Greeting, and welcome to Crane's Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Feldman, Director of Investor Relations. Thank you, sir, you may begin

Thank you, operator, and good day, everyone. Welcome to our Third 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 Credit 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 in tables at the end of our press release and the 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. Our strong start in the first half of 2018 continued into the third quarter, where we reported record quarterly EPS, excluding special items of $1.62, up 43% compared to last year. Record sales of $856 million increased 23%, including 6% core growth with strength across all three of our global growth platforms. Acquisitions contributed 19 points of sales growth, partially offset by 2% of unfavorable foreign exchange. For the full year, we expect to be near the midpoint of our core sales guidance range of 2% to 4%. Operating profit, excluding special items, increased 31% from last year to $138 million. Operating margins were 16.1%, also a new record for Crane. Compared to our outlook last quarter, our Aerospace & Electronics business performed better than expected. We also saw further strengthening at Crane Currency. In addition, our earnings are benefiting modestly from faster than expected reductions in short-term debt using repatriated cash. Other major end markets are performing well, with Fluid Handling on track to meet full year guidance and payment markets showing continued strength. We are effectively managing the current tariff and inflation headwinds, and we expect to be able to offset all impacts. Considering our performance in the third quarter and our outlook for the rest of the year, we are raising the midpoint of our full year adjusted EPS guidance by $0.15 and narrowing to a range of $5.80 to $5.90. We are also raising our free cash flow guidance by $10 million to $260 million to $290 million, even after a $28 million discretionary pension contribution in the quarter. We certainly benefited from generally improving end markets this year. However, our extremely strong financial performance year-to-date also reflects the actions and initiatives that we have been driving at Crane for years. Disciplined capital…

Thanks, Max. Good morning. I'll start with segment comments, which compare the third quarter of 2018 to 2017, excluding special items, as outlined in our press release and slide presentation. In the third quarter, Fluid Handling sales of $279 million increased 4%, reflecting core sales growth of 7%, partially offset by unfavorable foreign exchange and a small divestiture impact. Fluid Handling operating profit increased 21% to $40 million, with operating margins of 14.4%. The 200 basis point year-over-year improvement in margins was driven primarily by volume, productivity and pricing, which more than offset the impact of higher material costs. After adjusting for foreign exchange, the backlog of $298 million increased 3% sequentially and it increased 12% compared to the third quarter of last year. Orders also adjusted for foreign exchange declined approximately 1.5% sequentially but improved 6% compared to the third quarter of last year. We continue to believe that we will be able to offset any incremental pressure from tariffs or commodity costs, and we are still on track to achieve our original guidance of 13% adjusted operating margins in this segment. In addition, we are likely to modestly exceed our 3% core sales growth guidance for the full year. At Payment & Merchandising Technologies, sales of $327 million increased 74% compared to the prior year, driven by 71% growth from acquisitions and 7% core growth partially offset by 4.5% of unfavorable foreign exchange. Segment operating profit of $61 million increased 48%, with operating margins very strong at 18.7%, but down from last year driven by the impact of the Crane Currency acquisition. The currency business is seeing incremental strength in its core underlying business as well as continued shipments to a specific large customer. The payment business also continues to see very positive end-market conditions across most vertical…

[Operator Instructions]. Our first question comes from the line of Matt Summerville with D.A. Davidson.

First of all, could you provide just a little end market color, maybe some geographical color in terms of what you're seeing in your Fluid Handling business in terms of kind of in the context of funnel, orders, backlog that type of stuff, please?

Sure, Matt. So from a geographic perspective, overall, I would say very consistent with the trend that we saw coming through the first-half. Year-over-year growth in the process order space across most regions. United States continues to show a consistent growth, again, with what we saw coming out of the first half, I would say modest and steady improvement, particularly in the chemical markets and a good pace of orders with MRO in particular. Asia Pacific, China, Middle East also doing fairly well and consistent with what we saw coming out of the first quarter. And in Europe, order levels there remain a little bit better than last year at this time, which is good, and particularly for those smaller- to mid-sized projects as we've been talking about. Specific to the end markets themselves, modest improvement in chemical, again, a continuing trend from what we saw in the first half, particularly in Asia Pacific, the Middle East and United States. I would say refining was a little bit lower than the first -- the trend that we saw in the first half and power just continues to remain pretty weak.

