Greetings. And welcome to Crane Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jason Feldman. Please go ahead, sir.

Thank you, operator and good day everyone. Welcome to our fourth quarter 2019 earnings release conference call. I am 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 will start off our call with a few prepared remarks, after which we will respond questions. Just a reminder 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, Form 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. Please also mark your calendars for our February 27th Investor Day event in New York City. Please contact me directly if you would like to attend. Now let me turn the call over to Max.

Thank you, Jason. It was an eventful quarter with the -- and year with a lot of moving pieces. And Rich and I have a quite a bit to cover before we get to Q&A. So let me get right into it. We had a very strong close to the year particularly from a free cash flow perspective. The 2019 was another year for record financial results, though somewhat lower than we originally expected when the year started. As outlined in our press release last night, we reported recorded full year adjusted EPS of $6.02, up slightly from 2018. Sales of $3.3 billion decreased 2% compared to 2018 but we delivered a record $325 million of free cash flow, up 7% compared to last year. Operating margin excluding special items also reached a record 15%, a 50 basis points improvement from last year. Fourth quarter EPS excluding special items was $1.58 per share compared to $1.64 in the fourth quarter of last year. In addition, during the quarter, we use part of our record free cash flow to repurchase $80 million of our shares in the fourth quarter. We announced a 10% dividend increase yesterday reflecting confidence in our long-term outlook, and solidly within our targeted payout range of 25% to 30%. We initiated a new round of repositioning in our Fluid Handling business, which will generate $10 million of savings in 2022, incremental to the repositioning actions we began at the end of 2017. And after making the decision to pursue CIRCOR last spring and that process concluding unsuccessfully by August, we were subsequently invited by CIRCOR to participate in the process for the sale of their Instrumentation and Sampling business. We signed a definitive agreement to acquire this Fluid Handle business in late December and we expect it…

Thank you, Max and good morning, everyone. As usual, I'll be providing segment comments that will compare the fourth quarter of 2019 to 2018 excluding special items as outlined in our press release and slide presentation. Starting with Fluid Handling. Sales of $277 million declined 1% driven by a slight core decline and unfavorable foreign-exchange. Fluid Handling operating profit increased 9% to $37 million with operating margins of 13.5%, 120 basis points higher than last year, reflecting productivity and repositioning benefits. This was a very strong performance by the team in the quarter, again driving very strong operating leverage, while continuing to execute on repositioning actions, as well as growth initiatives. Fluid Handling order backlog was $267 million at the end of December compared to $280 million at the end of 2018, down 5% year-over-year on an FX neutral basis. Orders also adjusted for foreign exchange declined 5% sequentially, but increased 1% year-over-year. Order and sales activity in the quarter was approximately in line with our expectations. On a full year basis, core growth was almost exactly in line with our original guidance, but we did outperform on margins partly from certain repositioning actions being completed earlier than expected. Looking ahead to 2020, while we expect a modest decline in our end markets, we are guiding to a flat core growth as we continue to deliver on our new product development and shared gain initiatives. We expect margins to expand to approximately 14% consistent with the framework we have provided at Investor Day over the last few years, and reflecting slight margin dilution from the Instrumentation and Sampling acquisition given our current estimate of intangible amortization. At Payment and Merchandising Technologies, sales of $315 million in the quarter increased 1% compared to the prior year, driven by 1.5% of core…

Thanks Rich. I look forward to seeing many of you at our February 27th Investor Day. In addition to reviewing our core businesses, we will provide an update on our multiyear earnings growth outlook. The highlights are similar to what we have discussed in the past. We continue to execute extremely well in mixed markets. We continue to accelerate growth investments across Crane with increasing evidence of substantial traction. We will continue to prudently return cash to shareholders and we are taking a more assertive approach to acquisitions, while maintaining our strict capital discipline on an organic growth. We're also going to highlight how we think about our businesses in portfolio with Crane with added insight into describing what we own and how we operate our assets, while also providing further examples of how we continue to use CBS as a differentiator, running our core business and how it will continue to drive M&A opportunities. Overall, it's a compelling story and we look forward to sharing more with you next month. Operator, we're now ready to take our first question.

[Operator Instructions] Our first question today is coming from Ken Herbert from Canaccord. Your line is now.

