Crane Co (CR) 2002 Q2 法說會逐字稿

- comments we make on this call may include some forward-looking statements. We would refer you to the disclaimer language at the bottom of our earnings press release and also in our annual report. Now, let me turn this call over to Eric.

Good morning. From my perspective, Crane Company had a solid quarter. Our guidance was 40 to 42 cents and we earned 44 cents. Segment operating results were generally as planned with the exception of fluid handling, where we had unsatisfactory results in our high-margin valve services business and where weaker than planned orders from the chemical processing industry impacted results at Crane Process Flow, [Zomox] and [Kem Pump]. On May 24th, we acquired Lasco Composites from Tomkins Industries for a $44 million purchase price. Lasco is a manufacturer of fiberglass reinforced plastic panels and is being integrated into our Kemlite unit, and that integration is going as planned.

Strong free cash flow in the quarter paid for the acquisition, with debt as a percent of capital at a conservative 27.5% at June 30 versus 29% at March 31st.

As discussed in the press release, we are tightening the range of our guidance to $1.60 to $1.65 earnings per share for the full year from the $1.60 to $1.70 range we have provided since last October, reflecting the current difficult operating environment.

Mike will discuss this guidance again later in his remarks.

Let me turn the call over to Mike to review details on the quarter.

Good morning. Our total company sales in the quarter were 392 million. This was down 4% from the prior year. Operating profit was 43 million, down 22%. And operating margins were 11.1% versus 13.5%.

Earnings per share, 44 cents versus 54 cents last year. That's down 18%.

Cash flow was strong in the quarter, with cash flow from operations of 58 million. Year-to-date, we have cash flow from operations of 85 million.

And I'd just like for you to note in the - in the press release, we have restated the prior-year segment numbers to exclude goodwill, and this was the way I will review the business unit performance, continuing on.

Also, we have completed our asset impairment tests required by FAS 142, resulting in a retroactive non-cash charge of $28 million, 47 cents per share. We have reviewed all our assets and found impairment in only three of our business units. Specifically, [Streamware], Barksdale, and Crane Environmental.

And this charge represents about 7% of our total goodwill.

Turning now to aerospace, aerospace sales were 82.7 million. They were down 21% from the prior year. Operating profit was 19.8 million, down 28% from the prior year. Even with the continued weakness in this - in aerospace, this business produced solid operating margins of 24% in the quarter. These margins compare to 16 - 18.6% in the first quarter of this year and 26.3 in the second quarter of 2001.

Interpoint, our microelectronics business in this segment doubled its operating profit with aerospace type margins on 16% lower revenues.

They had a very favorable product mix, with high power in space shipments, and they also increased the utilization of their lower-cost Taiwan facility.

Order backlog in aerospace totaled 219 million. That was down 7 million from March and 96 million from the same quarter last year.

Aftermarket, which is very important to this business, their orders were down 32% from the prior year.

And in aftermarket orders, although they remain very weak, we've had gradual sequential increases from the fourth quarter. Aftermarket sales were up 25%, and aftermarket revenues remain about 33% of Hydro-Aire's, Lear's, and ELDEC's revenues. You have to exclude Interpoint from those numbers when we talk about that 33%. So that relationship has stayed about the same.

This business continues to invest in new products focused on safety and cost of ownership. This is to address the installed base, which totals approximately 30,000 aircraft. This is a change in strategy from our past practice of investing in new aircraft production, which totals about a 1,400 units a year and you have to wait 10 to 15 years to get the aftermarket margins.

And we continue to expect operating profit to decline 30% in this segment from - in 2002 from 2001, excluding goodwill amortization in both periods.

Turning now to Internet materials, sales were 74.6 million, down 8%. Base business sales, excluding acquisitions and divestitures were down 3%. Operating margins of 13 million were down 3%. And included .8 million in costs associated with the closure of the Resistoflex Michigan facility. We plan to consolidate this facility with our South Carolina facility. And we expect an additional million dollars in costs for this consolidation in the second half of 2001.

