Good day, everyone and welcome to Crane’s First Quarter 2018 Earnings Conference Call. Today’s call is being recorded. At this time, I would now like to turn the call over to the Director of Investor Relations, Mr. Jason Feldman. Please go ahead, sir.

Thank you, operator and good day, everyone. Welcome to our first quarter 2018 earnings release conference call. I’m Jason Feldman, Director of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Chief Financial Officer. We will start off our call with a few prepared remarks after which we will respond to questions. Just a reminder that the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers and tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section. Now, let me turn the call over to Max.

Thank you, Jason. Good morning, everyone. After our record-setting 2017 results, we’re off to another solid start this year. You may recall that last year, we delivered record adjusted EPS of $4.53, record adjusted operating margins of 15.2% and record free cash flow of $269 million. This year, we are on track for further adjusted EPS growth of more than 20%. And we are also making substantial progress on our various initiatives, from repositioning and accelerated growth investments to acquisition integration and plans for future capital deployment, all of which will keep us on a strong EPS and free cash flow growth trajectory in the years ahead. We shared that multiyear growth story with all of you at our Investor Day earlier this year. And we remain confident in our ability to execute on that plan. There have been a few changes in our outlook over the last two months since Investor Day. Specifically, we are incrementally positive on the likelihood of receiving some repeat business from one of Crane Currency’s largest customers last year. That benefit is being partially offset by RV sales at Engineered Materials that are a little softer than we expected. And we are also facing some modest headwinds from higher commodity costs. On balance, however, we have greater confidence in our 2018 outlook. Although it is still early in the year, we are raising our EPS guidance, excluding special items, by $0.10 at the midpoint to a range of $5.45 to $5.65. We are also raising our free cash flow guidance to $240 million to $270 million compared to our prior range of $220 million to $250 million. I will now briefly review this quarter’s results and then discuss some of the highlights, followed by Rich providing additional financial details. Starting with this year’s results…

Thanks, Max. Good morning, everyone. We’ll now move to segment comments, which compare the first quarter of 2018 through 2017 excluding special items, as outlined in our press release and slide presentation. In the first quarter, Fluid Handling sales of $267 million increased 11%, reflecting core sales growth of 3%, a 2.5% benefit from net acquisition and a 6% benefit from favorable foreign exchange. Fluid Handling operating profit increased 19% to $32 million with operating margins of 12.1% that increased 80 basis points compared to last year, reflecting higher volumes and productivity, partially offset by unfavorable mix. Fluid Handling backlog was $281 million at the end of March compared to $262 million at the end of 2017 and $250 million at the end of March of last year. After adjusting for foreign exchange, the backlog increased 6% on both a sequential and year-over-year basis. Orders, also adjusted for foreign exchange, improved 3% compared to last year and 5% sequentially. As we have discussed in recent quarters and at Investor Day, we believe that end markets bottomed in 2016. In early 2017, we saw a solid sequential improvement in orders. The order rates remained relatively steady throughout last year, basically a new order plateau, better than the trough, but still at depressed levels. During the last quarter here, we did see a modest further improvement in order rates. We believe that about half of the order growth is from share gains. But markets do look like they are improving from 2017 levels, although fairly slowly. Overall, order activity was slightly better than expected in the first quarter, driven primarily by a pickup in the Middle East and a little bit of outperformance in China. By end market, we saw solid order improvement across chemical, refining and general industrial markets with power…

Thank you. [Operator Instructions] Our first question comes from the line of Kristine Liwag with Bank of America. Your line is open. Please go ahead.

Good morning, guys.

Good morning.

Max, I was wondering for the Crane Currency increase and outlook that you have for the full year, you alluded that this is only partially incorporated into your outlook. Can you give more details on what’s included in your outlook and also what the opportunity is from this order?

Yeah. What I would say Kristine, is we’re comfortable with including a portion of our arrangement that we have with our client. If you think about the overall earnings guidance increase, maybe just to put it at a broader level or a higher level, we’re expecting somewhere around $0.15 of additional benefit versus our original guidance associated with this opportunity. From that, roughly $0.05 going in the other direction associated with a little bit of softness in Engineered Materials and the higher material input costs. But just to stay with the opportunity and the question that you have, I would think of it as about $0.15 impact to our guidance as we think about the balance of the year.