Hi. Good morning, Max and Rich and Jason. Hey, Max, I just wanted to start off in Fluid Handling. I mean you're guiding to basically flat core growth in 2020. Can you just unpack that a little bit for us in terms of expectations of share gains versus some of the expectations and some of the core end markets? Obviously, I know you've got the acquisition that's going to help there, but how should we think about the fluid handling core growth and some of the key moving pieces there?

Yes. So, Ken, just I'll take some of this. I would say, overall just to sort of recap a little bit. We finished-- we finished 2019 sort of right in line with what we thought right overall from a core growth perspective. As we exited the year overall when you look --when you break it up and you look at process versus commercial, on the process side of the business, again, a solid year last year and now cascading into 2020. We do see a market that's going to continue to be down. We've been very successful throughout 2019 on core growth initiatives that helped offset what was also a challenging end market, but we do expect end markets to be down in the process side in 2020. We are overcoming some of that down market with continued share gains with new product development and so forth. If I look at the commercial side of the business, we had a very strong year last year as well as part of that 4% core growth that we delivered and we see that just abating a bit. So that puts a little bit of added pressure when you compare it to 2019. So although we still see core growth across commercial not as great as we did in 2019.

Okay. That's helpful. Thanks Rich. And if I could just quickly on the MAX, can I --the 737-MAX. Can I assume from your comments that you're effectively maintaining your cost structure and your headcount and everything else in anticipation of a production ramp in the second half of the year? Are you looking at any cost actions now to maybe help with some of the near-term mitigation?

No. We're not planning any cost reduction initiatives, Ken. So we're assuming this is temporary and we're going to continue to invest in the business.

The next question is coming from Kristine Liwag from Bank of America. Your line is now live.

Hey. Good morning, guys. For year 2021 EPS outlook of $7.52 to $8, can you clarify how much incremental M&A is embedded in this outlook, if there is any?

So that's a -- so for 2020 -- the overall $7.50 to $8 as we framed it up initially and continue to today, there isn't any expected further M&A accretion included in that number. So and you look at our guidance here of $6.35 at the midpoint and you assume as we are that there's the impact of the return of the 737-MAX as well as a return of demand in our USG business for currency that's going to contribute somewhere around $0.60 a share. So from there you do the quick math on that, Kristine, and assume that our underlying business would grow somewhere between, I don't know, 7% and 9% from an EPS perspective, you can quickly get to that $7.50. So while maybe perhaps a bit of a bias towards the $7.50. We feel pretty confident. There are other measures as you suggest to get us well beyond that number for 2021.

I see. I guess I would have expected that with the two acquisitions you've announced and you're expected accretion from Cummins and INS that there could be upside pressure to that range. Is there something else with the headwind?

No. That's essentially, you're correct. I'm not including the $0.25, the incremental accretion coming from Cummins Allison, CIRCOR in future years, were not included in my number. So to your point other M&A accretion that might occur post the $6.35 further M&A, repurchase activity, the capital deployment is not included in that $7.50.

That's helpful. And following up on the 737-MAX. I think UTX said this morning, right, that they'll have a 90-day production pause and then they'll go to a 21 per month rate through the rest of the year. Is that similar to what you are assuming in your MAX impact for the year?

Yes. Kristine, so we're not going to comment on specifics with respect to production rates and timing at this point. Potentially we'll do that at Investor Day, take to the extent that we get further public clarity from Boeing that we expect hopefully this week.

Our next question is coming from Matt Summerville from D.A. Davidson. Your line is now.

Thanks. First on the Payment business specifically to Cummins Allison. Can you talk about what the profit differential may look like between the service side of the business and the hardware side? And what would be the average duration of the service contracts for that company?

On the service, the life of the service, so almost 75% of the installed base as an annual service agreement. So it's an evergreen kind of renew --renewable service agreement. We're pretty excited, Matt. It was one of the strategic reasons for the deal about 50% of revenue is this recurring revenue and service. Cummins with the deal is about 43 branches and over 400 really talented associates in the field that we see some opportunity on not only the existing service business, but on how we're going to leverage that not only with other existing Crane product, but also servicing some third-party opportunities that we already have identified. So it's a great piece of this business that we see. The synergies with the combined organization come in the margin profile.

I mean the margin profile on the equipment is solid. I would say right sort of what you'd expect from a component type manufacturer with the -- on the services side. I would say modestly higher than what we're seeing on the equipment with opportunity in our view from a pricing perspective as we look out.