The recent Lasco acquisition contributed 4 million in sales in the quarter, with operating margins of about 10%. This was about a 5-week month for them because it actually acquired them the last week in May.

Margins improved to 17.4% versus 16.6%.

Kemlite's sales were flat in total if you exclude the Lasco acquisitions, while operating profit was up 15%, with margin improvement due to good product mix, basically high RV sales.

On the other hand, the RV - RV shipments were up 24%, while the RV production level only increased 10%, which means we probably gained share or we made more inroads against the - against aluminum in the quarter.

In addition to that, transportation remained relatively weak. It was down 18%, and building products was down 15% from the prior-year level.

Turning to Resistoflex, Resistoflex operating results were very weak, with operating profit down 80% from the prior-year level, as it continued to suffer from the weak chemical process market, which is at a 20-year low. And also, the closing of the base - the Bay City facility.

The cost of closing the Bay City facility will cost approximately $1.8 million this year, but we would expect savings of two-and-a-half million dollars on an annual basis going forward, and we're not changing our capacity. The consolidation of this thing will not affect the capacity.

A lot of this is due to the lean - the ability to do this was - a lot of it was due to our efforts in lean and we've taken - we've freed up a lot of space in our South Carolina facility. North Carolina facility. Okay.

We expect engineering materials to remain flat for the full-year 2002, as improved Kemlite performance is expected to offset the weak chemical processing market and also the cost of the Resistoflex consolidation.

Turning to merchandising systems, sales totaled 41 million, down 24% from the second quarter of last year. Operating profit was $2 million, or 71% lower from the prior year. Operating margins totaled 5% compared to 13% in 2001. And as previously stated, we will have unfavorable comparisons throughout 2002 from NRI, as 2001 was an exceptionally strong year due to the Euro conversion.

NRI's sales were down 64% from the prior year, as NRI customers overbought in 2001 in anticipation of the Euro conversion.

This business remains very weak, with sales running at approximately a $24 million rate. And this compares to about a $80 million rate last year.

National vendors improved its cost position in the quarter, with operating profit up on 3% decline in revenues. The North American market was flat compared to last year, while the European market was off 20%.

National vendors has introduced two new products in the first half of this year, a frozen food vendor and a new food vendor, and we expect product sales from these two products to total about $6 million this year.

In addition to this, in the third quarter, they will introduce a new coffee drink machine which will vend a 20-ounce cup, and this compares to the traditional 8 to 12-ounce cup, and this is focused on our effort to improve the profitability of our operators to entice them to buy our machines, and they will get a revenue from a 20-ounce cup about a dollar, compared to the normal 55 cents in revenue, so we think this will help us in the second half of the year.

Both NRI and national vendors continue to operate in very depressed markets, and they both continue to exercise strict cost control. And we continue to expect operating results in this segment to be 50 to 60% below the 2001 level.

Turning to fluid handling, sales were 176 million, up 25%. Acquisitions contributed 34 million to this increase, and sales were essentially flat, excluding acquisitions.

Operating profit was 13.7 million, even with last year.

Margins were down to 7.8%. This is versus 9.7 last year. And this is driven by lower valve margins.

Crane valve shipments totaled 121 million in the quarter. This is up 39% entirely due to the [Zomox] acquisition. Crane valve's operating margin - operating profit was flat compared to the prior year, with margins declining from 11% to 8%. The decline was essentially due to the weak CPI market and lower site outages in the quarter which is impacting our valve business. Sales in our short cycle pump business was down 4% but pump operating margins improved a full percent to 10% in the quarter as a result of cost initiatives.

Crane pumps' [Pickles] facility significantly improved its cost facility as a result of the facility consolidation that was completed in the first quarter of this year. If you recall, we closed our Decatur facility and consolidated that into our [Pickles] facility. However, this business remains impacted by the weak CPI, and also the weak automotive market.

