Greetings. Welcome to Crane Company's First Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I'll now turn the conference over to your host, Jason Feldman, Director of Investor Relations. Mr. Feldman, you may begin.

Thank you, operator, and good day, everyone. Welcome to our first quarter 2019 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 Senior Vice President and Chief Financial Officer. We'll 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'll be using some non-GAAP numbers, which are reconciled to the comparable GAAP metrics and tables at the end of our press release and a company 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. After our record-setting 2018 results, we're off to another solid start this year. As outlined in our press release last night, I'm pleased to report that Crane's first quarter EPS, excluding special items, was $1.45, up 11% compared to earnings in the first quarter of last year. Sales of $832 million increased 4% with 6% core growth and a 1% benefit from acquisitions, partially offset by unfavorable foreign exchange of 2.5%. Core growth was very strong across all three of our large, global growth platforms. Operating profit, excluding special items, increased 12% from last year to $120 million. Adjusted operating margins improved 100 basis points to 14.4%, led by very strong margin performance at both Fluid Handling and Aerospace & Electronics. Consistent with our Investor Day messaging, I'm extremely pleased with how we are positioned for 2019 and for the years ahead of us. All of our businesses are executing extremely well, and we are continuing to aggressively invest for growth. We have a great portfolio of businesses, focused on critical components that are technologically differentiated. Overall, it was a strong quarter across our portfolio, and I'm excited about our organic opportunities. Given the strength of our balance sheet, I'm equally excited about our ability to create incremental shareholder value through continued capital deployment with a focus on acquisitions. I will make a few comments about each of our businesses, starting with Fluid Handling, which had a great quarter. Adjusted margins improved to 250 basis points compared to last year and more than 6% organic growth, roughly half of which is from share gains. Very strong execution with progress on numerous growth initiatives as well as our previously announced facility consolidations. A few weeks ago, I had the opportunity to visit our Marion, North Carolina facility, to…

Thank you, Max, and good morning, everyone. A great start to the year. Our teams across Crane doing a fantastic job, executing on all our key initiatives, and we have great momentum as we look ahead. As usual, I'll be providing comments - segment comments that will compare the first quarter of 2019 to 2018, excluding special items as outlined in our press release and slide presentation. Starting with Fluid Handling. The quarter played out as expected. In the first quarter, sales of $274 million increased 3%, reflecting core sales growth of 6%, partially offset by unfavorable foreign exchange. Fluid Handling operating profit increased 26% to $36 million with operating margins of 13.3%, that increased 250 basis points compared to last year, reflecting higher volumes and productivity. A very strong performance by the team in the quarter, driving results while at the same time focused on flawless execution on our repositioning actions. Fluid Handling backlog was $285 million at the end of March compared to $280 million at the end of 2018 and $281 million at the end of March of last year. After adjusting for foreign exchange, backlog increased 2% sequentially and 6% year-over-year. Orders, also adjusted for foreign exchange, improved 5% sequentially and 2% compared to last year. Moving to end markets. Conditions are very similar to what we described at Investor Day. By geography, Europe is stable. We're seeing moderate growth in the Middle East and most of Asia outside of China and the United States is growing but with some mixed signals. By application, chemical demand remains solid across most regions. Refinery turnaround activity continues at a moderate pace. Conventional power remains weak across geographies and general industrial activity remains stable. On the commercial side of the business, we had very good quarter across our U.S.…

[Operator Instructions]. Our first question comes from line of Brett Linzey from Vertical Research Partners.

Just wanted to come back to Fluid Handling and just maybe a little bit more color on the market, specifically with front log in the coding book in Q1 and maybe some color into April. If you could just kind of walk around some of the end markets and maybe geographically as well, how that looked from a year-over-year perspective in the quarter and, again, maybe into April?

Yes. I would say, Brett, that as - consistent with my prepared remarks, no significant changes as we exited the fourth quarter of last year. The order profile certainly a bit different compared to the first quarter of 2018, which we expected to see. So when you look at that year-over-year from Q1 '19 from Q1 of '18, again, not a surprise. No real changes as you come out of the second half of last year. So no real surprises from that point of view. And I would just echo or indicate that my comments that I had in the prepared remarks, no change from a geography perspective or end markets perspective.