Okay. And maybe following up on that, is this an order that you’ve already received? And why is it that you’re only factoring in partial of the order? Is it because of timing? Or do you still need to get deposits from your customers, I mean what’s driving the conservatism from your side?

Yeah. I want to be careful in terms of how – speaking about this particular customer order. As we described, this is a very large customer order that has some uncertainty in it. So yes, we have the full order. Even having said that, it is uncertain in terms of the exact timing and release of that order. We have some tighter terms and conditions related to that order. What we’ve included in our guidance is what we feel firm about at this time. There is some potential upside in the balance of the year. We’re not prepared to kind of call that out quite yet. I’d like to see a little more maturity in this – to this quarter. And we’ll give you an update on next quarter’s results as well. But if things progress, there certainly would be some additional potential upside.

That’s helpful color. Thank you very much.

Thanks Kristine.

Thank you.

Thank you. And our next question comes from the line of Matt Summerville with D.A. Davidson. Your line is open, please go ahead.

Thanks. Two follow-ups on Crane Currency; first, removing the noise from this one customer, can you talk about organically what you’re actually seeing in the business from a volume standpoint perhaps maybe relative to what you originally expected? That being the first question. The second question, Max, you mentioned know that you’ve been around to see all the major operations at Crane Currency. You seem to come away incrementally more upbeat. Can you talk about why you feel that way? Is it ultimately the dollar you’re looking at in terms of accretion? Is that looking increasingly conservative? Where are you more optimistic going forward?

Well, on the ability to execute, I can tell you that I was very impressed with the teams at every location from their knowledge, engineering expertise, the technology, operational excellence. And I think that this team is going to really develop at a whole new level with our combined guidance together. So I was very encouraged, embracing versus resisting, some acquisitions are more difficult culturally. I think I’m very, very pleased with the cultural fit between both companies, the leadership – the executive leadership, the Malta startup, very, very impressive, 1 of 2 lines already up printing. I was just very, very encouraged generally. And in addition, from a project funnel sales execution, what we’re tracking, what we’re working, very much in tune with our expectations for the year. Rich, do you have any?

Yeah.

Just on the core growth, I don’t know, I’m not sure exactly that we have that off the top of Richard.

Yes. Well, just in terms of the way the business is performing, yes, as expected in the quarter. It’s not – and just sort of come full circle on the dollar as well. I think we’re encouraged by what we’re seeing. But whether – the dollar is what we’re still comfortable with quite frankly on that. But in the quarter itself, the underlying business outside of this customer, we feel like things are moving as we expected and as we planned.

And then just in terms of the overall heightened level of growth investments that you’re making this year, can you talk about how the sequencing of those investments, the pace of those investment sort of rolls out through the year? Is that part of the dynamic impacting sort of this first half, second half weighting? I want to make sure we understand kind of again that first half, second half weighting that specifically, Rich, you made the point of mentioning twice towards the end of your comment.

Yeah. That’s about reinvestments, more about when we see the repositioning benefits entirely read through and just the profile of orders and sales in the businesses that I mentioned, Aerospace & Electronics, Payment & Merchandising and even fluid for that matter. So it’s just more of nothing here back end-weighted really outside the norm, just more of moving through the different initiatives that we had discussed at Investor Day and how it all rolls out. The reinvestments themselves, I would say that they actually, if anything, pick up a little bit more as the year progresses versus the first quarter. So when pursuing those kinds of initiatives, there’s a ton of planning and we’re making great progress. But a lot of the spend starts to happen frankly a little bit later. So hopefully, that answers your question.

Yes. Thanks guys.

Sure.

Thank you. And our next question comes from the line of Nathan Jones with Stifel. Your line is open, please go ahead.

Good morning everyone.

Good morning, Nathan.

Good morning, Nathan.

I’m going to go to Fluid Handling. You guys had been pretty clear last year that your order rates had stepped up a little bit but had plateaued out. And you are certainly sounding a little bit more bullish on the market there. And I think probably the most bullish you sounded was in the Middle East. Can you talk a little bit about what kind of projects there are there? Do they feel like these are a more sustainable level of increased projects? Or are they kind of one-offs that have just come to the market?