Crane supply sales were up 13%, with improved operating margins. Operating margins improved a full percent there, and this is as a result of strict cost control, and the success of their focus on the MRO market in Canada.

In this segment, we expect full-year results to improve significantly, with a stronger second half performance than the first half. And this is the result of stronger anticipated valve service revenues, and also cost initiatives that we have within this group.

Turning now to controls, sales totaled 16.8 million, down 6%, excluding Ferguson and [Fires]. Sales were down 43% on an as-reported basis, with a significant difference due to the sale of [Fires] and the creation of the Ferguson Emerson joint venture in the third quarter of 2001.

Operating profit of 1.2 million came in slightly below last year, but both businesses in this segment remain profitable.

We expect operating results for 2002 will increase over 2001 reflecting the elimination of the 2.1 million in losses last year from the Ferguson business model and with stable results from the other business.

Our balance sheet remains very strong. Our debt to capital was 27.5% at the end of June, and this compares to about 38% a year ago, and this is after making the Lasco acquisition which totaled about $44 million in the quarter.

And we continue to target $1.20 in free cash flow for the year, and that will be about $2 a share.

And as Eric indicated, we are - we are tightening our range for the full-year guidance from $1.60 to $1.65 per share, and we expect third quarter to be between 39 cents a share and 41 cents a share.

We expect a more challenging second half of the year, given the difficult operating environment as described, and as is our practice, we will provide a preliminary full-year earnings forecast for 2003 at the end of our third - in the third quarter.

Thank you, Mike. Let me take a few minutes before the question and answers to discuss disclosure and governance issues that are being requested of corporate America and, of course, Crane.

As you know, the SEC has requested that all major companies, chief executive officers, and chief financial officers recertify on 2001 full-year and 2002 quarterly results, and I'm pleased - we - Mike and I are pleased to comply.

As a matter of fact, our CFO and I have always signed off on both the annual and quarterly filings, and when he was chief executive officer for 17 years, Joe Evans did the same.

We feel strongly that our accounting policies and practices are very conservative. We write off receivables if they become 90 days past due with no exceptions. We don't book sales until they happen. We have only two small off-balance-sheet items which are disclosed in our annual report. Namely, our Ferguson joint venture with Emerson, and a financing facility for customers of our Crane merchandising systems business which totals 35 million, of which 20% is recourse to Crane.

We also continue to be asked about our asbestos exposure, which as you know we have been open about and have disclosed since 1995.

As stated in the annual report, we believe, after discussing pending claims with counsel, that resolution of these claims will not have a material effect on the company's financial position or cash flows. Typically, when there is a claim or filing, we are one of among 50 to 100 defendants in that filing. These filings also typically do not identify any products of the company as a source of asbestos exposure and based on the company's past experience, it is expected that a substantial majority of these cases will be dismissed against us for lack of product identification.

At June 30th, pending claims had risen to 25,000 outstanding from 16,000 cases at year end, largely due to one law firm.

This particular law firm has a track record of filing cases against a large number of defendants. Again, we are one among 50 to a hundred, and does not include any product identification in the filing.

The aggregate gross settlement costs we incurred in 2001 totaled $760,000. The aggregate gross settlement costs we have incurred since the early '80s with respect to our asbestos is $3.5 million. This is a gross cost, before insurance recovery, and we have insurance that covers about 50% of these costs.

Legal costs associated with these filings were $2.3 million in 2001 and $1.5 million to date this year.

With respect to our auditor fees with Deloitte, last year we spent $3.4 million in total for audit and non-audit-related fees. That breaks down to 1.2 million on audit and 2.2 million on consulting, where I would point out that 1.6 million was strictly tax-related.

On corporate governance matters, Crane's board of directors is comprised of 10 individuals. Except for me and [Shel] Evans, our chairman, none of these directors are employed by Crane or retired from the company. They are my boss. Our audit committee is made up of all independent board members. We do not pay consulting fees to board members beyond standard annual retainer and meeting fees.

