman: Also during the call, we will be using some non-gap numbers, which are reconciled to the comfortable gap numbers and tables at the end of our press release in a company slide presentation, both of which are available on our website at www.cranco.com in the Investor Relations section.

Margins are currently slightly below the segment average, but together with expected synergies should be margin accretive within a few years.

The purchase price was approximately $91 million, which is about 10 times expected 2023 EBITA.

Max Mitchell: 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 $1.3 with strong performance across all of our businesses. Our performance here to date along with our market outlook gives us confidence to narrow our guidance range with a midpoint, 17.5 cents higher than our prior guidance updated in July.

We expect this acquisition will hit 10, 5% ROIC.

With approximately 15% EPS accretion excluding amortization by year three.

A small acquisition, but it couldnt 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 Baumann for entrusting claim as the stewards of this outstanding second generation family business to our care and the outstanding bound team now part of Crane.

Max Mitchell: Our revised adjusted EPS guidance range is $4.5 to $4.20. While the comparison to last year's EPS isn't meaningful, given the recent separation, on an operational basis, our revised full-year guidance reflects 7% core sales growth driving a 24% increase in adjusted segment profit. Strong core growth along with very impressive execution on productivity and pricing initiatives deliver more than 50% operating leverage with operating profit increasing more than three times the rate of core sales growth.

I'd like to share a few success stories in the quarter as well on core growth and share gains.

Within aerospace <unk> electronics.

And the electric vertical takeoff and landing space, we secured contracts on to 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 Gen fighter demonstrated programs, including solutions from our fluid landing solutions and sensing solutions with additional proposals recently submitted and pending.

Max Mitchell: 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. As we have an extremely strong balance sheet providing a 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 mid-sized targets as well as a smaller number of large potential acquisitions.

We secured key wins in our thermal management business with coolant pumps for two classified programs.

And activity remains robust with proposals and process.

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 skit brake control systems.

Max Mitchell: In our current structure, we are entirely focused on our two global strategic growth platforms, aerospace and electronic and process flow technologies. All factors that set us up to be a consistent Howard, adding value above and beyond our organic growth investments and opportunities and strengthen our business to further accelerate growth. Last quarter, I mentioned three specific transactions we were actively working on, each enterprise values in the 75 to 200 million dollar range.

Our 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.

Max Mitchell: Of those three transactions, we closed on one acquisition a few weeks ago, I'll dress shortly. A second in aerospace is still in progress, and while the outcome isn't yet certain, we are cautiously optimistic about our prospects. And on one, a pharmaceutical asset, we lost to another bitter, 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.

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 <unk> product line with the value proposition of this recent product introduction resonating very well in certain markets, particularly for Chlor alkali.

Elsewhere in the chemical space, while new project activity has slowed we were very successful in the quarter, winning a few larger project orders and we continue to see pockets of active projects, particularly those expanding chemical capacity in the United States and product localization programs in China.

Max Mitchell: With that, I'm pleased to announce the successful acquisition of bound line piping GMPH. This is a business we have respected and followed for many years, and is a perfect fit with our existing business. Bound significantly increases our scale, install base, geographic coverage, and breadth of product offerings in the specialized flora polymer lined pipe business, where we already are one of the leaders today for highly erosive and corrosive flow handling. Approximately 40 percent of sales are in the chemical space, a little under 10 percent to pharmaceutical, about 7 percent 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.

In the wastewater space earlier this month that the west Tex Tradeshow, we probably introduced the latest extension of our premium efficient motor platform.

Houston, our wastewater pumps.

Called brand named Envy.

Since it was introduced in 2021, the NV 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.

Max Mitchell: All perfectly aligned with this segments targeted higher growth and markets. The business adds about 55 million of sales to our process flow technologies business, with growth rates nicely above our segment average. Margians are currently slightly below the segment average, but together with expected synergies should be margin-accretive within a few years. The purchase price was approximately $91 million, which is about 10 times expected to 2023 EBITDA. We expect this acquisition will hit 10.5 percent ROIC, with approximately 15 percent EPS accretion excluding amortization by year three.

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 in 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 and.

And we remain confident in our ability to execute on the strategy envisioned 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.

Max Mitchell: 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 action but over the next several quarters.

That should lead to double digit average annual core profit growth with potential upside from capital deployment and with virtually no debt.

Max Mitchell: My personal thanks to Mr. Marcus Baum for entrusting crane as the stewards of this outstanding second-generation family business to our care and the outstanding bound team now part of crane.

Capital deployment opportunity is significant.

And a five year vision to double revenues.

And get to a scale with $2 billion in sales at each of our strategic growth platforms with adjusted EBITDA margins above 20%, giving us the optionality for future strategic portfolio decisions.

Max Mitchell: 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 six Gen Fighter demonstrator programs including solutions from our fluid, landing solutions, and sensing solutions, with additional proposals recently submitted and pending.

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.

Max Mitchell: We secured key wins in our thermal management business with cool and pumps for two classified programs. An activity remains robust with proposals within 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, very 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.

Starting with aerospace and 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 resulted in an aging fleet that requires more aftermarket parts and service and demand for new aircraft continues to exceed what the Oems can deliver.

And Eric Eric traffic activity is also strong with global air traffic, just a few points below pre pandemic levels.

United States RP case are 9% above 2019 levels with international travel recovering in a slightly more measured pace overall, just a great demand environment.

Max Mitchell: 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 TriX product line with the value proposition of this recent product introduction, resonating very well in certain markets, particularly for core alkali.

For defense R&D team E or research development test and evaluation appropriations.

Growth along with procurement spending had been very strong over the last two quarters I'm sorry in last two years and there is a growing sense of confidence in the industry that geopolitical issues will both results in the passing of the fiscal 2020 for budget soon as well as resulting in additional investment reinforcing.

Broader defense industrial base.

And 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.

Max Mitchell: Elsewhere in the chemical space, while a new project activity is 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.

That strong demand was reflected in our third quarter growth rates with sales of $207 million, increasing 24% compared to last year.