Yeah. I would say we’re correcting that, we do feel a little bit better now than previously we have little bit of a modest uptick, and the Middle East being a primary area that we’re seeing increased activity. Overall for Crane, it’s not a large impact. But we wanted to provide that additional color to you all. It’s primarily in chemical, I would say, in terms of the nature of where those additional investments are coming. And it just gives us an increasing comfort. Frankly, in the Middle East, we also benefit in our commercial – the commercial side of our business from our business over in the UK. So it’s a good indicator just for us overall from an end-market perspective. The other things just to point to would be outside of the Middle East would be the Americas certainly felt a little bit stronger, everything outside of power, I would say. And so just overall, the tone feels – and what we’re seeing in funnels and order rates just feels a little bit just modestly incrementally better than we expected. I wouldn’t – at this point, we sort of feel like the levels that we’re at now feels pretty good. And when you look at comps for the balance of the year, we still feel pretty good about our core growth guidance that we have at the segment.

Just a little added color on the – just to add to what Rich said specifically to Middle East just to give you a flavor. So fertilizer and some gasfield development in particular, just to give you a sense, Nathan.

And then it sounds like you’re looking for maybe some improved turnarounds in refining in the U.S. and maybe some improved projects there. I think that’s probably a little bigger market for you than the U.S. Are you expecting that to continue to improve through the year? Or do you feel like this is reset up to a slightly higher level of orders that’s plateauing again in 2018, the same way it did in 2017? Or do you feel like that the trajectory is on the increase?

Yes, it was a nice bump for us from the rate we were running at in the second half of last year into this year in the Americas. I don’t – I wouldn’t say that we’re expecting to see that continue to happen as we move through the balance of the year just yet. It feels pretty good. But we’re not prepared to say that we’ve seen any kind of meaningful trend that would suggest that we should feel really good about that kind of an improvement happening in the balance of this year.

Okay. Just a quick one on aerospace, you talked about firming orders here, things going as good as they have in the last five years. But you talked about cabin products being soft. Why would cabin products be soft when most of the other parts of the business are growing well?

It has to do with the shift from stronger single aisle versus…

Yes, just the build rates in 777 and some of the larger aircraft, where we have more content in that particular area. I think the message there was more along the lines of it just remains – it remains a bit sluggish for us, not necessarily incrementally worse than we otherwise would have thought. We just didn’t see the strength come through like we did in the rest of the business.

Gotcha. Less business class in narrowbody.

Correct.

Okay, thank you.

Thanks, Nathan.

Thank you. And our next question comes from the line of Ken Herbert with Canaccord. Your line is open. Please go ahead.

Hi, good morning, everybody.

Good morning.

Max, I just wanted to follow up on the comment with Rich. It sounds like you’re fairly quickly deleveraging again and you’ve taken advantage of the opportunity to repatriate some cash and put it to the balance sheet. But even with obviously the most recent acquisition, you’re relatively low from a leverage standpoint. Can you just maybe reset now expectations and maybe what you’re seeing from an M&A standpoint and how we should think about priorities there or a potential allocation from a growth relative to return to shareholder perspective?

Well, we’ll continue to prioritize our internal growth investments than we prioritize the inorganic. I can tell you that there is activity in each of our major segments right now, nothing imminent. But we are working our funnel. We’re working opportunities. We stay focused in our three major platforms of Fluid Handling, A&E and Payment & Merchandising Technologies. There is some activity in each of those segments.

I would just add, Ken, that in terms of capacity and where we ended the year last year, as you know, we file a rating agency model in the way of debt-to-EBITDA. And when you put everything all together, at the end of last year, you’re north of 3, 3.5. Roughly 3.5 I believe is where we ended the year last year. So even with repatriating and doing – which was fantastic, kudos to my team frankly on being able to do what we did here. But we did delever. And if you look at where we otherwise expect it to be, I would say almost 0.5 turn better, which is fantastic, at this point in the year versus what we otherwise would have thought. I would expect us to get down to that 2.9 to 3 level by the end of this year with greater confidence for sure. And then of course, to the extent that we have opportunities in M&A and you get the benefit of an EBITDA that you’d be acquiring, we have some nice opportunities as we close out or even from here through the end of the year to look at opportunities.

