Greetings, and welcome to the Crane Company First Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jason Feldman. Please go ahead.

Thank you, operator and good day everyone. Welcome to our first quarter 2020 earnings release conference call. I am Jason Feldman, Vice President 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 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 Web site at www.craneco.com in the Investor Relations section. Now let me turn the call over to Max.

Thank you, Jason. And good morning, everyone, as outlined in our press release last night. We reported first quarter adjusted EPS of $1.15. We estimate that impacts from COVID-19 had an approximate $0.15 to $0.20 impact on first quarter results, driven by some supply chain disruptions, softer demand in certain end markets and minor operational challenges at some facilities related to government health directives and our efforts to ensure the safety of our associates. Until early March, we were subtly on track to exceed our original guidance for the year. Sales of 798 million declined 4% compared to the prior year with a 10% decline in core sales. Operating margin excluding special items of 12% compared to 14.4% last year. Given the extremely broad based and substantial impacts we're seeing related to the Coronavirus pandemic. That's probably about as much attention as our first quarter results merit. I will spend most of this call discussing our outlook provide you as much detail as I can about what we are seeing today and what we expect moving forward. First, however, let me start off with a few key messages I would like you all to take away from the call. First, we have a solid balance sheet at Crane, ample financial flexibility for the current environment, strong track record of free cash generation and consistently disciplined capital allocation. Second, we have a diverse portfolio with strong and resilient businesses that will recover nicely when the markets improve. Third, we've managed through downturns before when I say we, I don't just mean Crane, I mean, I have as well as Rich the rest of Crane's senior leadership team. Lastly, you all know that we have an extremely strong track record when it comes to execution and cost management. Crane is an outstanding…

Thank you, Max, and good morning, everyone. First off, I'd like to make a few general comments related to our preparedness and the general compliance work environment. While everyone in the world is having to learn new ways of working, I feel we are ahead of others and what we saw coming in our preparation, not just the numerous proactive steps we have taken to address the safety and well-being of our associates. But also the many actions required to ensure our systems and controls support remote office work, enabling the continued high quality execution of all critical activities. To-date, everything has run quite smoothly. We are maintaining our cadence of deliverables on all fronts and on time. Our global leaders have acted with compassion and decisiveness. And I'm proud of our strong associate morale across the organization in the face of uncertainty. In addition, I want to thank our associates globally for their teamwork and camaraderie, as well as -- as we continue to partner with our customers and their needs and challenges to work together for mutual solutions to what lies ahead. Crane will continue to be a strong and trusted partner that our customers can always rely on for critical engineered solutions. Our balance sheet strength and cash flow generation, allow us to remain confident in managing through this downturn continuing to drive our long-term strategic growth initiatives. We are managing all aspects of our cash flow carefully. Capital expenditures in the first quarter of 2020 were $8 million compared with $20 million last year. First quarter 2020 free cash flow was negative $43 million consistent with our normal seasonality and compared to negative $120 million last year. Going forward, our revised expectation for capital expenditures in 2020 is approximately $45 million as most discretionary CapEx will…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] The first question today is coming from Nathan Jones from Stifel. Your line is now live.

I'd like to start just on the balance sheet leverage and what are your plans for this cash out, you're sitting with a large chunk of cash here, it looks very likely that you are going to produce positive net cash during the year. Maybe you can talk a little bit about the plans for potentially deploying that the cash that's sitting on the balance sheet whether further repurchases are possible. Whether you would look at M&A in the back half of the year, probably not over the next few months, I guess unlikely sellers are going to be in the market. But just the way you're thinking about actually deploying that cash off the balance sheet over the next few quarters.

Yes, Nathan, so this is Rich. The decision to move ahead with that term loan was designed essentially as an insurance policy, frankly, very cheap insurance policy. So with the uncertainty that I saw in the business, exiting March into April, I felt it was important to make sure that we had this increased liquidity available to us. From a planning perspective in terms of how we deploy it right now, it is to just maintain the liquidity over the coming, call it quarter or two, for sure. And certainly we'll look at the pace of any recovery that we might see and then make decisions from that point forward. But at this point, it's meant as an insurance policy for us to move through this process of pretty significant uncertainty.