With some benefit from shipment timing as we did everything possible to accommodate our customers' requirements and some linked quarter shipments that would otherwise have shipped early in the fourth quarter.

Max Mitchell: In the wastewater space, earlier this month that the Weftech trade show, we proudly introduced the latest extension of our premium, efficient motor platform, used in our wastewater pumps called brand named NV. Since it was introduced in 2021, the NV motor platform has seen explosive growth, and we are on track for a 300% growth in 2023. This latest extension, which increased our horsepower range from 75 to 125 horsepower, will drive further growth in 2024, and we are actively working additional extension projects that will continue the momentum in 2025 and beyond.

Even with this high level of sales growth backlog of $678 million increased 15% year over year.

With a slight increase sequentially.

In the quarter total aftermarket sales increased 44% with commercial aftermarket sales up 39% and military aftermarket up 60%.

OE sales increased 16% in the quarter with 19% growth in commercial and up 13%.

In military.

While the demand environment remains as strong as I can ever remember seeing it or continued.

The 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.

Max Mitchell: 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, today, it's been a year of great performance across our business, and we are increasingly turning our focus and attention to 2024 and beyond, and we remain confident in our ability to execute on the strategy and vision we laid out at our March investor day event.

Rather we expected a more gradual recovery.

Our position has not changed Moreover, while demand is generally back to 2019 levels of broader supply infrastructure is not spanning the gamut from raw materials components and labor not only in terms of availability, but also experienced levels.

Max Mitchell: A 46% 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.

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 and others like machined components, particularly from smaller suppliers.

Our suppliers and sub suppliers are also managing through shortages of skilled labor.

Max Mitchell: And a five year vision to double revenues and get to a scale with two billion and sales at each of our strategic growth platforms with adjusted EBITDA margins above 20%. Giving us the optionality for future strategic portfolio decisions.

While we have navigated these shortages extremely well they do introduce added cost. For example, we have had increased costs related to expediting shipments due to supply chain issues as well as costs associated with qualifying new suppliers and adding second sources.

Rich Maue: 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.

At Crane, we have always prioritized safety quality delivery before cost and we did that in the quarter doing everything possible to accommodate our customers as we believe that is the best approach to maximizing value 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.

Rich Maue: 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 and electronics, end-market conditions remain robust, and that's reflected in both our growth rate and the quarter and on our year-to-date basis.

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 we 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 23%, 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.

Rich Maue: On the commercial side of the business, aircraft retirements remain 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. An air traffic activity is also strong, with global air traffic just a few points below pre-pandemic levels. In the United States, RPKs are 9% above 2019 levels with international travel recovering at a slightly more measured pace.

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.

Rich Maue: Overall, just the great demand environment. For defense, RDT and E, or research, development, test, and evaluation appropriations, growth, along with procurement spending, have been very strong over the last two quarters, sorry, last two years, and there is a growing sense of confidence in the industry that geopolitical issues will both result in the passing of the fiscal 2024 budget soon, as well as resulting in additional investment reinforcing the broader defense industrial base.

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 as we move forward.

<unk> to drive productivity.

Expediting and adjusting staffing in our factories to manage the supply chain and continuing to make investments in new technology position us very well for strong leverage and margin expansion in 2024 and beyond.

Rich Maue: And 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 link quarter shipments that would otherwise have shipped early in the fourth quarter.

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.

The softness remains largely confined to European chemical nonresidential construction and industrial markets as well as some project push outs in North America, though we did see some nice project wins in the quarter.

Rich Maue: 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 of 39% and military aftermarket of 60%. OE sales increased 16% in the quarter with 19% growth in commercial and up 13% in military. While the demand environment remains as strong as I can ever remember seeing it, our continued challenge is the supply chain.

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.

Rich Maue: 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.

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.

Rich Maue: Miles. Areas of specific shortages continue to shift and evolve. Over the last quarter, we have seen greater stability in the supply of electronic components. However, as we see improvements in one area, we are seeing new constraints in others like machine components, particularly from smaller suppliers. Our suppliers and sub-suppliers are also managing through shortages of skilled labor. While we have navigated these shortages extremely well, they do introduce added costs. For example, we have had increased costs relating to expediting shipments due to supply chain issues, as well as costs associated with qualifying new suppliers and adding second sources.

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 at the supply chain continues to improve.

Rich Maue: At Crane, we have always prioritized safety, quality, delivery before cost, and we did that in the quarter doing everything possible to accommodate our customers as we believe that is the best approach to maximizing value over time. Segment margins of 19.4 percent 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 percent to 16 percent, reflecting the very strong third quarter.

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.

Rich Maue: For the fourth quarter, specifically, that implied 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 the margin target of 20.3 percent, reflecting 200 basis points of improvement compared to last year and applying 33 percent leverage for the full year, even in the face of all the challenges the industry is facing.

In 2019, just before Covid margins were 13, 6%.

And when we hit our guidance. This year, we will have far more than outpace that 100 basis point average.

Reflecting on the full year guidance as a whole are 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.

Rich Maue: 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 7-9 percent sales keg or forecast with operating leverage in our targeted 35-40 percent 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.

<unk> 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 when we have the greatest differentiation and the best ability to create value for our customers.

These are also the markets were bound line piping participates today a perfect addition to the portfolio.

Rich Maue: However, we are confident that the actions we are taking today, being appropriately assertive on pricing, where we still have significant opportunities as we move forward, continuing to drive productivity, expediting and adjusting staffing in our factories to manage the supply chain, and continuing to make investments in new technology, positioned 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.

We also continued to invest for the future with new product introductions released at record pace and with structurally higher margins.

New product vitality metrics continue to improve year after year, giving us high confidence in the 3% to 5% growth profile through the cycle and the substantial opportunity to further expand margins.

For the fourth quarter, our guidance does imply a step down 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 given the slowdown in our chemical market and some higher investment spending.

Rich Maue: 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 and previous cycles, we also tend to recover a few quarters earlier.

Remember that some of the significant factors that resulted in stronger first half margins relative to the second half were timing related.

And 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 operating plan review process, where we will refine our outlook.

Rich Maue: We continue to focus on what's in our control, namely gaining share to outgrow our end markets. Higgs. Waters 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. 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.