Okay. Good. And then maybe just shifting to margins in Fluid, very strong results. You mentioned volume and productivity, but you also did indicate that the Supply business in Canada and U.K. were up, which is obviously good returns, but mix margin, negative, which should - I would assume you had have to overcome as well. So maybe you could talk about some of the components of the year-over-year progress you made in the quarter?

Sure. So look, the team's overall across the segment performed very well, as I mentioned. All businesses were up. But I think for one, from a margin point of view, so really solid execution. When you look at the leverage year-over-year in terms of what we would have otherwise expected or sort of a normal leverage rate, this business performed and executed really, really well, in particular with respect to productivity. So you get your normal volume leverage. But from productivity perspective, very solid performance. I would say it was as we expected internally. And then on top of that normal productivity, the team's delivered everything from a repositioning benefit perspective. So I think the short answer is just solid execution across the group. To your comment on the mix between Crane Supply and the balance, the performance was more notable in terms of execution in our process valve business, which overcomes that sort of intra-Fluid Handling mix components that you mentioned.

Got it. Make sense. And then maybe just one follow up on payments. How large was the drag from the reserve related to Venezuela in the quarter?

Yes. So just overall, when you look at the amount of sales increase year-over-year, we would have expected a profit improvement or you would - we would normally expect a profit improvement somewhere between $5 million and $6 million, right? So when looking at that delta, I would just high level say about 50-50 between the reserve and mix in the quarter. And the mix in the quarter largely attributable to some of the sales that we had in our currency business, where we had incremental paper sales, which carry a lower margin.

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

Max, for the 737 Max for Boeing, are you continuing to produce at 52 per months or at 42 per months? And at what rate are you getting paid today?

Yes. We're not going to speak to the exact specifics, Christine. I can just say that we haven't had a material impact on our build rates. I would point you to Boeing's public statements, we're supporting our customer. It has not had a material impact on our capacity planning nor do we expect it, and we're maintaining it.

And what's your current ship-set content on the 737 Max?

Yes. We don't disclose on each aircraft platform, Christine.

Sure. And maybe switching gears to Engineered Materials, as this business declines today, do you still think of this business as core to Crane? And if not, how do you think about different strategic alternatives for that segment?

And I think, as we've described in the past, Christine, well, potentially, not - one of our larger global strategic platforms, I wouldn't say that it's not core, I would say that it's not one of our global strategic platforms that we're continuing to stay focused on. However, it remains an important business to us that continues to deliver and execute, contribute significant cash flow, well-positioned, dominant kind of market presence. We continue to invest in our facilities, invest in our people. So it's just a really good business, but we're not going to clearly expand in the composite - Engineered Materials space on a global basis.

Great. And if I could squeeze one more. Rich, on Fx, can you provide an update to your exposure? And what exchange rate is embedded in your outlook for the year?

Yes. So what we saw into the first quarter was really a nominal change, really, compared to what our expectations were as we set our rates in - at the beginning of the year and what's embedded in our guidance. But there's a variety of rates, obviously, Kristine, that are included. But I would say no change and nominal impact if any, at all, in the quarter.

Our next question comes from the line of Damian Karas from UBS.

So without getting into the exact shipment details and whatnot, maybe you could just help reconcile the 1Q performance for A&E with full year guidance and some of your commentary earlier on 737 Max. Is it fair to assume that the first quarter just came in a lot better than you expected, and you actually are lowering your expectation for the rest of the year on some of the 737 Max impacts? Or really, are you just kind of taking a more conservative approach at this stage?

Yes. So I would start off by saying that we're confident in our full year outlook for this business. No question about it. When we look at the performance in the quarter itself, as you saw from the materials and some of the prepared remarks, aftermarket was incredibly strong. And no way, do I expect that to continue at that sort of rate. The other thing to keep in mind is that the comps are tougher in the next several quarters, the next few quarters. Last year, we were in the high single-digit range. So when you look at those comparables relative to what the comp was here in the first quarter, they get much more challenging. Q1 by far the easiest. The other thing I would say is that in terms of the outperform the first quarter, about 80% of it, overall, was from aftermarket and military. So they tend to be a little bit tougher to predict from a timing perspective. So if that gives you a little bit more - it gives us a little bit more of that comfort in terms of we shouldn't be necessarily getting ahead of our skees on the year for this business. So hopefully, that provides a little bit of a color for you, Damian.