Okay, thanks. And just to follow- up on that, obviously now that you’ve got Crane Currency, are you – is there a set of level within each of the core 3 platforms you’d like to see? Or would you be able to – are you prioritizing any market more than others as you potentially look at inorganic opportunities?

No, not prioritizing any one of – beyond those three, but certainly prioritizing those three. It’s going to be around actionability.

Yes, okay. And then just finally back on Fluid Handling one follow up there, appreciate all the detail you’ve given. You did mention in the prepared remarks that the mix was a bit of a headwind. And I just wanted to follow up if that was more project versus sort of MRO slower growth there or if that was related to any particular region or ready more cover on the mix headwind and the impact in the quarter would be helpful.

Yes. We continue to see some nice relative core growth in our commercial business. Our business up in Canada was really – really delivered a solid quarter frankly. And that was one – that was part of the mix issue. And then it’s just one- off project versus MRO across the rest of the business I would say – but primarily, Ken, I would say it’s the business mix with our commercial business being quite strong in the quarter.

Okay, thank you very much.

Thanks Ken.

Thank you. And our next question comes from the line of Robert Barry with Susquehanna. Your line is open. Please go ahead.

Good morning, Rob.

Hi, everyone, good morning.

Morning.

Just wanted to start with a change in the free cash flow outlook. It seems like maybe even less than half of that is explained by the earnings guidance change. Is there something also happening with working capital? Or are financing costs lower?

Yes, just you nailed it right there, Rob. About half of it is coming from the guidance change. And then working capital, we’re just seeing some good progress in the rest of the – in the couple of the other segments. But we felt comfortable enough, just given what we see in the outlook we have, to raise it by $20 million. But it’s really those two components.

Got it, got it. And then I just wanted to make sure everyone’s expectations were clear on lumpiness in the currency business. I know when you bought that, you talked about the absence of this order that you’ve now won actually, causing a big step down this year. Does that mean that, that step-down gets just pushed out one year? Is that how we should be thinking about the revenue cadence?

I think that’s fair. That’s a fair way to characterize it.

Yes for everything that we know right now, that would be the way – that’s the way to look at it, Rob.

Got it. And then you mentioned that things were going ahead of schedule. I think, Max, you even said there was a line printing in Malta. I’m just curious how far ahead of schedule you’d say that is. Because I thought that was going to kind of kick in more in early 2019. And I’m just curious, too, if there’s kind of a similar expedited progress on shifting some of the legacy production at Crane Currency out of other parts of the footprint.

I would say that it’s on schedule. There’s still a lot of work to be done through the course of 2018 at the facility but on schedule progress. The second part of the question, Rob, what was it again?

Yeah. I thought there was this kind of dual dynamic of ramping up reduction in Malta but maybe curtailing it elsewhere. And so I was curious if it was ahead of schedule in Malta, is it also ahead of schedule, curtailing elsewhere?

We have some arrangements with outside suppliers as well that we’re actually insourcing. So some of that volume comes from insourcing of outside suppliers.

Okay. I mean, we can follow up offline if you want. I guess the bottom-line of my question is, I’m wondering if the -- is the fact that it’s pacing ahead in that kind of near- or mid-term positive from kind of all-in cost perspective or if it’s relatively neutral.

Yeah. I would just – I would say it’s relatively neutral, Rob. And I think the color that we’re trying to provide is that it’s an important element of our overall path to the earnings growth profile to that dollar. And we wanted to communicate that things are moving basically on plan. The comments that we made at Investor Day about us being – it’s mainly a 2019 benefit, that’s when we’re not expecting to see any material inefficiencies. So we’re still going to continue to see inefficiencies, notwithstanding the fact that I got one line up and running, whether we have accomplished what we have so far. So we’re still going to see that kind of a headwind this year and it’s tracking. So I wouldn’t say that our comments were geared towards telling you that things are way ahead of schedule and we expect incremental accretion because of that stuff.

Got it, got it. Okay, that’s helpful. Thank you.

You’re welcome.

Thank you. And our next question comes from the line of Walter Liptak with Seaport Global. Your line is open, please go ahead.

Hi. Thanks. good morning guys.

Good morning.