Half of the retainer is paid in company stock.

Our chairman, [Shel] Evans, is nonexecutive chairman since his retirement last year as chief executive officer.

We have also been asked about [Shel] Evans' stock sales. [Shel] accumulated 3.5 million shares of Crane's stock during his 17-year tenure running the company. After his retirement, he made the personal decision to diversify his holdings. During the past year, he has sold roughly half his shares, yet still holds 1.8 million shares, including options, or just under 3% of Crane's outstanding shares.

All of these sales were reported to the SEC on a current basis.

Also in the news has been the subject of expensing options. We've been disclosing the potential impacts from expensing options, should it ever be determined that we should do so. Full disclosure is in our annual report, but I would note that the overall annual expense would have been around 6 million to Crane, or approximately 10 cents per share for each of the last three years.

Let me also note that we do not have, nor have we in the past had, any loans outstanding to the company's officers or executives.

Hopefully, these items have anticipated some of your questions. So now, operator, let's open up the call for any remaining questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to signal for a question, you may do so by pressing the star key followed by the digit 1 on your touch-tone phone. Once again, that's star 1 on your touch-tone phone.

We'll go first to Don Zwyer with Lehman Brothers.

Good morning, Eric, Mike and Tim. How are you.

Good morning, Don. Fine.

A question on fluid handling where you - it sounds like you're expecting a better second half in valves, and I'm just curious as to why you're expecting that.

Well, first off, part of the reason for the underperformance in the first half was our nuclear service businesses, and we had a number of outages that switched from the first half to the second half, and that's high-margin, good business for us.

Secondly, our valve, valve part repair business is continuing to have stronger orders. And thirdly, a big part of the disappointing performance in the first half in valve services was our commercial services repair business which we think we now have under financial control.

Okay. A question on controls. I was surprised by the weakness related to the oil and gas industry. I guess I was under the assumption that that business had been picking up in general.

It - we were a little bit surprised ourselves, Don. The weakness principally relates to our man/machine interface displays at Azonix. It's all tied to that one product line, which is a hazardous, if you will, encased computer on exploration rigs, and orders there were very slow in the quarter, worse than - much worse than we had planned. We are seeing a pickup in the repair business there, which usually is a precursor, but frankly we don't expect this back to where it should be until more like the fourth quarter.

Okay. Were Ferguson's losses higher in last year's second half than in last year's first half?

Mike, you correct me -

No, they - first of all, we sold the business in the third quarter. We disposed of it in the merger. But they were less in the second half than the first half. They were more in the first half last year than they were in the second half.

Okay. So - because you make the comment that not having those Ferguson losses will help comparisons in the second half.

Not for the year. If I said the second half, it's for the year.

Oh, for the whole year?

Yes.

Okay. So basically, the comparisons would have been even worse, had we - had that not been separated out?

That's correct.

And just a final question. You've got great cash flow. It doesn't look like you did buy back any stock in the quarter. Is that correct? And do you think you might step in here?

Don, we - that's correct, we did not buy any stock in the quarter. We, as you know, post September 11th, made the decision with the support of the board that it was important to preserve our liquidity, maybe err a little bit on preserving liquidity in the strength of the balance sheet. As you know, our cash flow during the year is the lowest free cash flow we have is in the first quarter, and then it builds thereafter. And the cash flow that we had in the second quarter, we used to buy Lasco.

It is buying stock versus acquisitions is something that we constantly weigh.

Okay. Thanks a lot, guys.

You're welcome. Thank you.

We'll now go to Dean Dray with Goldman Sachs.

Good morning. The first question relates to engineered materials, and just a clarification, Mike. When you were stepping - when you were concluding in that sector discussion, you said expect flat - was that operating results in '02 or were you referring to sales?

No. Operating results.

Okay. And that's for the year.

Yes.

Good. And then with regard to the acquisition of Lasco, could you just give us a sense of how the deal was done, how long you had looked at the asset, was it an auction, and what the kind of integration plan is and synergies and so forth?