At this point for the segment, we expect core sales next year to be relatively flat, perhaps up or down a few points before re accelerating in 2025.

With that sales outlook, we would expect margins to be flat to up modestly next year.

The Baum acquisitions should contribute approximately $55 million of sales with no material impact on margins.

In engineered materials.

A $56 million decreased 11% compared to the prior year as expected.

Adjusted operating profit margins increased 290 basis points.

To a solid 13, 7% with lower volumes heavily offset by lower inflation and strong productivity and reflecting another impressive deleverage rate.

Rich Maue: 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 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 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 excuse me 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.

Rich Maue: For the full year, we continue to expect 6% core sales growth with contribution from the Bound acquisition starting in the fourth quarter of about 12 million, adding about a point to the full year. We are raising our full year margin guidance by 90 basis points to 19.4%. More than 300 basis points above last year's record at 16.2%, reflecting continued execution on our stated goal of driving an average of 100 basis points of margin improvement.

At the beginning of October after the end of the third quarter, we drew $100 million on our revolving credit facility to fund the <unk> acquisition.

We also increased the size of our revolving credit facility to $800 million from $500 million with the same terms as the original credit facility.

The higher limit will give us more flexibility for small to mid sized acquisitions in the quarters and years ahead.

Rich Maue: 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.

We continue to have substantial financial flexibility with more than $1 billion in M&A capacity today, reaching and 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'll 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.

Rich Maue: 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 a bound line piping participates today, a perfect addition to the portfolio. We also continue to invest for the future with new product introductions released at record pace and with structurally higher margins.

We increased and narrowed our adjusted EPS guidance.

Our guidance range to $405 to $4 20 from the prior range of $3 80 to $4 10, with adjusted EBITDA guidance now at $366 million or 17, 6%.

While I have already discussed the segment details the primary drivers of the increased guidance are higher core sales growth now in a range of 6% to 8%.

Up a point from prior guidance and adjusted operating margins of 15, 7% up 60 basis points from prior guidance.

Rich Maue: New product vitality metrics continue to improve year after year, giving us high confidence in the 3 to 5% growth profile through the cycle and the substantial opportunity to further expand margins. For the fourth quarter, our guidance does imply a step down to margins consistent with our commentary throughout the year. We did outperform expectations in the third quarter driven by strong pricing that of inflation and productivity, along with more favorable mix than expected.

Those items are partially offset by higher non operating expense, which is which is primarily interest up 1 million to $16 million for the year.

Slightly higher corporate expenses of $72 million, reflecting higher compensation expense due to our outperformance year to date.

And a diluted count of 57.

$5 million in shares slightly above prior guidance.

So another great quarter, following our separation and demonstrating that we can deliver in any environment and.

Rich Maue: In the fourth quarter, as we have discussed previously, we do expect a seasonal slowdown, less favorable mix, given the slowdown in our chemical market, and some higher investment spending. Remember that some of the significant factors that resulted in stronger first half margins relative to the second half were timing related. And 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.

And a very strong balance sheet and free cash generation to support value, creating capital deployment.

Operator, we are now ready to take our first question.

Thank you.

Like to ask a question at this time you May press Star one from your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Rich Maue: For 2024 specifically, we are just entering 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 re-accelerating in 2025. With that sales outlook, we would expect margins to be flat to upmodestly next year. The bound acquisition should contribute approximately 55 million of sales with no material impact on margins.

One moment please poll for questions.

Thank you and our first question today is from the line of Scott <unk>.

<unk> with Deutsche Bank. Please proceed with your questions.

Hey, good morning.

Good morning, Scott Rich why do A&H sales go down sequentially in the fourth quarter.

Any 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.

Rich Maue: 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, and we're fighting another impressive delivered rate. For the full year, we continue to expect the 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.

Slightly.

Okay, and sorry, if I missed it but can you say what the third quarter price realizations were at both <unk> and PMT.

Yes, I didn't mention it on the prepared remarks, but I would tell you that price cost was.

Quite solid overall for the business in <unk> I would say it was.

<unk>.

Definitely accretive, but not anywhere near as much as.

It had historically been in the court and the <unk>.

First half of the year. So we did see some of that sort of closed a little bit it was sold.

Rich Maue: As a reminder, the fourth quarter is always 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 bound acquisition.

Modestly accretive, but not as much as historical historically in the first half.

And then I would say it PFT. It was 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 GTS I think youll have some engine content. There. So curious how you would frame the impact to aftermarket sales over the next few years as a result of those accelerated shop visits. Thank you.

Okay.

So on the GTS.

Rich Maue: We also increased the size of our revolving credit facility to 800 million from 500 million with the same terms as the original credit facility. The higher limit will give us more flexibility for small to mid-sized acquisitions in the quarters and years ahead. We continue to have substantial financial flexibility with more than 1 billion in M&A capacity today reaching as much as 4 billion by 2028. While this is more financial flexibility than we have historically had, our capital allocation strategy is unchanged. We will deploy our capital with the same strict financial and strategic discipline that we always have, prioritizing internal investments for growth followed by M&A and returns to shareholders.

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 there is 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 as Scott has a significant impact for us.

Okay got it thank you.

Thank you our.

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

Morning, Jamie.

Rich Maue: Now turning to other elements of our guidance for 2023. We increase the narrowed our adjusted EPS guidance range to 405 to 420 from the prior range of 380 to 410 with adjusted EBITDA guidance now at 366 million for 17.6%. While I have already discussed these segment details, the primary drivers of the increased guidance are higher core sales growth, now in a range of 6 to 8 percent, up a point from prior guidance and adjusted operating margins of 15.7 percent, up 60 basis points from prior guidance.

Hey, good morning, guys. Congrats on the continued demand momentum youre, saying.

So I think the one thing that kind of stuck out was.

Is all of this aftermarket surge if you will.

But yet you had that kind of some I guess lighter incremental margins. If you will for <unk> is the right way to interpret what you said that you basically saw a step backwards in the supply chain conditions.

Or something else.