Right now, just in terms of capital -- yes, we don't see any M&A activity most likely for the balance of the year until things we have more clarity on the future.

Okay. Fair enough. In terms of your own working capital, did you guys end with inventory at the end of the first quarter that was higher than you'd expected given the late drop off? Have you seen any change in receivables collections, customer behavior there that gives you any concern about customers being able to pay their bills, any color you can give us on what you think around working capital for the balance of the year?

Sure, Nathan on the inventory side, definitely a little bit of growth there coming into March now you can see that our backlog actually grew in a few of our businesses, notwithstanding some order degradation. And that's essentially a function of some supply chain constraints that we saw for product coming in that we needed to see in order to make shipments and so forth. So I would say was on the -- it was on the edges, mainly in aerospace and a couple of our fluid handling businesses but honestly, really around the edges more than anything. From a receivables perspective, the teams are doing a phenomenal job. We haven't had any bad debt write-offs to-date. We're tracking in some of our businesses ahead of last year on a three month DSO basis, a couple of them were trailing a little bit we are seeing some customers slow in payments. Frankly, we've had some customers ask us to change terms and strategically we're looking at those opportunities to potentially foster additional business and looking to leverage best we can while we help our customers. So no significant issues and to report so far, but it'll be something clearly that with our cadence, we'll be managing closely moving forward.

Do you think that's possibly -- I mean, I guess since using your balance sheet a little bit to fund some customers here, is an opportunity to gain market share, how do you think about the risk of doing that versus the potential to gain market share?

Yes. I would say, balanced assessment across the businesses, some customers were going to be certainly those that are more strategic or very strategic to us making a certain level of decisions and others perhaps not. We have to weigh everything in relation to whether or not there's incremental risk on collection. And I think the key takeaway here is that we're evaluating every opportunity across the business to make sure that we're making the best decision. And we do have that that balance sheet strength that you point out that enables us to do that.

Fair enough. Thanks for all the detail Max that was really good. I'll pass it on.

Thank you. Your next question is coming from Matt Summerville from D.A. Davidson. Your line is now live.

Thanks. And yes, I would echo the sentiment, Max. Thank you for all that detail. I wanted to ask the question on the military side of aerospace and electronics still looking for that business to grow which sounds organically double-digit. What are you seeing the business sort of underpins that outlook? And then also, with respect to the currency, the physical currency business inside of payments, whether or not we could see some upside, if either the U.S. government or international central banks start literally turning on the printing press? Thank you.

I will start off and Rich will chime in a bit on. The second question first on currency, we were executing well and slightly above plan, we see no major moves yet from both U.S. government or international. As we know, we have the annual [indiscernible] quarter will be up again in September. We expect that to increase -- I've given some --- we've given some previous expectations around that new range, we're still on track with that. Inventory is being burned down. So we think everything's to plan right now. I think it's a little too early to determine the impacts of COVID-19 on currency. So stay tuned, we'll hopefully give you some more color in the second quarter to see if there's any new opportunities. Military, our teams have continued to execute on our product development roadmaps on power conversion, high power, microwave and we're winning a number of those -- a number of those opportunities. So we're seeing some nice program wins on a wide range of programs. I don't know Rich, if you'd add anything else as well.

What I would say on that Matt is, we have a pretty marquee set of customers in the defense area. The Lockheeds, Raytheons, the Northrops of the world and they're continuing to make some pretty significant investments. And as Max points out, our strategic growth initiatives aligning with those types of customers, we're continuing to invest. We've been very successful over the last couple of years. And it's really the momentum of what we started to see or have been seeing over the last couple of years, just carrying forward. Continued radar application, great ground-based radar applications, high-power applications and so forth. So it's really the momentum of what we started seeing over the last couple of years built on the investments strategically that we've been making in that business.

Thanks. Your next question is coming from Ken Herbert from Canaccord. Your line is now live. Ken perhaps your phone is on mute. Ken, if you could hear me I cannot hear you. [Operator Instructions] Our next question today is coming from Damian Karas from UBS. Your line is now live.