Yes, I'd be happy to do that, Dean. This is - this was not an auction or - and Tomkins was not actively selling the business. We approached them on a proactive basis with a very targeted inquiry for this specific property. There was fairly extensive discussions over a period of time, a lot of sensitivity, being a competitor, with a lot of give and take and back and forth on price indications and gradual disclosure of information. So it was a - an important strategic acquisition to us that we proactively sought out and were able, on a good-faith dealings, I think, with Tomkins, to settle out, negotiate, and close.

The - I would note here, since you asked, that the Tomkins has disclosed what Lasco made, which was about $3.7 million in operating profit. We paid 44 million. I would note that that is trough earnings. I think peak earnings are more than double that. Several years ago. We intend to bring substantial synergies, which we've already, from our perspective, are confident that we have over 50% locked in, and we're going to run this as a plant, as well as diversify into some important new markets.

The - as I - the acquisition integration has gone flawlessly. We already have our material cost savings that were in our assumptions locked in. The SG and A cost reductions have already - were taken on the first day of the acquisition, and the manufacturing efficiencies will come in over the course of the next nine months.

We have two good people, senior financial person and a fellow who is running the plant, both of which we've retained and are excited about having on the Crane team.

Are there plans to take charges for any integration activities.

No.

No.

Okay. And then with regard to aerospace, you know, if I look at what some of the production cuts at Boeing, in terms of builds, as well as at engine hours and planes marked and it all looks like 20% areas, most recent numbers, and then if I reconcile that to what your expectation, as being down 30% on an operating profit level, just help us understand as to, you know, where you are in the cycle. Is this a - a lagging indicator, and how should we think about that, going forward on the recovery side?

We - how do I do that. We - you know, results were a little bit better than we planned in the first half, and probably going to be weaker than we had expected in the second half. There has been no demonstrable change in the number of parked planes in the desert. It actually was reduced a little bit last month, but not for the reasons you want. They reduced it because they scrapped planes, not because they brought some old planes back in service.

We are seeing a slight improvement, you know, fourth quarter versus first quarter into the second quarter, Mike indicated, in our aftermarket - in our aftermarket orders, but not really at the level that we had previously anticipated.

As I look at - from our perspective, the key here in looking out to the future - so we expected a pretty tough second half in aerospace, and we've given you guidance on that accordingly by reaffirming where we are.

In terms of the 2003/2004, remember that I'm focused on 2004 and Boeing and - because if Boeing starts ordering planes at the end of '03 and start of '04, we're going to hear about that in June - April, May, June, July. So we're six months early. I think the key thing to watch here is before - before that is the parked planes coming out of the desert, because they're going to need spares and repairs. Those are the older planes. And we're assuming 7, 800 will come off the desert. And then on top of that, the key for us - and we don't have anything to show for this yet - is again this attack in the installed base/retrofit market for safety and cost of ownership, which is what we're working on, we're spending money on, but really nothing of consequence to show for it.

So that's - that's what we're watching as we move into 2003.

Okay. And then a couple of housekeeping questions for Mike.

Plans - where do you expect to be on capex for the year, and any comment on pricing issues across the segments?

We still plan to spend about 25 million. We're about halfway there through June. It could run over a little bit of that. We'll - we'll indicate that we did sell, you know, some fixed assets that we had some, some real estate that we had, so we generated about 4 million in cash in the first half of the year but it's going to be pretty close. We are going to make good capital investments. If we have some good investments out there, we will make those and run over the 25, if we need to. But we're trying to control that a little bit.

Pricing. Obviously, pricing in this market has been weak across all our businesses, but we continue to focus on that, and it's been a big initiative this year to squeak out pricing, where we can, whether those are in B's and C type items in certain markets that we're dealing in. We're very much focused on that, but we haven't - I don't think we've seen a decline in pricing anywhere.