Yes. It does. And I guess a follow-up question on just the free cash flow. Rich, you alluded to this being the seasonally weaker period for free cash flow and you had some receivable timing. I'm just wondering if you could give any additional color on perhaps expectations for the timing of those receivables. And should we expect sort of just through the rest of the year normal type of free cash flow profile or any sort of movement around the quarters?

Yes. No, I'd - it's all - I expect to get all of that in the second quarter, Damien. So I have zero concern here with respect to the profile moving forward and deliver into that guidance range. I've got no issues with the quality of the receivables. It was just timing.

Our next question comes from the line of Matt Summerville from D.A. Davidson.

A couple questions. First, on the Payment & Merchandising Technologies vertical. Can you maybe give a little bit more color from an end-market standpoint as it pertains to CPI and talk about maybe around the 5% overall organic growth? Which businesses between CPI vending and currency tract may be above or below that? Can you just give more granularity on that business overall?

Yes. Sure. So overall, in the quarter, we had a solid performance, as you said, the 5% versus last year, the majority of it - substantially all of it came from the Payment business, which we largely expected. It was a little bit stronger in payment than we even expected. And most of that coming from the retail channel, frankly. We're continuing to see solid retail demand as we painted for you all at Investor Day. So that's continuing. I will also say that although the core growth year-over-year didn't come necessarily as much from currency, it did outperform our own internal expectations a little bit. So it was a solid performance by the currency team as well. Some of that being in those paper sales that I mentioned earlier, which carried a little bit of a lower margin but, overall, pleased with the performance there. So those will be the two dynamics I'd paint for the segment and, in particular, the strength that we're seeing in retail.

And then I think, Max, it was maybe last quarter, the quarter prior, I apologize, I can't remember. You talked about pursuing a number of opportunities on the microwave side of Aero & Electronics I think framing it upwards of $150 million to $400 million in opportunities. Is there any sort of progress update? You can provide us some kind of thoughts there going forward?

Yes. That was an Investor Day, and Steve Zimmerman, our new President, highlighted satellite-constellation program that we're chasing. We're chasing a number opportunities in everything from Nextgen of just plug for everything the team's doing from a technology standpoint. Matt will come back to that. But from Nextgen aircraft, engine satellites, high-power electrification, I mean, I just - of the technology this team continues to drive is impressive. On the microwave side, our unique multi-mix technology solution with the density of the packaging for that solution is a clear differentiator, especially for the low weight and size that's needed on satellites. We continue to chase that opportunity. It's advancing. It's still in that $150 million to $400 million range, and so it's progressing. No other update other than that. But there continues to be movement in normal cycle of bidding the programs.

And then just one last one. Can you maybe speak to Max the actionability of your M&A pipeline and quality of the funnel and where you're seeing opportunities, whether it be in the Fluid or the Payment side of the business? I imagine Aero assets are overpriced in your mind?

Interestingly, there's some activity across all segments right now. So whether anything will come fruition, we're busier than we've been lately and it's across each of the three segments, believe it or not, including A&E. So we're looking hard at all of them and excited about the opportunity that we're going to bring. If we're able to close, we feel confident in our ability to execute and drive integration planning, drive improvement through CBS. But yes, actually, there's quite a bit of activity right now, Matt, that we're focusing on in each of the remaining three segments, looking at bolt-ons, near adjacencies, and we'll see how the year progresses.

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

A couple of follow-ups here. Firstly, on free cash flow. I don't how far you guys want to get into the weeds on this. Clearly, a big swing in receivables, which you've talked a little bit about. Any more color you can give us on what drove the timing? Where the timing is? What the confidences is in that coming back? And I think, Rich, you said you're confident on getting all that back in the second quarter. If I look back at last year, receivables used $17 million of cash in the first half of the '18. If you're somewhere similar and this was just a timing thing, that would imply maybe $40 million of cash generation out of receivables in the second quarter. Is that a reasonable expectation? And then pretty much every current asset or current liability account got a little bit worse than it was last year. Any color you can give us on any of the drivers behind that?

You're into the weeds. He's in the weeds.

Yes. So I mean, I think, the way to maybe just simplify this a little bit, there's year-over-year and then there's what you said is your operating plan for the following year, right? If I look at what the components of working capital are relative to what I expected to occur in the quarter, outside of receivables, everything was a little bit better. So in terms of inventory or the other line items in working capital. Receivables were, I would say, from a prior-year perspective, is a big swing. And versus my expectations - or our expectations from our planning point of view was modestly worse. And that modestly worse was all related to timing of shipments in our Payment and Currency business and all of which I expect to recover in the second quarter.