Hey good morning guys. I was on mute apologies. How are you doing? This one's on the -- sorry for the scare. Thanks for -- really appreciate all the color and kind of getting the fine details on the various segments and portions of the business. Wondering first ask you quickly about the cost actions. If you could give us a little bit additional color, it seems like you basically are expecting to realize more or less all of that starting the second quarter. Just wondering how much of the cost action you'd characterizes is more permanent structural type changes you're making versus more variable cost it would probably come back out when we get into recovery mode. And I guess just thinking about the $100 million up to $150 million you've laid out, just what are you thinking in terms of future actions what those could look like and when you might act take incremental actions? Thanks.

So Damian on the nature of the cost actions, what I would say is, we started pretty quickly on all the easier things, cutting back on everything discretionary immediately. And I have cascaded now into some decision-making that's more difficult and where we are embarking on those actions now. In terms of how to characterize that $100 million, as I would look at this, a good third of it is maybe a little bit more call it 40% is fairly, fairly fixed over the next couple of years is the way I would think about that. And the balance being discretionary that we hoped would come back things like travel as an example, trade shows sort of type of -- trade show participation, things like that. So that would be how I would characterize the $100 million. The teams have plans in place to the extent things worsen from where we sit today, I will call at the midpoint of our guidance or towards the higher end of that guidance range. So additional actions that are being planned across the business as I call it Plan B. And it would range from incremental, more difficult decisions related to headcount, for example, as well as further discretionary. What I would say from a structure perspective that we don't have significant -- any significant facility related decisions that we're making at this time. We don't see that as in the cards today.

Okay, thanks. That's helpful. And then in the CPI business and I guess, with Cummins Allison in there as well now? Would you maybe be able to give us a little bit additional perspective on the key end markets there, thinking about gaming and casinos, obviously, in retail, you guys have been strategically focused on the self checkout and you alluded to in financial services that's obviously not alluding the near term headwinds, but maybe some opportunity there. Could you maybe just kind of walk through sort of the risks and the opportunities you're seeing right now in those key markets for CPI?

Sure. So from a risk perspective, or where we see things more challenging clearly in gaming, casino end markets are without question significantly challenged, I'm sure you've read about all those. Those challenges in that end space, that market space that's being hit, I would say the hardest in our business. We see actually retail as, call it in the midterm and providing ample opportunity for us in this space. But right now, the level of CapEx and spending in that space has been curtailed pretty significantly. So we're seeing pretty good hit there as well. But again, I think moving forward, we see that one presenting some good opportunities for us moving forward. Transportation end markets also, investments being curtailed pretty significantly here in the short-term, hoping that we would see that improve in the latter half of the year. And then if I move to financial services, as Max mentioned in his prepared remarks, an area that I think in the near term, hit a little bit here, but I think probably one of the ones that will come out maybe a little bit faster towards the end of the year, or in the fourth quarter.

And David from -- in terms of the end markets, what we've been driving from a productivity standpoint to our customers as well as connected solution has been winning across all solutions, honestly. So from retail gaming, financial services, transportation vending. In addition, keep in mind, we were driving new solutions, OEM solutions and pay pod, pay tower, smart saves, so we've been very, very aggressive, assertive. This is absolutely just a dislocation. With all most of these end markets shut down for this quarter. And there's going to be a bit of a reset until things can come back. But we still feel very, very positive about our solutions, the solutions that we drive, our position in the each end market. And when it comes back, we'll be leveraging it appropriately. I think it's going to be interesting even to see as I mentioned in terms of opportunities, look, it's very, very early. I think everyone is seeing new opportunities that may not have existed in the past some new ways of working or new implications. We were driving productivity, I think hygiene takes on a different plus here of -- a cashier is not having to handle the cash directly. In vending, there's been a trend over the years of micro markets that office -- more secure office settings, have food products exposed out and you simply select and pay and grab what you want and go. In this environment now each one of those are where people can grab and touch food and then potentially put it back. It's going to be interesting to see how the marketplace reacts. And is the security of a vending machine where people can't touch the food does that become actually more attractive? So all these things still early, early days in terms of the solutions and opportunities and how things play out? Again, this dramatic decline in CPI end markets driven solely by COVID-19. As the economy opens, as people begin to get back to a more normalized level in a measured way, as we have described, we're positioned to win and we've got the solutions to do that not only cash but also cashless, which is a major initiative for us managed services. The new solutions I talked about driving next generation note recycling, coin recycling. I hope that helps.