And as my follow-up question, can you give us a feel where your core incremental margins would've been in the Payment & Merchandising Technology segment? And then maybe talk about the context of how you're able to achieve pretty sizable sequential margin improvement in that business with a relatively small change in revenue?

Yes. Overall, I would say that the -- our performance in that business, to your point, has been proceeding very well. We had, I think, it was 16.5% or so margins in the first quarter or 16.8% and now we jumped up here to 18.7% in the quarter. So solid performance in that segment. I would say, in our Payment space, doing a little bit better and then in Crane Currency, really being the most meaningful impact in the quarter from a margin perspective.

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

If I could start on the Fluid Handling margins here, 14.4% X the new pension accounting stuff is the best since 2014. I think you guys had said you would need a fairly significantly lower level of revenue to get back to kind of prior peak margins in that business. Can you maybe talk a little bit about what kind of level of revenue you would need to get to that kind of level? What kind of incremental margins we should expect in that business going forward?

Sure, Nathan. So, yes, we're pleased with the performance in the quarter for sure. The teams across the segment performing extremely well. In the face of the commodity pressures as you all know, and other material input cost pressures, just an exceptional performance year-to-date. As we think about this business going forward and margin potential, I think is really what your question is. We see 30 points to 35 points of just normal core leverage. But then on top of that, the benefits of the repositioning that will sort of layer on top of that as we think about 2019. And so that leverage profile probably gets to as high as 45% or something like that as we think about next year. I would say that we're sticking with the pace of -- what level revenues need to be at for us to achieve our, call it, mid-teen margin target. We're not going to necessarily come off that just yet, but certainly, we're making excellent progress and momentum in the face of some pretty significant headwinds around input costs and such.

Just on that price-cost issue, clearly, investors are concerned about that here. And I think you guys have made a couple of comments that would tend to have us believe that you're not seeing much of a price-cost issue. But maybe if you could just put a finer point on it across the portfolio, where you are with price-cost covering tariffs and all of that kind of stuff just to be clear about it?

Sure. So I think our prior comments were more of along the line of that -- it's been well understood and our teams are all over it, and we're covering and mitigating the impacts and not seeing a significant impact. And I think as you can see from our results year-to-date, particularly in the third quarter here as well, overall margin profile is at 16%, little over 16% OP. Fluid Handling, which is where most of our exposure is at 14.4% in the quarter, really dealing well with the inflation that we're seeing from a material cost perspective, as well as tariffs. So if I peel that back a little bit, about 60% of the overall inflation excluding tariffs is really within our Fluid Handling business. And again, with a 14.4% margin profile here in the third quarter, we're dealing with that fairly well. It's things like pig iron, a little bit of steel, aluminum, copper and areas like that from a material cost perspective. On the tariff -- from a tariff point of view, on a -- from a full year perspective, I'll just give you some quick color as well. Probably 80% of what's impacting us from a tariff point of view is also within Fluid Handling, okay? And the total tariff impact as we see it from 2018 is just south of $4 million in total. So I think on the tariff side, I would say, it's not been a significant factor overall for us in 2018 and certainly, much lesser in scope or in relevance than just overall material cost pressure, but clearly being able to deal with that in a pretty meaningful way. Across the rest of the business, it's modest increases in material costs. If we're thinking about Payment & Merchandising Technologies, Aerospace & Electronics, the next biggest would be Engineered Materials, which is where we see the impact from the higher oil prices. So I think to step back, material overall 60%, it's really in Fluid Handling. When you think about the overall exposure, we're dealing with it well. On tariffs, current year roughly just a little bit less than $4 million in total and most of that also being in Fluid. And I would say, if you're thinking about 2019 now when you think about the rollover impact of less than $4 million in '18 on tariffs, we're probably going to see someplace between $10 million and $12 million in total without any mitigating actions against it. So obviously, we're not going to let that happen. So hopefully that helps you understand the overall picture on materials and inflation.

It does. And then just on Payment & Merchandising, did you guys take up the guidance number at all for that large customer Crane Currency revenue? And then, another question we get from investors is that Payment & Merchandising is going to face a tough comp next year, if you fail to replace that contract or that contract doesn't have some more in it in 2019? Do you guys have any visibility to potentially shipping to that customer again in 2019? Are there any other large projects out there that could fill a hole? Or should we really be expecting probably revenue to be down in that segment in 2019?