To kind of factor in there and rich you highlighted right your expectations that in 'twenty four youll see much.

A much stronger margin expansion.

What kind of Incrementals should we be thinking.

Rich Maue: Those items are partially offset by higher non-operating expense, which is primarily interest, up 1 million dollars 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 deluded 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.

In 2024.

Yes, yes.

Yes, so and so I'll, let Alex 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.

<unk> still got to go through our planned process as you know Damian, but we would expect it to be somewhere in that range and just given the the supply chain itself, we're thinking that it might be towards the lower end of that range, but in the range.

Damon I wouldn't suggest that to the supply chain as it took a step backwards I would say that we took a step forwards.

Operator: Operator, we are now ready to take our first question. Thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, will we pull for questions.

Addressing.

Some of the challenges we have to try to expedite.

Material.

And delivery to our customers.

<unk>.

I don't know if you want to frame up a little bit how we're thinking about.

Yes, I think I'd say impact quarter to Q3 to Q4, yes.

Yes, I think I think that's right Damian in the quarter. We certainly were doing all we could to make sure that we were delivering to our customers and with that comes.

Scott Deuschle: Thank you, and our first question today is from the line of Scott Deschel with Deutsche Bank. Please just see with your questions. Hey, good morning. Good morning, Scott. Rich, why do A&E sales go down sequentially in the fourth quarter? A&E sales will be down modestly to your point. It's just largely timing associated with what we were able to deliver here in Q3, so we did have some accelerated shipments, 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.

A bit more higher expedite charges you might have we've done I think we've done a fantastic job just generally with.

Establishing second sources, which.

It requires re qualification costs and so forth and frankly, those are going to be cost with a fantastic payback in the future as we will have.

A more I guess diverse supply base from which to satisfy our demand in the future. So we certainly had.

More of those costs in the third quarter.

Then.

I would say we did maybe in the first in the first half.

Scott Deuschle: Okay, and sorry if I missed it, but can you say what the third quarter price realizations were at both A&E and PFT? Yeah, I didn't mention it on the prepared remarks, but I would tell you that price cost was quite solid overall for the business in A&E. I would say it was definitely a creative, 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.

Look if I was to give you the the overall from Q3 to Q4 in terms of.

What we would otherwise what you would otherwise expect on the revenue growth because we did have the higher revenue growth we had.

Some favorability in an aftermarket.

We would have expected or the math would simply suggest five or $6 million more no pay and it really is a combination of what I just mentioned that might be.

Maybe half of maybe half of those half of those.

Scott Deuschle: It was so modestly a creative, but not as much as historically in the first half, and then I would say at PFT, it was a creative to the overall margin profile. Okay, and then last question for Mac, how would you characterize the ability to accompany to benefit from these accelerated shop visits on GTF? I think you all have some mentioned content there, security is how you'd frame the impact aftermarket sales over the next few years as a result of those accelerated shop visits.

Those costs that I, just mentioned represent that half of that $5 million to $6 million or so.

Also had higher material costs in the quarter.

I'd say, maybe 20% of that 5% to $6 million relates to.

Price cost.

Getting a little bit on Scott's question it wasn't as accretive as we normal as we saw at the beginning of the year.

And then about 30% or so relates to higher program costs generally just because of all the recent program wins, but I would tell you, though that these are costs that we largely expected there were some incremental.

Scott Deuschle: Thank you. So on the GTF, when the engines are taking off wing earlier than expected, our products tend to be serviced as well. So we are seeing a modest acceleration relative to what we would have originally expected. Relative to the overall business, at this point, I wouldn't say this 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's got as a significant impact for us. Yes. Okay, got it. Thank you.

So that five to six is a simple math from Q3 to Q4, but if you step way back and look at your full year.

The leverage rate that we expected to hit this year relative to our January guidance.

We raised revenue 40 million since January and we've raised <unk> guidance by <unk> 12, right and so you do that math on a net basis. Our total cost profile. You could argue is up maybe $1 5 million Bucks right. Its a small amount.

But to kind of explain that Q3 to Q4 those would be the elements and just remember that part of that is timing elements right. So the re qualification 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.

Damian Karas: Our next questions are the line of Damian and Karas with UBS. Let's just hear with your question. Hey, good morning, guys. Congrats on the continued demand momentum you're saying. So I think the one thing that kind of stuck out was, you know, you saw this aftermarket surge, if you will, but yet you had that kind of awesome, I guess lighter incremental margins, if you will, for 80 is the right way to interpret what you've said that you basically saw a step backwards in the supply chain conditions, or something else to kind of factor in there and rich, you highlighted right your expectations that, you know, in 24, you'll see much stronger margin expansion.

These are not structural or permanent.

This is a.

Specific transient tissue.

Makes sense, thanks for all that detail.

And then I guess switching to PSP orders seem to be bearing.

A good bit better than I think you'd been expecting could you maybe just break down how much.

Positive price uplift youre still getting in orders versus volume levels and just any color you can maybe get in.

On demand trends Youre seeing.

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

Alright ill take a stab at the demand trends first and then move to your second question. Just overall I would say nothing material has changed overall in the profile.

We saw some a nice uptick in the quarter.

Which was a good.

Maybe less expected to happen in the quarter on a few projects. We had a few nice project wins combination of China and in North America in the chemical space. So that really did in fleet and fleet the order profile a little bit here in the quarter, which is fantastic, but it doesn't change that underlying trend that we had been talking about all year.

If anything it might have moved slightly to the right alright, and so instead of funds.

Rich Maue: Damian, I wouldn't suggest that the supply chain is took a step backwards. I would say that we took a step forward in addressing some of the challenges we have and try to expedite material and delivery to our customers.

Fundamental orders I think inflicting negative here.

September October , it's probably going to happen in December right, but the overall trend is going to happen. The way. We suggested and then revert to go negative next year and then revert back at the at the end of 2024 so.

Max Mitchell: I don't know if you want to frame up a little bit how we're thinking about. Yeah, I think I think that quarter Q3 to Q4. Yeah, I think I think that's right, Damian in the quarter. We certainly were doing all we could to make sure that we were delivering to our customers and, you know, with that comes a bit more higher expedite charges. You might have, you know, we've done I think we've done a fantastic job just generally with establishing second sources, which, you know, requires requalification costs and so forth.