Hi, guys, it certainly will be interesting to see how things play out. Thanks so much for the color and good luck guys.

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

Wanted to come back to the deleverage rates on Slide 8 and 9, if I'm understanding it correctly. Those are the incremental pre-cost take out deleverage rates, which are in that 50% range, which does imply that the uncontrolled deleveraging is about 65% for the full year. I guess I would expect that for a few quarters but those decrementals do seem very sharp for a full year basis, maybe just a little color on, what's volume decrementals versus mix versus some M&A impacts that might be in there.

You're referring to our new guidance versus our original guidance. So there wouldn't be relative M&A impacts. If you look at our gross margin profile across the business, we're going to be generally a pretty -- it'll be a pretty high leverage rate Brett. So, this is that 48%, 49% now moving down to 30%, 34% post cost takeout. From our perspective, a deleverage rate of that magnitude 30%, 34% with those -- with the 17% to 22%, sales decline is noteworthy, in particular, and maybe this is where you're headed to as it relates to the mix impacts, for example, with commercial aerospace being hit pretty significantly here in 2020. So in addition, our Crane payment innovations business also being hit, which is pretty significant profit contributor relative to say for example, fluid handling or engineering materials. So, mix clearly a big factor, but even so if you digest that and still see a 30% to 34% deleverage rate, I would say that that's actually pretty substantial a very good performance.

Yes. Thanks for that. And then just the second question on price. Are you seeing any deflationary pressures show up in the businesses in April and I guess what are your expectations for gross price and price cost in 2020 year?

Yes. During our forecast reviews, our expectations right now are to hold most of the price that we had planned coming into the year, we'll certainly balance that as we move through. But we're sticking to price as best we can here moving through the forecast period. We might of course see some of the pressures on the material side where, we get requests to make some changes, but net-net, I think we're going to hold our price cost profile as we plan coming into the year.

Okay, great. I'll pass it along. And thanks again for all the color.

Thanks. [Operator Instructions] Our next question is coming from Caitlin Dullanty from Bank of America. Your line is now live.

Maybe a broad one for me. Max, you mentioned at the beginning of the call that both you and Rich have seen and managed through downturns before. What lessons have you learned in the past that you are applying to the way you're managing the downturn today?

Probably the number one is that this is unlike any other downturn in addition to the actions that are needed to take this being extremely thoughtful and careful as we move forward. This is going to come back, I was hoping it was going to come back in more of a V shape. As you've heard in our estimates, for the second half, I think it's going to be, unfortunately a little more measured. We are not going to cut to levels that historically and another economic driven downturn which has a longer period of recovery to quite the same levels. And so we're taking our time, we're being very thoughtful. We're being very methodical with our business units to review before we pull the trigger on any cost actions. So that's a very important one because I'm very much in tune with setting us up for success as we enter into the back half and into 2021. Rich, if you would offer anything? Have some fun.

Having gone through this a few times here at Crane, lessons just around cadence in our capability to do what we do well. We executed very well under the '14/'15 Industrial recession and then the global recession in '08/'09. And you take away a number of different learnings, whether that's the nature of the types of costs that you're taking out and how significant you can actually see success in the -- what I would refer to as the nice but not necessary costs. And then again, just the cadence and measuring month-to-month on whether or not we're seeing what we should be seeing. So, basic lessons, I would say, in addition to what Max said.

Thanks. Our next question is coming from Ken Herbert from Canaccord. Your line is now live.

Yes. Hi, Max and Rich, how you doing?

Good.

I just wanted to follow up on the mix question regarding the he cost savings and the decremental margins. I mean, it sounds like aerospace, if you assume after markets down sort of 65%, for the remainder of the year would be obviously pretty significant to margins. When you talk about that, call it, 15% to 20% sort of gap that the savings helps you on the decrementals relatively if you didn't do the cost savings? How much worse is aerospace and electronics in that? Or can you just provide any more detail around the mix relative to sort of the margin hits and the cost savings?