Yes, Nathan, this is Max. Let me try to hit a couple of points, and ask again if we miss anything. The first thing I'd paint is, as we said on Investor Day, that we have a clear vision with the self-help, with the accretions from Crane Currency of $1, with the tax benefit, with core growth of achieving $7.50 to $8 a share EPS by 2021, and we still feel very confident on that path. So I would start answering the question, painting that picture of that longer-term vision of what we clearly have line of sight towards. Now we back into the impact on 2019 after an exceptional year in 2018. We are about ready to visit all of our businesses for 2019 plan starting next week. And so we're really going to be spending time dialing in that earnings growth expectation for next year. Right now, the customer impact that you speak to continues positively. We continue to have positive negotiations on 2019. There's some uncertainty still as we move forward, we feel very good about 2018. There is not a strong significant contribution to the increase in earnings. It's baked in. We have clear line of sight to that. There's not a whole risk in that number. There are expectations that it continues into '19, as well as expectations that there -- that it will continue. So we've got our work cut out for us. I think if it were to go away immediately, then clearly, on a year-over-year basis, we would have some challenges in terms of year-over-year growth. However, we still have clear expectations and line of sight for the dollar EPS accretion by 2021. Nothing changes in our longer-term view. There's some cyclicality next year that -- or some timing that we need to tighten up and look forward to communicating in much more detail both on the next call as well as on Investor Day. I don't know, Rich, do you have anything that you'd point out on Nathan's question?

Yes, Nathan, the only thing I would add is, I think Max covered it in terms of the current year, a little bit -- a couple of pennies or so worth of the increase related to our progress with that customer. And if you're worried about the downside risk, because maybe perhaps some of what your question is getting at is what happens in '18 given our guidance, and to the extent that things were to moving in a difficult direction, we're not worried with the guidance range at all in that regard.

Our next question comes from the line of Brett Linzey with Vertical Research Partners.

Just want to stick with the Payments business, another really strong quarter of backlog growth. Could you just talk about the parts of the business driving that uplift? And then maybe more specifically, you guys highlighted the Paypod solution opportunity at the recent Investor Day. I think you mentioned in the sales pipeline there's $30 million or so just six weeks of the launch. Any update or color you can provide about maybe broader themes and then any specific opportunities?

Paypod continues, not a significant update since the meeting we had in Malvern, Brett. We have -- the funnel continues to grow. We have some sales that have already been executed on. We have learnings that are taking place in the field right now, success stories that we're leveraging, a dedicated sales force that is taking the roadshow to end customers and OEMs providers. So all solid and consistent with what we communicated there. In terms of end market color, from a sales standpoint within the quarter, we really had strength across the board except for retail, which is really the year-over-year impact from the large customer impact last year. But still, generally positive forward-looking trends, Paypod being one of them. On the order front, I would say that strength really coming through in financial services, gaming and vending; retail and transport being a little weaker in the quarter from an order standpoint.

Okay, great. And then maybe on the other side, on Merchandising, you noted in the slide that it contributed to core growth in the quarter. That appears to be an inflection versus previous trends in what's been a pretty stubborn market. What were the contributors there, and are you starting to maybe finally see a turn in capital investment from some of the cold beverage players? Or is it digital connectivity up-selling? Any color would be good.

Yes. I think it was -- as expected from our point of view, you do have some lumpiness that's embedded within that business. It did contribute to the overall core growth profile a bit, which we're pleased to see. We had a couple of quarters preceding this one that were very difficult or more difficult. So seeing that kind of pullback here in the third quarter, something that we did forecast and expect internally here. Full line operator, business doing a little bit better, I would say and -- but overall, I would look at it as more of a timing item and to think of the business is this 3% sort of type of growth trajectory as we think about moving forward.

Okay, great. And then maybe...

Yes, I would just say, we're pleased with what we've been able to do in the quarter. The teams there also performing -- performed very well.

Okay, great. And maybe just one more just on Crane Currency. $20 million of cost synergies was the original target. What -- by year -- by year-end here, what's going to be the ultimate realization for the cost synergy there?

So just to be clear there. So the -- if we think about the number that you mentioned, through 2021, what we had forecasted was savings from the transition from our Sweden facility to the Malta facility of $20 million of...

It's $20 million to $25 million.

I think it's $20 million of net income, and then on top of that, an additional I want to say $15 million of productivity across all locations, again, through that whole time period. So we haven't parsed out necessarily the components by year, Brett, but we feel like we're on track to hitting those targets and it's something that we spent quite a bit of time on as we manage that business through the integration, and as we think about 2019 in particular when the Malta transition will be largely -- will be complete, frankly, by the end of the first quarter of 2019.