So no real significant change.

Change there on price it really depends on which part of the business that you that we talk about.

Max Mitchell: And frankly, those are going to be costs with a fantastic payback in the future as we'll have, you know, a more, I guess, diverse supply base from which to satisfy our demand in the future. So we certainly had more of those costs in the third quarter than, you know, I would say we did maybe in the first in the first half. Look, if I was to give you the overall from Q3 to Q4 in terms of, you know, what we would otherwise, what you would otherwise expect on the revenue growth, because we did have the higher revenue growth.

And our water wastewater business.

Probably 50 50.

In our in our process markets, just given where the markets are today, it's more skewed towards price.

And in <unk> and then we have a couple of other pockets, where its probably 50 50 as well on the smaller parts of the business that we have so.

I would say no significant trends changing on price and volume in backlog, but thats the way I would think about it across the across the segment.

Really helpful. Thanks, guys.

Fixed income.

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

Hi, Matt.

Hey, guys. Thank you.

I do.

I want to talk about how should how should we be thinking about the mix for A&D going forward into 'twenty four between commercial and military and then I wanted to be clear are you still sort of faced with I think rich coming out of Q2, you indicated 60% to 65.

Max Mitchell: We had some favorability in an aftermarket. You know, we would have expected or the math would simply suggest $5 or $6 million more in OPA and it really is a combination of what I just mentioned. That might be, you know, maybe half of, maybe half of those, of those costs that I just mentioned represent that, you know, half of that 5 to 6 million or so. We also had higher material costs in the quarter.

Quote supply chain stranded revenue is that still sort of the.

The right figure for where the business sits today and then I'll follow up.

On the stranded and then you can take the or the mix.

We started off the year, saying, if we could if we could ship with no supply chain constraints on a normalized level whats being held up in backlog and the number was 50 I think today, we'd probably say, it's probably somewhere between $65 million to $70 million somewhere in that range, Matt that's not the same.

Max Mitchell: I would say maybe 20% of that 5 to 6 million relates to price cost, you know, getting a little bit at Scott's question. It wasn't as accretive as we saw at the beginning of the year. And then, you know, about 30% or so relates to higher program costs generally just because of all the recent program wins. But I would tell you though that these are costs that we largely expected. There were some incremental, so that 5 to 6 is a simple math from Q3 to Q4.

Want to make sure investors understand thats not like trapped $65 million to $70 million is just a rough number of which were just saying if we were completely unconstrained what can we get out the door. So it has grown slightly we continue to.

This gets to the Q3 the expedite.

Max Mitchell: But if you step way back and look at your full year, you know, in the leverage rate that we expected to hit this year relative to our January guidance. We raised revenue 40 million since January and we raised OP guidance by 12, right, and so you do that math on a net basis, you know, our total cost profile, you could argue is up maybe one and a half million bucks, right, it's a small amount.

The challenges that we have and we're doing all we can we're.

We're required to drive some inefficiencies to make sure our customers are satisfied.

But that number is probably 65 to 70 million right now on the mix.

And on the mix, what I would say is.

Yeah.

We're going to continue to see I think strong aftermarket.

Max Mitchell: But to kind of explain that two, three to two, four, those would be the elements. Yeah, and just remember that part of that is time elements, right, you know, so the requalification second sourcing has a payback, the price cost, which was a little less favorable in the quarter, but we get very good pricing have been in this business, it just comes with a little bit more of a lack than in process flow technologies, right, so these are not structural or permanent, this is a, what are specific, transient issue. Make sense, thanks for all that detail.

As we move through 2024, it's not going to be as strong as we saw this year on a percent basis, but it will still be relatively strong.

Oes are going to be I would say increasing.

At a faster pace relative to 2023, so you could have a slight.

It won't be an overwhelming.

Mixed differential if anything it might be on the negative side, just given oes have to get there have to get shipments.

Damian Karas: And then I guess switching to PFT, order seemed to be fairing a bit better than I think you've been expecting. Could you maybe just break down how much, you know, positive price uplift, you're still getting in orders versus volume levels and just any color you could maybe get, give on demand trends you're seeing.

Out in up right. So.

But the aftermarket still solid I don't know if that helps you. It's a little early for us to give too much guidance on that Matt right now, we'll definitely going to be providing a lot more in January but that's the high level.

Yes, no I mean, the fact, you gave 24 commentary in general I think is absolutely a positive.

Rich Maue: All right, all, take a stab at the demand trends first and then, and then move through second question, just overall I would say nothing material is changed overall on the profile, you know, we, we source some nice uptick in the quarter. Which was a good, you know, maybe less expected to happen in the quarter on a few projects, we had a few nice project wins combination of China and in North America and the chemical space.

Sticking with A&D then for my follow up as we think about all of the programmatic wins, you've been calling out specifically those that you are probably not able to call out when do we start to see an upward inflection in revenue contribution start to kick in from from some of those wins.

Based on again this is several quarters in a row you guys keep calling out new wins, you've had at some point do you need to revisit that settlement, 9%. Thank you.

Rich Maue: So that really did inflate the order profile a little bit here in the quarter, which is fantastic, but it doesn't change that underlying trend that we had been talking about all year. If anything, it might have moved slightly to the right, all right, and so instead of fundamental orders, I think, inflecting negative here in September, October, it's probably going to happen in December, right, but the overall trend is going to happen the way we suggested and then revert, you know, to go negative next year and then revert back at the end of 2024.

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

We'll have significant move 25 programs that are I mean, the <unk> one program in particular, we have the retrofit upgrade for the for the F 16 brake control right and that's absolutely going to be hitting in 'twenty five as well as a number of other.

Rich Maue: So no real significant change there.

Rich Maue: On price, it really depends on which part of the business that you that we talk about. You know, in our water waste water business, you know, it's probably 50, 50, you know, in our, in our process markets, just given where the markets are today, it's more skewed towards price. And, you know, and then we have a couple of other pockets where it's probably 50, 50 is well on the smaller parts of the business that we have. So I would say no significant trends changing on price and volume and backlog, but that's the way I would think about it across the across the segment.