Is that the main structural issue? I guess I'm surprised with 50% of that business being annuity like service that the operating margins are only 5% and -- or mid single digit, I think is what you said. So I want to clarify that. So if it is a mid-single digit is that mid-single digit number pre the incremental intangibles amortization or is that fully absorbed for that? Just to be clear.

No. That's fully -- that includes the intangible amortization. So from our point of view and with the prepared comments regarding our target margin range and the opportunity that we see to bring that business there. This is what's exciting to us frankly about the business. We see a significant amount of potential to improve the margin profile.

This was a well-run absolutely respected family run business for many, many years that had different motivations and drivers. I think it's just an incredibly well-run organization with fantastic people. And we're going to be very careful and methodical on how we continue to grow and execute, but if there's a lot of opportunities in the combined strength of payment and merchandising technologies.

If I can just sneak one more in sticking with the Payment segment specifically to CPI. Can you sort of talk about what the market overview is or end market overview is for that business? What you're seeing in retail, transportation, gaming et cetera? And how that sort of calibrates to the segment organic guidance for the year? Thank you.

Sure. So just overall on the segment guidance. I think we're plus 1% for next year. We have a bit of the headwinds obviously in 2020 continuing with the US government. So just overall that being a headwind to that 1%. The Payment business continues to look pretty good across most of the verticals that we have, Matt, so I would say continuing underlying trends in the various sectors that you mentioned in particular around even transport, retail and so forth. Gaming, some slight headwinds that we saw this year that we expect, we should recover from but overall when I look across all the solutions, we feel pretty good about the business and we're going to see some of that continuation of core growth that we saw over the last couple of years.

Our next question today is coming from Nathan Jones from Stifel. Your line is now live.

Good morning, everyone. Just following up on the U.S. government destock. Do you guys have any intelligence or any additional information that would suggest that the government will be back to a more normal level of buying in 2021, other than looking at history and where things have been before to justify the outlook for next year?

Just extrapolating, you broke up a little bit, Nathan, but I think I got the gist of the question. Extrapolating, we still feel pretty solidly about that range of normal demand and I think, look, I mean verbally we're not going to know until the absolute order that's not --that will be the new number. But I can tell you that in conversations with those at the bureau, we certainly have an indication it's going to revert to a normal level and but nothing that has been definitive. I can also say that anecdotally we've been tracking this now. We don't expect any change. There's very little change with the order rate once it's given and so that's going to be very, very stable through the year. But we are anecdotally hearing that the destocking is well on track and as expected.

Okay. Outside of the impact from that this year, I think Payment and Merchandising growth number at plus one actually I think are very solid and probably demonstrates some pretty good growth in the business outside of that. Are you guys able to quantify the impact of this destock on the overall segment growth for the year? What's the underlying growth in the other businesses?

So I mean I think what I would say, Nathan, just is I would agree with what you're saying to be at plus 1% not withstanding the headwind with the US government. We're seeing continued momentum on the international side of the currency business would be the one thing that I would clearly point to you but also like I just mentioned in response to Matt's question with respect to the underlying end markets in our payment business. We're continuing to see continued traction and solid demand across those solutions. So I would say it's a combination of those two factors.

Okay. And just one more on the acquisitions. You talked about Cummins Allison getting up to segment average level profitability going forward. My quick back of the envelope math would imply that, that's an additional incentive accretion there. I would assume that there's got to be some cost synergy opportunities for the CIRCOR business. I'm wondering why 2022 would only be $0.25 of total accretion from those two acquisitions. Is there - does it take longer to get Cummins Allison up to those margins? The services and built into that estimate?

Yes, no. It's a good question, Nathan. I would say that we feel, I would say we feel very comfortable with the $0.25. We'd like to see things play out a little bit, but I would say that we're very comfortable with hitting the $0.25 per share target that we laid out today.

Our next question is coming from Robert Barry from Buckingham Research Group. Your line is now live.

Hey, guys. Good morning. So I just wanted to clarify on the 737, the $0.25 impact is for some undefined amount of time that this pause occurs.

So we base our --

The $0.25 [Multiple Speakers] quarter, yes.

So we so we based our estimate pursuant to feedback and what you'd normally expect us to be receiving from our customer. So in response to that we've laid out a pretty thoughtful cadence of that production pause in our 2020 operating plan and our guidance. So there are specifics. I just --we'd rather not comment on them until we allow our customer to publicly disclose what their production plans are.