Our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch.

Max, can you provide more color on the repositioning at Fluid? Is this more footprint optimization? Or is this preparation for growth that's coming? We'd just like to have more information on that.

What did we communicate publicly already?

So yes, I mean, if I can -- I mean, this was -- so this was nothing new, right, Kristine. It's something that we announced back in the fourth quarter of 2017. I think that's what you're referring to. We haven't announced anything new today or in the current year. So in terms of the progress around that, it's about footprint optimization, largely within our process valve business and moving according to plan, yes.

Great. And that 13% operating margin outlook in Fluid, is this before or after special items?

Before special items. And in terms of savings, if that's maybe part of your question on repositioning, there is a modest amount that's included in the second half around that. That was part of the reason for the success that we've had in the second -- that we expect to see in the full second half of 2018.

Great. And I really appreciated the market color that you provided by end markets and Fluid. And if I recall, your full year outlook for revenue growth in that segment, you expected to be driven by market share wins. Can you provide more details on the competitive environment and is that market share win progressing as you expected?

Yes, Kristine, we have a launch of new products and they continue to do well. The same story, I hate to sound like a broken record, but TOV being an example with emission solutions, part of our solution in the space is really focusing on enhanced emission, low-level emission requirements that we're winning with and winning with our customer base, even seeing some of the upside in China is playing through with domestic manufacturers, which is a newer trend for us. Historically, we've always positioned -- had a strong position with the global players where we have been seeing, because of the stringent pollution controls and changing environment in China, that higher value-added solutions are needed much like we have from an emissions standpoint. In terms of some of the share that we're taking also in our pharma-related businesses when NexGen Biologics, which we've seen some great success there, where we're capturing some share. Some of the momentum we've seen in the quarter, both on MRO as well as some expansion, which has been interesting to see around the MDI chain, both here in the U.S. as well as Europe. Pesticides, fertilizers, some of the end drivers of the demand that we've seen with our solutions as well. Hopefully, that gives you a little bit more color.

Our next question comes the line of Ken Herbert with Canaccord Genuity.

I wondered, Max or Rich, can you provide any more detail on the up 19% aftermarket growth within Aerospace & Electronics in the third quarter? And maybe how that parses out military versus commercial or within commercial, with some of the different product lines there, maybe a little color on some of the trends you're seeing.

Sure, Ken. Well, I mean, we had another solid quarter here on aftermarket as you saw and the nature of your question. IP spares was a big component, 777, 767, 787, even some of the narrow-body as well. But we also did see continued strength in military. If I was to say what percentage, the majority of the increase was around commercial spares on a year-over-year basis. But we also did see growth, as I mentioned, in military programs like the A400 M, the KC-135, the C-130. So it's a little bit broad, again, following the same experience we had in the second quarter, I would say. As we think about aftermarket going forward, we're a little bit more cautious, two quarters here in a row with pretty substantial growth in aftermarket is exciting, but it's also -- causes you to pause a little bit in terms of what to expect as we think about the balance of the year and as we think about 2019. So hopefully that gives you some perspective on where we're seeing it.

That's helpful. And I guess caution on aftermarket and when I think about mix in the fourth quarter, is that what's behind your sequential down margin sort of guidance for the fourth quarter in the segment?

Yes, it's a modest downtick, but yes, that would be the driver to not -- we're not forecasting the same exact strength that we saw here in the...

And it's not -- Ken, this is Max, it's not a concern over the end market. Keep in mind for investors that we see all aftermarket orders. It's just a matter of timing. Our -- we have a difficult time to predict exactly the short cycle aftermarket sales, and we can be surprised. I think we were pleasantly surprised on the upside the last two quarters. We've gone back to more historic norm levels for our forecasting for the fourth quarter.

Okay, that's helpful. Because you do -- obviously, typically C&I is seasonal, at least on the top line or on the bottom line, but a really nice top line bump in the fourth quarter, and it sounds like I know comps were very easy or easier this quarter, but it sounds like that top line outlook for the fourth quarter is holding up.

That's correct.