The defensive offense exactly defense as a high power platforms, so they'll start in that period as well.

Damian Karas: Really helpful.

We might have a little bit of low rate initial production on a couple at the end of next year, but I don't think its going to be overly meaningful next year.

But to your point Matt.

Unknown Executive: Thank you guys.

The team is doing a phenomenal job we continue this multi year.

Investment in technology.

Were exciting programs continue to ramp up we've won and executed on programs that are reading through today and into 'twenty four and then the content that we have one secured ramping up.

Both in our Burbank facility for Walton Beach facility, I mean, theres some significant.

Matt Summerville: Welcome. Our next question, come from the line of Matt, Suberville, with the aid Davidson. Please see you with your questions.

<unk> and growth.

<unk>.

Matt Summerville: Hi, Matt. Hi, guys. Thank you. I just want to talk about how should, how should we be thinking about the mix or any going forward into 2024 between commercial and military. And then I want to be clear. Are you still sort of faced with, I think rich coming out of Q2, you indicated 60 to 65 million of, quote, supply chain stranded revenue. Is that still the right figure for the business today, and then I'll call off.

Readiness and our teams are all over it we're ahead of schedule. So I feel really good about it.

We keep hitting this picture of all the demonstrators and all the future programs that we're on which which goes out even.

A decade out and more so just incredibly well positioned.

Great. Thank you guys.

Thanks, Matt.

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

Good morning, everyone.

Alright, well, thanks, Max how are you.

Matt Summerville: Just on the stranded, and then you can take the mix. The, you know, we start off the year thing. If we could, if we could ship with no supply chain constraints on a normalised level, what's being held up in the backlog and then number was 50. I think today we'd probably say it's probably, you know, somewhere between 65 and 70 million somewhere in that range. Matt, that's not the same. I just want to make sure investors understand that's not like trapped 65 and 70 million.

Okay.

Question on <unk>.

And zooming out a little bit.

From that <unk> kind of questions.

I reach you talked about several I guess there.

Dave.

Expenses and inefficiencies around expedited shipping qualifying second sources.

Matt Summerville: This is just a rough number, which we're just saying, if we were completely unconstrained, what do we get out the door. So it has grown slightly. We continue to. This gets to the Q Q three expedite. Challenges that we have when we're doing all we can. Where required to drive some inefficiencies to make sure our customers are satisfied. But that number is probably 65 to 70 million right now on the mix.

Higher development expenses these kinds of things, which are which are obviously some david good.

You're continuing to make yourself a trusted supplier.

With your customer is development expenses Arrow is good because that future revenue is there a way you can quantify some of the inefficiencies that are in the system around.

Especially things like the supply chain.

Cost.

Matt Summerville: Yeah, and on the mix, what I would say is we're going to continue to see I think strong aftermarket as we move through 2024. It's not going to be as strong as we saw this year on a percent basis, but it'll still be relatively strong. OEs are going to be, I would say, increasing, you know, at a faster pace relative to 2023. So, you know, you could have a slight, you know, it won't be an overwhelming, you know, mixed differential.

It sounds like you're thinking that going away in 2024.

Does that same building.

Mall margin expansion as we get out into 25% to 20 <unk> as those things normalize.

Yes.

Yes.

Yes, I think we would agree with you.

To quantify that would be a bit of a challenge.

Hesitant to do that now we can think about how we might try to frame that up when.

We give guidance in January or at our Investor Day certainly.

Matt Summerville: If anything, it might be on the, on the negative side, just given OEs have to get there, have to get shipments, you know, out and up, right? So, but, but aftermarket still solid, I don't know if that helps you. It's a little early for us to give too much guidance on that, Matt, right now.

But there definitely is cost in the system that's related to the supply chain here, that's been happening all year, even the numbers I called out right. These were not necessarily all unexpected and they were existing as we move through the year, there's a little bit higher here in Q3, but but not really a lot more I think you've framed it up 50% of what we expect to leverage.

Max Mitchell: We'll definitely going to be providing a lot more in January, but that's the high level. Yeah, no, I mean, the fact you gave 24 commentary in general, I think is absolutely positive. Sticking with A&E then for my follow-up is we think about all of the programmatic wins you've been calling out specifically those that you're probably not able to call out. When do we start to see an upward inflection and revenue contribution start to kick in from some of those wins and based on, again, this is several quarters in a row, you guys keep calling out new wins you've had.

Was I just want to make sure that this isn't a worsening.

I do believe I mean, we clearly see improvement in the supply chain that continues.

It's gradual and it's slow and it's moving and so thats, what we continue to see and it's broader than just on time delivery. So it's everything from.

Smaller sub supplier that all of a sudden.

Decides they are going out of business. So you've got a second source.

In short order or.

There's labor challenges.

Retirement is post Covid that you are.

Both internal as well as third party.

As loss talent, there's the hiring process. So its just it is not worsening but continues to gradually improve we've communicated that from the beginning of the year consistently I think we're one of the few that openly as discussed this and I think we've been spot on.

Max Mitchell: But at some point, do you need to revisit that seven and nine percent? Thank you. Yeah, that's a great question. And, you know, a lot of the wins are fantastic demonstrator platforms that are, you know, a little bit later, but we would expect to see some significant movement in 25, I would say. It will, it will have significant move in 25 programs. I mean, one program in particular, we have the retrofit upgrade for the F-16 brake control, right?

Max Mitchell: And that's absolutely going to be hitting in 25 as well as a number of other defense, defense, exactly defense A&E's high power platforms. So they'll start in that period as well. You know, we might have a little bit of low rate initial production on a couple at the end of next year, but I don't think it's going to be overly meaningful next year. But to your point, Matt, I mean, the teams doing a phenomenal job, we continue this multi-year investment in technology.

It is going to continue into 2024 and it will continue to improve overtime. So these will I fully expect them to.

Lessen over time and that margin to read through.

Yes.

Okay.

That is not was not worsening but.