But it is the rate that's been publicly disclosed today. I'm sorry --it's been privately disclosed today. If others are communicating that we prefer not to until we have more confidence around that. I think the way to think about this to, Rob, is on a worst case basis if production literally went to zero for the entire year, we would still feel comfortable with the low end of our range.

Got it. Got it. Okay. So the $0.25 is kind of at the midpoint and that if it was a worst-case scenario would just kind of bring you down for the low end of the range.

That's right.

Okay. That's helpful. And any thoughts on this virus and how that could impact the business? I mean maybe just from what you've seen in the past with SARS or something like that? I know it's still early and but big picture how are you thinking about that? And is there any contingency in the guidance for that?

There is no contingency in the guidance for the coronavirus. I think this is something that everyone is watching carefully. I know we are and gathering intelligence having lived through SARS as well and understanding the ramifications. I think watching this play out there was --it's been quiet the first week because it happened to be conducted over the Chinese New Year when things were already down. When things were quiet, when the government was able to continue to ratchet up some counter measures. And then we saw the spread into a couple of other countries on a minor basis. I think we're in close contact with our leadership in China that is making some calls. We've extended slightly the Chinese New Year in terms of returning that matches the government actions. I think this is something that's going to play out here real time day to day. Rob. And is a concern but it's going to impact. It's something that we're all going to have to face, be faced with and deal with shortly depending on the continued severity spread so forth. I think, as I think about this, the risk is not so much with our --from a materiality standpoint. It's not so much with our existing facilities and dependencies. It's more than broader supply chain. It's going to be what happens in the Chinese supply chain all in. And when I think about that some of the end segments that are a little more dependent than others would be Fluid Handling, Payment and Merchandising that, yes, A&E very little and Engineered Materials nothing. So that's kind of how I'm thinking about it. There's going to be a lot to learn every day as we move forward and I'm sure investors are all in tune with this as well.

Got it. So you don't see it as much of arrow kind of reducing travel, flight hours after market impact. It's more of --

Yes. In terms of, I was speaking specifically to supply. Yes. I was speaking specifically to supply chain demand but in terms of impacting end markets for sure. I think the transportation industry, I think, we're already seeing signs of travel, reduce travel so forth that it's going to play out. How deep, how severe, early days.

Yes. It's just too early. I guess just lastly. I was wondering if you could help us on how we should think about the cadence of growth in payment. I mean that frankly after seeing 3Q down so much on the government contract destock it was a little surprising to see 4Q kind of rebound. I mean is that your --should we model the payment business like down in the first half and then up a lot potentially in 4Q? If there's assumed return to normalcy in that contract or how you --how should we think about the cadence of growth in payment?

Yes. Rob, we'd rather -- we'd rather not get too deep into these segment quarterly splits. I mean we'll go down a lot of roads here with the different businesses. What we can do is make sure that we address this during Investor Day and provide that color for you so that things become a little bit more clear. It's a little bit more challenging given even the moving pieces within that business itself right between what's international and what's US government. And so you can really wind up unpacking quite a bit there. So if that's okay we'd like to update everybody during Investor Day.

Our next question is coming from Damian Karas from UBS. Your line is now live.

Hi. Good morning, guys. So wanted to ask you about currency thinking outside of the current destocking cycle going on at the US Fed. But just in general could you maybe give us some additional color on, that the trends you're seeing and I guess what the project pipeline might look like for that business. Just wondering if there's anything promising that you've perhaps got some pretty good visibility on whether or not it's in your guidance for this year at this stage.

Yes. I think just generally International is doing very well, very well. I mean so we have the technology thread that we can sell both independently or with a finished bank note. That technology is differentiated from all competitors. It continues to play out and that value is understood in the marketplace. So there is a rich pipeline of opportunities both on what we are chasing, what we bid on, what we're expecting; what we are winning and I can tell you that we continue to take share not only in technology but in finished banknotes. So that's a bright spot. The team continues to execute very well.

Okay. And shifting over to capital allocation. So you've completed these two acquisitions recently December and then also executed $80 million in buyback. Now how much capital do you think you have available to deploy this year? And are you considering any incremental buyback at this stage?