Dean, I would just - the challenge at Crane is not our capital equipment and capacity. We're spending a lot of money, capital, in the P and L, in terms of people, recruiting, training, some new - new product development effort, all in an effort to try to materially improve our business here and our business processes and be faster, better, and easier to do business during this period. And a lot of that is in the P and L.

Good. And just the last point is, it's more of an observation. I'm very impressed with your special effort here on the call to walk through these corporate governance types issues. I mean that kind of took a handful of questions right off the table. And then specifically with regard to asbestos, everything you said is very consistent with what we hear and see regarding this issue, and the only thing that's slightly different is that you all have been very forthcoming in terms of disclosing. It's - you're still in the minority there, and - but in terms of how you're describing the issues and the specific plaintiff attorneys involved is very consistent with what we're hearing. And just the only question there: Do you disclose who the - your insurance carrier is, or carriers, plural?

We don't, because it's a pretty broad group.

Yeah. That's fine. Okay. Thank you very much.

Thank you.

We'll now go to Don MacDougall with J. P. Morgan.

Good morning, Eric, Mike, Pam.

Eric, in your closing comments, you could have taken credit for having the most conservative pension assumptions in the sector as well, but moving on to questions -

Thank you.

- I would say, I guess a couple on aerospace.

First, you do typically have a six-month lag between what Boeing is seeing on deliveries and what you guys are delivering them. Are we now seeing - or maybe another way to ask the question, what level of production at Boeing is now being reflected in the current quarter's delivery rates?

Do you remember specifically?

I don't know specifically. We are using production - Boeing's and Airbus' production rates in our forecast. I can say that. I think we're six months ahead of those production rates. So I think we're going to be okay through - you know, so when they get to - in the second half of the year, we're going to be on - we're going to be on their forecast for next year.

Okay. So we -

Theoretically. Now, I don't know if that falls exactly that way.

If you see Boeing's published rates, that's what we're using. We'll be happy to come back to you on that, Don.

One of the things I think you need to keep in mind here, though, that the aircraft industry is changing the way they order. I mean, they're not going out and ordering a year's supply anymore. They're cutting down what they're ordering. And we're trying to respond quicker. So I don't think the ordering patterns are quite the same and it's very difficult for us to sort out exactly where we are here.

Right. I guess what I'm trying to figure out is, how much of a step-down do we still have ahead of us in the second half, getting to Boeing's published delivery forecast for next year? I would guess that there's probably still some, but that you've probably also seen some of that already.

I think that that's true but I think those are reflected in the forecasts that we've given you.

Okay.

Okay.

Just wanted to be clear on that. And then with regard to the aftermarket sales that you guys put up, you were down, I think you said, 25%.

In sales, yes.

Yeah. That is maybe a little weaker than what we've seen from some of - some of your peer companies out there, and I know it's - it can be a noisy number. But is there anything that could explain why your aftermarket would not be performing as well as someone else's in the space?

There's nothing that I know of, but I do know that our aftermarket sales are as we're explaining them here.

Okay. And then on the topic of margins, you know, very impressive margin in aerospace, particularly given the magnitude of the - of the revenue decline you faced.

What's - you know, what's a sustainable kind of margin expectation here going forward?

I think you've got to be a little bit careful with the second quarter, because Interpoint was very, very strong. And we don't - I mean, I'd like to think that that margin is sustainable, but it's really not. It's some unusual events right there. And what happened, their custom medical and also their commercial business, they almost had - they had very little sales there, and as we build those sales back up, they're going to come in at lower margins.

Okay.

So we're in the segment that was really the most profitable and we also have some - you know, we were utilizing our Taiwan facility and the standard power product is almost all made in Taiwan now, with huge margins, so it's an unusual situation right there.

Okay. Turning to vendors, are we - are we out of the woods at vendors?

Yes.