Also wanted to just make sure everyone understands that there are temporary cost inefficiencies in the system here in A&H structurally the margin profile is higher than where its sitting right now.

Yes, we got it done.

Without a doubt yes.

And then I guess my follow up question on <unk>.

If we're expecting orders to be negative for the next few quarters why would be.

Max Mitchell: We're on exciting programs that continue to ramp up. We've won and executed on programs that are reading through today and into 24. And then the content that we have won secured ramping up both in our Burbank facility for Walton Beach facility. But even 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, you know, we keep painting this picture of all the demonstrators and all the future programs that were on, which, which goes out even, you know, a decade out and more. So this incredibly well position.

Unknown Executive: Great.

Initial outlook for revenue core revenue growth to be roughly flat next year why wouldn't we expect that to be down a little bit.

Yes, so I mean so.

<unk>.

Market, we see the market being down right.

To continue to do what we need to do to help offset to the best that we can so a combination of share and price.

But market overall is expected to be inflicting.

Next year and a more significant way is what I would say so we're making some of that back and then you have US back. This is the positive news of the investments that we've had correct.

New product 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.

Unknown Executive: Thank you, guys. Thanks Matt.

Nathan Jones: On this questions from the land of Nathan Jones and Steve. This is your third question.

The two factors Nathan just to be clear right. One is there is the mathematical effect of shortening lead times, reducing the backlog right. So youre shipping more of the backlog.

Nathan Jones: Good morning, everyone. Very well. Thanks Matt. How are you? Good. Question on A&E, assuming our little bit more from the 3Q4Q kind of question, and I've reached you talked about several, I guess, their sources of expenses and inefficiencies around, you know, expedited shipping, qualifying, second sources, higher development expenses, these kinds of things, which are, you know, which are obviously, some days are good, you're, you're continuing to make yourself a trusted supply of, with your customers, development expenses are always good, because they're future bread, and you're, is there a way you can quantify some of the inefficiencies that are, are in the system around, you know, especially things like the supply chain costs, doesn't sound like you're thinking they're going away in 2024, does that thing build in some, you know, small margin expansions we get out into 25 and 26 is those things normalized?

Above and beyond whatever the incoming orders or that's just kind of a natural process is.

The supply chain continues to improve and lead times normalized the second is that the short cycle piece of the business, which doesn't really flow through the orders for.

For next year, specifically is going to be growing faster.

And longer cycle part of the business right water wastewater in particular.

Yeah.

It tends to be a very short cycle business and that's going to do.

<unk>.

Makes perfect sense, thanks for taking the questions.

Thanks, Nathan Thanks Nathan.

Thank you.

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

Yes Damian.

Hey, Matt So just a couple of follow up questions here on <unk>.

The bond 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.

Maybe what kind of synergies are you expecting with this deal.

Yeah, you bet. Thank you for the question I appreciate it so.

Nathan Jones: Yeah, I think we would agree with you, to try to quantify that would be a bit of a challenge, or I'd be hesitant to do that now, we can think about how we might try to frame that up when we give guidance in January or an investor day, certainly, but there definitely is cost in the system that's related to the supply chain here that's been happening all year, even the numbers I called out, right, these were not necessarily all unexpected. And they were existing as we move through the year, they're a little bit higher here on Q3, but not really a lot more.

<unk> polymer we play with a resist the flex brand. If you go to the website you can check out there is just a flex we don't talk about necessarily individually as the brand but it's.

As a part of a complete solution with line pipe and valves the <unk> brand.

Significant global share so when you go into bit of chemical package and you're bidding.

The pipe.

One follows the other in terms of the valves as well so they're part and parcel. So we have a significant presence in North America. We're one of the number one player. We are the number one player in North America.

Nathan Jones: I think you framed it up 50% of what the expected leverage was, but I just want to make sure that this isn't a worsening, I do believe, I mean, we clearly see improvement in the supply chain that continues. It's gradual and it's slow, and it's moving, and so that's what we continue to see, and it's broader than just on time delivery. It's everything from a smaller sub supplier that all of a sudden decides they're going out of business, and you've got a second source in short order, or there's labor challenges.

Baum has been a a worthy competitor for many years about has their strength in the den category of standards European standard.

They have an extended size range and they have a dominant position in Europe .

As well as some other countries and then we always run into each other and and butthead.

Having the opportunity to fold baum into crane continue to keep it strategically separate as the brand allows us to avoid unnecessary overlap of where we're focused we're really strategically positioned in terms of where we want to be with our end customers as well as the channels on a global basis it enhanced.

Nathan Jones: There's retirements post-COVID that you're both internals as well as third party that has lost talent, and there's the hiring process. So it's just, it is not worsening, it continues to gradually improve, we've communicated that from the beginning of the year consistently. I think we're one of the few that openly has discussed this, and I think we've been spot on. It's going to continue into 2024, and it will continue to improve over time.

Nathan Jones: So these will fully expect them to lessen over time, and that margin to read through. Yeah, I get that it's not worse, it's not worsening, but I also want to, you know, 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. Yeah, we've got to go without a doubt. Yeah.

Our positioning significantly it's a smaller deal and its one that just fits perfectly into our core business.

<unk> is going to is going to.

Allow us to do some some great things here for our customer base as we're moving forward served market size. If I think of line pipe overall about $1 4 billion. The floral polymer space is probably closer to $300 million, but you're always up against others, who are trying to compete with could be a proxy lines thermoplastic lines, they're very specific performance.

Characteristics at floor polymers allow you to have that are very unique.

In terms of their chemical resistance.

Pressure ratings temperature ratings and so forth so.

Rich Maue: And then I guess my follow-up question on PFA, if we're expecting orders to be negative for the next few quarters, why would the, you know, the initial outlook for revenue called revenue growth to be roughly flat next year, why wouldn't we expect that to be down a little bit? Yeah, so I mean, so the market, we see the market being down, right? We're going to continue to do what we need to do to help offset for the best that we can, so a combination of share and price.

That gives you is a bit of insight in terms of the market size, we probably have call. It 40% share North America bound probably has 40% share Europe rest of world. We all compete.