So, Damian, yes, post the acquisition activity, post the repurchases in the fourth quarter, we still have pretty good capacity here for M&A, right. When I think about and there's a difference right between capacity for M&A and capacity for repurchase. From an M&A point of view call it between $400 million and $500 million today but it grows pretty quickly once we get towards the end of 2020. You can envision actually being double that size by the end of the year with projected EBITDA levels and so forth. So from a repurchase point of view, it's going to be lower than that given you don't have any acquired EBITDA but that the short answer is with that kind of M&A capacity you can envision a decent amount of repurchase to the extent we can't locate any sufficient opportunities for that capital.

Okay. That's helpful. And one last quick one on the CIRCOR I&S acquisition here. I think if I heard you correctly that's expected to contribute about $70 million in sales this year. And, Max, you talked about that mostly being a replacement business. But I think if you kind of look that the release that that business might have been in the low 80s a few years ago. So it seems like it's been down could you maybe just elaborate on what's going on there and what kind of growth profiles you would expect for that business? Is it similar to fluid handling segment overall?

Yes. I think that's what you can expect similar to the existing end markets. I think it's been challenged with general end market conditions to date. We've got a nice adjacency here with critical applications same end markets and customers as our process valve business. And focused on chemical, petrochemical, 50% MRO, nice margins just a solid business. And we think that in addition to just being a nice tuck-in the right value as we think about what Crane can bring Instrumentation and Sampling is the global presence. We just have a slightly stronger support structure globally, Saudi in particular. We're looking at accelerating some enhanced localization that we already have well underway. So that's just one example of how we think we're going to bring more as a combined entity.

Your next question is coming from Brett Linzey from Vertical Research Partners. Your line is now live.

Hey. Good morning, everyone. I just wanted to come back to fluid handling, orders up 1% on a two-year stack. I mean it's similar level to Q3. So it doesn't appear there's sharp erosion in the business. Could you just characterize the customer tone, expectations for capital budgets? Just a little bit more color on your market outlook for 2020 by vertical.

So, yes, I would say, I would agree with you. There's not some inflection point here that's overly negative by any means. When we look across the opportunities, the funnel of projects, small and large and whatever they might be. They are-- I would say consistent with what we've been seeing coming out of Q3 through Q4 and now as we look at our plans for 2020. So chemical, I would say there's some stability there. The markets perhaps just a little bit down but not in any significant way. Same with general industrial, I would sort of pack those two together. Refining, not a whole heck of a lot of real momentum. It's, I would say also consistent not particularly strong I would say if I was to compare that against the other two that I just mentioned. The other two were perhaps a little bit stronger in 2019. So I would say just, overall, no significant inflection point down. There's just a modest market decline that we're projecting in process. And we're offsetting it with share gains.

We're going to give you more color, Brett, in less than a month away on February 27th. Brad Ellis will give a little more detail by vertical.

Okay. Great. And then maybe just one more in fluid handling. So the $10 million of incremental restructuring you're doing. How's that feather in over the next couple years? I guess what's the embedded assumption for 2020? Because it looks like you're obviously still looking for some margin expansion there.

Yes, most of those savings almost all of it is going to be not in 2020. So that most of the activity is going to take place to actually restructure the business next year, and even into the following year. So it'll be --those savings are substantially outside of 2020.

Our next question is coming from Nathan Jones from Stifel. Your line is now live.

Hey, guys. I got to get an update on the current currency accretion target of $1 in 2021 to see whether you guys are on target to hit the $1 beta?

Yes. So I think, Nathan, what we've been saying in that regard is that we'll have our cost base set up to ensure that we could hit that dollar by 2021. I would say the timing in terms of when the volumes are there for us is a little bit less clear. As we've talked about there's a bit of lumpiness in the business. But without question, our cost base is set up for us to achieve that dollar by 2021. End of Q&A

We reached end of our question-and-answer session. I'd like to turn the floor back over to Max for any further or closing comments.

Thank you all for joining the call today. We have some temporary headwinds this year, but I'm excited about our outlook. And I believe Crane is extremely well positioned to the future. I cannot say enough about our incredible management teams across the globe and across our organizations. I look forward to seeing many of you at our Investor Day event, February 27th, where I will share with you more about how we think about our businesses and our portfolio. And how we see it evolving over time. In the words of the late great congressman and civil rights advocate Elijah Cummings, you must have confidence in your competence. At Crane, I assure you we have both. Extremely competent across our businesses and confident in our path and future. Thank you for your interest in Crane. And have a great day.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.