Okay. And then one here I guess for Max. You guys don't seem to be getting a lot of credit for the capital allocation that you've done over the last few years, which I think has been very good. And the execution that you have demonstrated over the last few years, which I also think is very good. How do you view potentially using some of the balance sheet here to repurchase shares, rather than target M&A to take advantage of what I think is a dislocation in the value of the stock price here?

Well, we never preannounced, Nathan, as you know. I'll just reiterate what we've said historically. We prioritize internal investment first. We certainly are going to look at deploying our capital in M&A. We think we've got a number of opportunities that would drive longer shareholder value creation versus simply share buyback. But if we're unsuccessful, we will absolutely look at returning capital to shareholders.

Our next question comes from the line of Ken Herbert from Canaccord.

I just wanted to first start off in Payments & Merchandising. It sounds like, obviously, probably a little better than expected in the first quarter in terms of the top line and maybe even the margin. But I'm curious on the top line. Clearly, the comps do step up here in terms of difficulty in the second and third quarter. I mean, it looks like there is a fairly significant step down in the top line implied in the guidance, looking at the full year number. Two questions really around it: Is there anything you can comment on in terms of cadence, or how we should think about that segment on the top line progressing through '18 - I'm sorry, through '19? And then second, maybe was there - was new product or I guess one of the things I'm trying to think about is how some of the organic opportunities you're pursuing could offset some of the comps in the back half of this year. Any commentary around the success of some of what you outlined at the Investor Day last year in this segment and some of the new initiatives and maybe where we could potentially see some upside?

Yes. I guess I'll start there, Ken. So in terms of the comps, right, I think, as you know, we guided down 7% on the segment for the year. A good performance here in the first quarter. That down 7% contemplated two relatively large programs that aren't going to repeat and, therefore, the down 7%. As I look at the cadence of revenues through balance of the year, in this segment itself, with the strength that we had here, I wouldn't expect a step up at a significant degree from where we are today. And it's probably relatively around where we're at. There's a little bit of outperformance in maybe the second quarter. But generally speaking, it's fairly consistent as you move to the balance of the year. On - Yes. On your second question, with respect to I think it was around NPD. Is that - with a number initiatives...

Yes. It was, yes.

Yes. In terms of what we're driving, not just for '19, but also '20 and beyond, I mean, with Payment & Merchandising Technologies at 7% of spend percent of sales for engineering. And A&E, it's 6% right now. We continue to just overdrive investments for growth. And as we highlighted, that's everything from EasiTrax Live and Payment & Merchandising. EasiTrax Live and gaming, which is moving into EasiTrax Connect, all-in-one CashCode reader, ALIO. We're developing breakthrough OEM solutions in not only Paypod in the U.S., but also smart save and [indiscernible] in Japan. Moving over to currency. Introduction of new technology, rapid and surface solutions. And we're really focused on brand protection as well, which we're very, very excited about that market. And Louis highlighted that on Investor Day. So it's not only the momentum that we're going to see through '19 but, also, the continued investments in growth opportunities that we see moving forward.

Okay. That's helpful. And if I could, I just wanted to follow up on one comment you made, Rich, about very strong aftermarket trends in the first quarter. Obviously, difficult to replicate those comps for the full year, but are you seeing anything yet in the second quarter that would imply deceleration there or a slowdown in the growth? Or were they very specific onetime items you point to in the first quarter that were a nice benefit on the aftermarket, both military or commercial.

Yes. The trends are still fairly solid, I would say. But we certainly did have some items and maybe on the military side, that were a little bit stronger. That are, again, a little bit tougher to predict in terms of timing some of the military aircraft, the F-16, the F-22, C-130, things like that.

No dramatic changes in the aftermarket. Momentum...

Yes. Momentum on the spare side, it still feels pretty good here in April.

[Operator Instructions]. Our next question comes from the line of Robert Barry from Buckingham Research Group.

I just wanted to start the following up on that last question about Payment and what did you mean by that, Rich, when you talk about things kind of staying where they're at, you mean in terms of dollars of revenue?

I think the question was the cadence of revenues through the quarters as we look forward. Yes.