Okay. So -

I feel that we've got an experienced - we brought in a - John [Barcini] has brought in - brought in a very senior sales and marketing globally from the industry. He brought in the head of U.S. sales again from the industry. Both of whom had prior experience with vendors. We're in good financial control. We've got substantial improvement in our operating metrics, on-time deliveries I think are running in the very high 98%. We've got a solid new product flow here. We are - have got a very stable, you know, 20-plus person North American sales force that is out aggressively working clients.

I'm a little bit concerned about the fall-off in Europe. We'll have to watch that. That happened very late in the quarter, and we'll have to see if that continues, but this - overall, globally, this is an organization that is back on the offense.

Just understand the market, even in the states, though, remains very weak. I mean, operationally, I think they're out of the woods and I also think if you focus on the products they've developed this year, the [Sure Vend], it helps the operator reduce his costs because you don't have the operating costs. This new coffee machine is going to be very helpful because it's going to increase the operator's profit. It's going to allow him to buy more machines through us. And also, just on the new frozen food machine and this new deli machine we've come out with [inaudible], it's going to help the operator make more money. And where vendors have been successful in the past, that's what their product introductions have been. And we're going to have at least four of those this year, and that's going to help us going forward.

Okay. In a - I guess you do have your - at least in North America, your toughest comps are behind you. Is that - is that - that's correct?

I would think that that's fair, yes.

Yes.

Okay. Very. Good. Thanks. Looks like a good quarter.

Thank you.

Once again, that is star 1 for questions. We'll now go to Ran [inaudible] with David - excuse me, David J. Green and company.

Hello.

Hello.

Fluid handling. You've mentioned a couple of things there, but, you know, I'm uncertain as to really what's going on, because, you know, you have a lot more volume there and yet you brought in operating profit equal with last year, so something has slipped, I guess. You mentioned something like 2 million might be associated with the -

Valve service.

Nuclear outages slipping, is that right.

Valve service in the aggregate is a couple million.

Yes.

Maybe just spend a couple more minutes just in detail sort of describing this to me because I - again, I - you've mentioned a couple of things but I don't fully understand what's going on here. And I guess, you know -

I think that - I think in addition to valve services, which we've explained, the second major overriding theme here is the continued weakness in the chemical processing industry, which has resulted in orders less than we expected at [Zomox] and less than we expected at Crane process flow and certainly true for our most modest sized [Kem Pump] organization and those weaker orders clearly have impacted margins.

Now - and we've seen some incipient, very sporadic signs that that may be changing in the industry, and if you look at resin prices and listen to the chemical companies - Dow, DuPont, et cetera - they'll talk to you about firming prices, and firming prices should start to free up maintenance projects, facility updates, and, subsequently, some capex.

Uh-huh.

But that - we expect that to lag. But I would say that's the other major theme in a quarter which was, you know, a disappointment to us.

Yeah.

Just also understand, you know, overall, Crane has significantly reduced their inventories this year compared to last year and fluid handling has been a piece of that. And as we're driving those inventories down, we get less utilization of some of our facilities. So we've been very selective in doing that.

Yep.

So we're not trying to generate profits here by building inventories. The inventory decline, if you take out all the acquisitions and all the currency noise, it was about 27 million in the first half of the year.

Right.

I mean that didn't all come from fluid handling now, but you need to keep that in mind that we're trying to do that the same at the same time.

Right. Okay. In fluid handling you did 13.6 million in operating profit. What was - what were - I mean what was in, you know, your expectations? Maybe was there like a four or five million dollars miss there or -

No, it's not that big.

No?

It's not that big. Again, I've been very consistent on this. This is not a straight lineup in fluid handling. We're going to have some seasonality. You're going to have some quarters where we get better results than others, and, you know, I'm not - we weren't all that satisfied with fluid handling's quarter, but we're - we're - I think we're reasonably on track here. We could use a little help from the market.

Yeah. And then what was happening with the commercial services business? You mentioned that you had some issues you were addressing. What, specifically, was happening there?