It just allows us to.

Really serve our customers better holistically with.

With aligned product offering so.

Hopefully that gives you a nice overview.

Yes, no very interesting and I guess on M&A front.

Rich Maue: So, but market overall is expected to be inflecting next year, you know, in a more significant way is what I would say. So we're making some of that back. Then you have back. This is the positive news of the investments that we've had. New product, 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 factors, Nathan just to be clear.

You've closed this deal you mentioned you lost a deal. So I guess that suggests you still have one active is that on the <unk> side, if you don't mind.

The active is letting us.

Yes <unk>.

And there have been other act, we talked about those three a quarter ago just to be clear. There are others that are now active that werent part of that three right exactly.

Rich Maue: Right. One is there is the mathematical effect of shortening lead times, reducing the backlog. Right. You know, so you're shipping more the backlog above and beyond, whatever the incoming orders are. That's just kind of a natural process as as the supply of opportunities to improve in lead times normalized. The second is that the short cycle piece of the business which doesn't really pull through the orders for next year specifically is going to be growing faster than the longer cycle part of the business. Right. What are waste water in particular. You know, it tends to be a very short cycle business. And that's going to do. Makes perfect sense.

Exactly right yes.

Yesterday, we throw it out.

Nathan Jones: Thanks for taking the questions. Thanks Nathan. Thank you.

<unk>.

Three or four day lives at this 0.1 of which is the former A&D deal, which we talked about which hasnt been resolved yet fully and then a couple of new ones that kind of are now getting a lot of activity.

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

Well, it's going to depend on how we how does this one that's lived in particular then when that's been live in A&D.

If we're successful there it should close this year.

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

Damian Karas: Our next question is from the line of Damien Harris with UBS. This is your question. Just Damien. Hey, Max. So just a couple of follow up questions here on actually the bomb 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, you know, maybe what kind of synergies are you expecting with this deal? Yeah, you bet. Thank you for the question. I appreciate it.

Okay terrific. Thanks, a lot guys best of luck. Thank.

Thanks, David Thank you.

Thank you at this time, we've reached the end of the question and answer session I will 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 Craig.

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.

Max Mitchell: So. The line flow polymer, we play with our resistive flex brand. If you go to the website, you can check out resistive flex. We don't talk about it necessarily individually as the brand, but it's. As a part of a complete solution with with line pipe and valves, the Zomox brand. We have a significant global share. So when you go into bit of chemical package and you're bidding the pipe, you know, it one follows the other in terms of the valves as well.

It can be truly overwhelming at times, but we continue to focus on what's within our control.

In addition, I'm proud of cranes place in the world in our global team's efforts, our philanthropy and volunteerism continues to make a difference in so many areas.

Max Mitchell: So they're part and parcel. So we have a significant presence in North America. We're one of the number one plate. We have the number one player in North America. Baum has been a worthy competitor for many years. Baum has their strength in the din category of standards, European standard. They have an extended size range and they have a dominant position in Europe as well as some other countries. And then we always run into each other and and and but heads.

As the late Great Jimmy Buffett, once said I can't change the direction of the wind, but I can adjust my sales to always reach my destination.

At Crane, we continue to focus on what's within our control, we're being nimble and flexible to adjust quickly and always keeping our sight 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 and thank you for your participation.

Max Mitchell: Having the opportunity to fold Baum into crane, continue to keep it strategically separate as the brand allows us to avoid unnecessary overlap of where we're focused. We're really strategically positioned in terms of where we want to be with our end customers as well as the channels on a global basis that has enhanced enhanced our positioning significantly. It's a smaller deal and it's one that just fits perfectly into our core business and is going to is going to allow us to do some some great things here for our customer base as we're moving forward.

Max Mitchell: So serve market size. If I think of line pipe overall about 1.4 billion, the floral polymer space is probably closer to 300 million, but you're always up against others. You're trying to compete with could be epoxy lines and a plastic line. They're very specific performance characteristics that floral polymers allow you to have that are very unique in terms of their chemical resistance pressure ratings, temperature ratings and so forth. So that gives you a bit of insight in terms of the market size. We probably have been called 40% share North America, but probably has 40% share Europe rest world. We all compete. It just allows us to really serve our customers better holistically with the line product offering.

Max Mitchell: So hopefully that gives you a nice overview. Yeah, no, very interesting.

Max Mitchell: And I guess on M&A front, so you close this deal, you mentioned you lost the deal. So I guess that suggests you still have one active, is that on the PST or A&E side, if you don't mind. The active is letting us know it. Yeah, yeah. Actives on A&E. And there have been other acts, you know, we talked about those three and quarter ago, just to be clear, there are others that are now active that weren't part of that three.

Max Mitchell: Right. I mean, yesterday, we, so three or four of us stay live at this point, one of which is the former A&E deal, which we talked about, which hasn't been resolved yet fully. And then not. Okay.

Max Mitchell: So any expectations for incremental capital deployment before you're in, you've got that billionaire capacity. And I mean, whether we're talking deals or otherwise. Well, it's going to depend on how we, how, how this, this one that's live in particular than when that's been live in A&E. If that, if we're successful there, it should close this year. The, the others that are now active realistically would probably be more prosperous quarter. Okay.

Damian Karas: Terrific. Thanks a lot guys. That's a lot. Thanks, David. Thank you.

Operator: At this time we've reached the end of the question and answer session.

Max Mitchell: I'll turn the call over to Max Mitchell for closing remarks. Super. Thank you very much.

Max Mitchell: Hey, another great quarter and an exciting outlook for the rest of the year and into 2024 for grain. So many opportunities in so many areas, so many good things happening.

Max Mitchell: However, even with all the pauses 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.

Max Mitchell: In addition, I'm proud of Crane's place in the world and our global teams efforts, our philanthropy and volunteerism continues to make a difference in so many areas.

Max Mitchell: As the late great Jimmy Buffett once said, I can't change the direction of the wind, but I can adjust my sales 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 site set on delivering our goals.

Max Mitchell: Thank you all for your interest in Crane and your time and attention this morning. Have a great day.

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