Yes. Ken just to unclear, in terms of -- look the mix element that's impacting the 48% and 49% without, we would probably because of the significance of aerospace and electronics, we would probably see something slight maybe 4 or 5 percentage points less than that maybe if that's getting to your question. Is that answering your question?

Yes. That's very helpful. I'm just trying to better understand the magnitude or the mixed impact by some of the different segments. And I would imagine, automatically aerospace and electronics is probably from a decremental standpoint, maybe one of the most impacted segments, obviously, you mentioned, you called out a few other business lines as well but…

That's correct. It's by far the most significant by far.

And, okay, that's helpful. And two, maybe turn the other way. It's obviously very early, but when you think about on the aerospace and electronics business, as you look at the aftermarket and short of the looks like down 65%, it's probably embedded in sort of the low-end of your guidance range. What would you expect the first thing you would see that would maybe start to point to a turn around there? I mean, besides the obvious of just people flying a little bit more, but is there anything else that you would start to see in that business that might help to give you a little more confidence or what do you want to see that gives you a little more confidence that the back half could be a little better than the scenarios you've outlined?

You know what Ken, I think your analytics on this are spot on and just throw you a compliment because I've read your research and I think you appropriately insightful on what's happening here. The planes that are being parked, the cycle we're going to go through on unused serviceable equipment. I mean, there's just too many unknowns, too many unknowns. I've lived through this cycle a couple of times now on aftermarket and I think we're in for a longer period for our product line to be significantly impacted. So it's not just the rates. It's not just recovery. I think it's going to be retirements, it's going to be watching the broader indicators is going to be -- what are they doing with those parked planes? But these are the things that are impacting our decision and guidance right now. Long-term everything is positive. I mean, it's just predicting when and how and how fast.

Just the other thing I was trying to get to your question on a leading indicator, I mean, to the extent that we start to see discretionary spending on behalf of corporates increase that travel, all these things that would impact passenger travel Ken, I mean, I don't know what else, the thoughts and views on vaccines and timing, it's going to be those kinds of things beyond that, the airlines need to make sure that they have the liquidity that that's needed to continue. So, I think to Max's point, you have all the right data, frankly, from our perspective and enjoy everything that you put out there.

Feel free to share some leading indicators you'd like us to -- make sure we were looking at.

I appreciate the comments. I guess just one final question. As you look at your spares business within the aftermarket, what percentage of that business could be at risk or would potentially be at risk if we do see a lot of retirements like we expect? I mean, I know obviously serviceable material doesn't displace everything, but how do you think about the piece of your business that would be impacted by that?

Yes. I mean, it would be the spares in relation to total commercial aftermarket. So that's maybe 40% would be the spares -- we the spares element beyond condition spares elements, if you peel out our know in M&U that would be the most significant.

Perfect. All right. Well, thanks a lot appreciate all the detail.

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

Thank you. Thank you all for joining the call today. As I mentioned at Investor Day, Crane is now celebrating its 165th year anniversary in 2020. Over that time, Crane has seen six pandemics, a Civil War, Great Depression, two World Wars and a myriad of other global challenges over the years. We will manage successfully through this most recent challenge as well. As late Kobe Bryant said, "If I panic everyone else panics." There's no panic at Crane. We are transparently and openly dealing with the challenge ahead as a united team. As I mentioned to our associates in my last video message, I hope that all listeners today and your extended families remain safe and healthy. May we all continue to work to be supportive of one another in our governments during this time. Let's continue to show thanks and appreciation to healthcare and emergency workers tirelessly assisting those in need as well as our essential services workers. And may you all continue to have patience, peace and strength as we weather this together and may bring us closer together as family members of the human race across this world. And to close on the words of R.T. Crane resolution penned in 1855 that guides us to this day, "I'm resolved to conduct my business in the strictest, honesty and fairness, to avoid all deception and trickery to deal fairly with both customers and competitors, to be liberal and just towards employees, and to put my whole mind on the business." Thank you for your interest in Crane. Have a great day.

Thank you. This 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.