Okay. And then just finally as you think about the incremental margins there in the aftermarket, again within Aerospace & Electronics, how is activity been on the military side? And I know it can be lumpy, but are you seeing any change in your customers in terms of greater sense of urgency, now that we have sort of a fiscal '19 budget in place and clearly, fiscal '18 money still to be spent? Have you sensed any inflection there and maybe greater urgency or greater desire to spend when you talk about KC-130 and some of these older platforms from a readiness standpoint and is that something that could sort of carry into 2019?

There's a longer-term trend that we're clearly seeing around electrification. And with our Power Solutions and Power Conversion Solutions, it's something that -- now this is going out even beyond the five year horizon. So -- but there's a lot of activity around electrification and directed energy and so there's some things that we bring in terms of our power conversion knowledge and expertise that we clearly have seen an uptick in development, in R&D, as we're looking forward, which is exciting and where we're continuing to invest in terms of maintaining our technology differentiation. In terms of some of our other solutions that are applied in both commercial and military applications, I would just say that it certainly has been strong overall although not the same level of -- if I may answer your question properly about any inflection point or trend on that side of the business, as much as it is just general strength.

[Operator Instructions]. Our next question comes from the line of Walter Liptak from Seaport Global Securities.

I'd like to ask one on Engineered Materials. I know it's small but no one has asked one of those yet. I wonder if you could just maybe separate out the business. And if anything's doing better in there and then the inventory correction seems to be something that's dragged down for a couple of quarters. I wonder if we're nearing the end or if this is something that stretches out into 2019?

So we're going to be visiting with our business unit, Walt, and asking those same questions and looking into the facts in detail. Right now, if I looked at it at this point in time, we still see market data that says the end retail sales are mid-single digit read-through and that, that's going to continue into '19. If that's the case, then this inventory correction is going to reach a bottom, we would expect it in the fourth quarter and it could indicate flat to up sales in '19. I think that's the big question, and we'll have more detail for you on exactly how we're going to see that play out in our guidance in January and the February Investor Day. Beyond that, there is not a lot more insight that we have. It has gone on longer than anticipated, longer than expected. It's that end retail sell-through that we're all watching very carefully to try to project and anticipate.

Okay. All right, sounds good. And if I could switch over to Fluid Handling, and I wonder if you could talk about the business in terms of long cycle versus the book/ship business? And what you're seeing, if anything, on pricing for long cycle versus the book/ship, any changes?

So yes. So as we talk about Fluid Handling and think about the long cycle portion of the business, that's the process side. That's where we really saw a lot of the backlog growth over the last few quarters as we've been pointing out, and then here in the third and what we expect in the fourth quarter would be some read-through of some of that backlog growth, as we had previously communicated and what we demonstrated here in the third quarter. So similar trends, as I mentioned earlier. On the long cycle portion, we would expect the same thing that we saw in the first three quarters that outlined earlier on the geographic and end market outlooks. For the shorter cycle businesses, things are looking fairly good there as well. We are pleased with the performance that we've seen in our Crane Supply business in Canada, our distribution business up in Canada, as well as what we're seeing in the U.K. and the Middle East from our Building Services short cycle -- shorter cycle business supplying nonresidential construction type end markets in that space. So -- and then we have a water business, as you know. It's a smaller business but excellent -- an excellent business with fantastic margins and growing. So that's the municipal end market channel that we serve as well as some industrial and building end markets. So overall, I would say that both the short and long cycle are performing as expected and well. There's not one section of that portfolio that we would -- of the portfolio that I would say we're overly concerned with.

Okay. Is the pricing improving on the long cycle business?

Yes, sorry, on pricing, we're -- yes, we need to in order to offset some of the headwinds on material costs, and we're doing a very good job there. But from a new product development perspective, and the things that we're bringing to market, it's commanding an increased price as well. And so I would say overall, a continuing trend from what we started to see at the beginning of the year.

There are no further questions in the queue. I'd like to turn the call back over to Mr. Max Mitchell for closing comments.

Thank you, operator. Thank you all for your time today. I look forward to providing our next update in late January, when we will report the fourth quarter results and provide 2019 earnings guidance. We will also be hosting our Annual Investor Day Event in New York City on February 28 next year. We remain confident in our outlook, confident in our disciplined capital allocation, confident in our continuous operational improvement and confident in our growth and innovation investments. As the late great Aretha Franklin once said, "Always be confident in what you're doing. If you're not going to be confident you may as well not be doing it." We remain confident that we will continue to create value for shareholders, as we execute now and in the years ahead. We look forward to our next call and guidance for 2019. Thank you all. Thanks for your interest in Crane and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.