I wanted to ask you about Fluid Handling as well and the mid-single-digit growth that you’re getting. And I wonder, was the volume pretty consistent during the quarter? And also pricing, how are you feeling about the pricing of product? Can you get price yet?

Yeah. Good questions. As we look at the order profile that occurred through the quarter itself and some of this could be seasonal, but we did see a pickup as you look from January through March. So it felt good. But we typically would see that. But it was nice to see the pickup that we did. So we were -- the profile was momentum, I guess, is the way to think about it. From a price perspective, things are tracking according to plan. We had pricing put in our plans for this year from a guidance and plan perspective. And if anything, we’ve only -- we’re only doing a little bit better, I would say, as we’re offsetting much of any material cost headwinds that we’re experiencing.

Okay, okay. I guess along those lines then, are there any other segments? Because in the guidance, you called out that there’s some price/mix issues that were a little bit worse than you thought when you initially did the guidance. Where else are you seeing sort of these price cost/mix problems?

Not really in any of the other businesses, we’re doing very well. I think the comment that we made about our underlying payment business, the margin profile there is actually better – a little bit better than we expected, improved over last year, notwithstanding a slight core sales decline. So payment, very solid. Engineered Materials would be the only other one, right, with a little bit higher resin costs and some pressure. But nothing surprising, I guess, I would say as it relates to that relationship between price and materials. Beyond that, Aerospace & Electronics, really performing very well, as Max mentioned in his prepared remarks. So mix headwinds in Fluid Handling and some higher notable resin increases in Engineered Materials but all as expected.

Okay. Wit that said, the price cost, is there like one more quarter where we get a hit from this? Or is this a problem that you think persists throughout the year? Like if we’re going to factor it into our models, should it be a second quarter thing or throughout the year?

No. So just to reiterate, so in Fluid Handling, it was more mix and the business mix that we’re seeing. But in Engineered Materials, we do expect to see the profile of demand improve in the second half of the year. Material cost at this point, I wouldn’t say I would make any real significant changes to Q2 as it relates to any kind of price materials exposures.

Okay. All right, great. Thank you.

That helps?

Okay. Yeah. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Damian Karas with UBS. Your line is open, please go ahead.

Hi, good morning everyone.

Good morning, David.

Good morning.

So, since last quarter, we did see the U.S. budget pass with a pretty large defense increase. Wondering how much would you expect this to boost the company’s defense exposure? And is it too early at this point to start seeing resulting orders increase on this front?

I think, it’s – yeah, it’s definitely too early, and I think the longer-term funnel opportunities that we see surfacing are encouraging. But some of this is even well beyond 2018 quite honestly. I think it’s a general – as you should think about where we’re playing and what we’re seeing generally very positive. I think what I’m very pleased with as well is the technology development that our teams have been on over many, many years that are providing opportunities, not only with the increased budget – related to the increased budget but just with core defense opportunities that we have been chasing and winning quite honestly.

Okay. Makes sense. And Engineered Materials, obviously a smaller segment, but you have had a nice run here in RVs the last few years. And perhaps this first down quarter comes later than some had expected. But just curious, what gives you confidence that retail demand should remain strong through the balance of the year here as you get past this short-term channel correction?

There’s quite a few well-tracked research indices and industry publications that would indicate that 2018 is going to continue to be very, very solid here. So that’s the best estimates that we have from the market and from our own team.

Okay, great. Thanks guys. And congrats on the improving outlook here for the year.

Thanks, Damian.

Thank you.

Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to President and CEO, Max Mitchell for any closing remarks.

Super. Thank you so much, operator. As we discussed at Investor Day for many years, Crane has continued to evolve into a global, diversified, integrated operating company and a technology-driven enterprise with a very strong position in target niche markets. I remain excited about our current positive outlook and the opportunities that we have ahead of us. Crane’s path reminds me of the words of a recently deceased science-fiction writer, Ursula Le Guin, who once wrote, “It is good to have an end to journey toward, but it is the journey that matters in the end.” I’m proud of our journey and the progress that we’ve made. And I’m looking forward to our team continuing to deliver shareholder value as we move further on our journey in the years ahead. Thank you for your interest in Crane and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. this does conclude the program and you may all disconnect. Everyone, have a great day.