Do you think it'll - the revenue will stay at about 1Q level?

Yes. So there was a step up I was saying in Q2, and then it's relatively stable.

Okay. Because if you stay at around in the low 300s for the remaining quarters, I think you'll do...

Yes. No, that's not - hopefully, that not what I - yes. No. I think I set a step up in Q2, no? And then a move from there, but it's not dramatic.

I see. So the back half is where really the pressure will be to kind of get the year down to negative $7 million? The way you're thinking...

Yes, I mean, we're getting into the details. But it's like $5 million to $10 million range one way or the other as you move to the balance of the year.

Okay. I mean, a similar question at Aero, I guess. So you did 14%, you guided 4% for the year, implies the remaining quarters are growing like 1%. But the backlog looks really good. I mean, I think it's up almost 30% year-over-year in the first quarter. So I don't know what the timing of that is, but it implies that things are tracking nicely better and up for in Aero. Just trying to kind of reconcile that.

Yes. What I would say that, Rob, obviously, in this space, you tend to get a multiyear orders that tends to happen often in this segment. I would say - I would probably reiterate what I said at the beginning of my first question on this, which was that we're fairly - we're confident in this business. I wouldn't say that we're being overly conservative by any means, but we feel good about executing on the year and most confident in this segment overall.

Got it. And then just also follow up on some of the commentary around getting the margin, you're targeting in Payment kind of the opposite story guided 19% started at 15%. I mean, I think you said kind of the progress is back half weighted. So I think that would imply kind of low 20s in the back half. I mean, how much line of sight do you have to actually getting there? How much of that is in your control?

Yes. We feel confident in those margin targets, Rob. I mean, again, a couple of unique items here in the first quarter that we don't expect as we move to the right. And we feel good about the integration, savings coming through the transition to Malta as well as the repositioning actions that we have in the core Payments business, all contributed to that confidence in the second half or in the next three quarters.

Got it. Just lastly for me that Fluid order sequentially number up 5%. How does that compare to normal seasonality between 4Q and 1Q?

Yes. So how does that compares sequentially? So up 5% from Q4 last year, I will have to go back to Q4 '17. I don't have Q4 '17 in front of me, but it's not - I would say it's not uncharacteristic. If you look at the profile of sales, orders and backlog coming off of Q4 of last year, which I don't have in front of me, but I have Q1 through - it's not - I need that sequential improvement to generate the backlog that I have here for the step up that we typically see in the second quarter. So I would say it's fairly consistent, Rob, without having the numbers in front of me.

Our next question comes from the line of Ken Herbert from Canaccord.

Yes, Max, just a quick follow-up on Aerospace & Electronics. I'm just wondering your exposure to the 919 in China. Was that at all a factor in the backlog growth? Are you seeing any step up in activity there? Or maybe within the Aerospace & Electronics segment, if you can just provide any more color on the backlog and the growth there and what you saw that? But I'm specifically curious, if you're seeing any increase in activity on the 919 considering your obviously a strong content on that aircraft.

No. Nothing notable on 919, in terms of any of the growth in this quarter.

In this quarter, activity continues just in terms of ongoing support development. We're excited as we said in the past. We have more content on that single aisle than any other single aisle just to put in - we don't give content per aircraft, but on a relative basis. So when the 919 launches and flies, we're excited about the growth that will be coming in the backlog in the future. But nothing in this current backlog.

And just to add on color with respect to the growth in the quarter, F-35 was a contributor, probably the most substantial individual contributor across what was really a bit broad-based. But that was the number one, I would say, contributor. But again, broad-based across a number of platforms, many of which were military.

We have reached the end of the question-and-answer session, and I will now turn the call over to Max Mitchell for closing remarks.

Super. Thank you, operator. Appreciate it. Thanks, everyone. Fantastic quarter. Just so proud of all of our associates across Crane with a great start to the year. Consistent with our Investor Day messing, we're also very focused on our long-term objectives, investing to protect and improve our position for profitable growth in the years ahead. As the late Nipsey Hussle once said, "Instead of trying to build a brick wall, lay a brick every day. Eventually, you'll look up and you'll have a brick wall." While we have ambitious goals at Crane, we make sure we never lose focus on the fundamentals, and we continue laying new bricks of innovation and execution, building our foundation of solutions and technologies for our customers. Thank you for your interest in Crane, and have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.