Well, in commercial services, we - a year-and-a-half ago - bought two small repair businesses in the Houston area, and we consolidated them in one, and the integration - we didn't have the right people in place and the integration plan wasn't properly executed, and so we've had to step back here in the second quarter and make sure - and do all the things to the facility and the ERP system and the financial controls and the processes for the repairing the different kind of control valves to make sure that they're in good shape.

Yeah.

And in fact, the head of all of valve services is in Houston actually running that operation now.

Okay.

And, you know, it's - it was just a painful quarter, though.

That's a small - that's a pretty small business.

It's a small business.

Yeah. As it relates to aerospace, I was doing some math based on the numbers you gave me, and I was trying - what were the orders - or I guess orders were 75 million-ish in June?

Yes, approximately.

Yes. What were they last - in March? In the March quarter, what were the orders?

You know, I don't recall the March quarter.

Yeah. They were higher, though, right?

I think -

You got to be comfortable between the OEM and the aftermarket.

Yeah, yeah. You do have to be a little bit careful as you look at this thing for the airline patterns that they're - that they're drawing right here.

Right.

But -

Why don't you come back to Mike separate on that.

Okay.

We don't have it at the at this point of our fingertips here.

They were a little - they - I think the second - we've had sequential improvement over all these quarters in aerospace. We've had it in the aftermarket and we've had an improvement in the OEM also.

Yeah.

But the OEM can be kind of lumpy. I just want to tell you that OEM can be lumpy just because of the ordering patterns right there. I think the more significant thing is that we are getting improvement in the after market and it's just not to where we expected it to be.

Right. Okay. All right. Thanks, guys.

We'll now take a question from David Durow with T. Rowe Price.

Hi. Congratulations for the nice quarter.

Just a couple of - a couple of questions. I think Mr. MacDougall stole about half of my questions here.

Looking at the asbestos, how many of the claims are from this one law firm which is sort of - is that 75% of the claims, 80% of the claims?

18,000 of the 25? 18,000 of the 25.

Okay.

But all a recent - almost - not all of, but a substantial portion of the increase has come from this law firm that - in the last six months.

In your strategy with regard to especially this one law firm, can you just sort of fight as opposed to, you know, once you start paying these people off, they just keep coming back?

Our strategy since day one has been to fight these claims because most of our products are encapsulated. I mean you've got to take them apart and eat it to get the disease and we've found that -

So you've got to identify our product.

You've got to identify the product and you've also got to - you know, simple things like we get - you know, we have a product installed at this facility. Well, you got to go to that facility to make sure it's installed there. And we have found by some of the money that we've spent that that's not the case. And so we are spending - we are spending a lot of money on the defense side of this thing.

Okay. Can - let me move to a different question.

Can we just talk about NRI and is this basically this quarter the bottom, the last of sort of the year 2000 conversion to the Euro basically behind us, and that this is sort of the - you know, at least the bottom and getting better from here in the order book? And also, can you talk a little bit about how much NRI lost in the quarter?

The - it's a good question. The answer is, it's not over. What's happened here is there is going to be a fairly sustained hangover in Europe. The operators - what's happened is the operators substantially over-ordered, in they're kind of panic to make sure they had the new changers, and then secondly, it appears that there has been a downturn in the vending market overall generally, anyway. And the confluence of those two factors suggests to us that this is an environment that's going to stay with us certainly for the third quarter, and I would - our current feeling is for the second half of the year, although hopefully it's a little bit better towards - towards the end.

NRI was about break-even, a little bit - a small loss in the second quarter.

Yeah.

Any sense of - obviously there's this big bubble of conversion. Any sense of how long it takes you to get back to sort of, I don't know, pre-bubble level, sort of 1998 level at NRI, which, you know, were well below, I believe? I mean how far - what is the - what is the time in which these things get changed and fixed and -

Well, Mike and I spent an hour yesterday morning with the head of this business, and it's just very tough to call here. Our gut feel is that most of the inventory overhang and workthrough should be over by this year, and we should start to get back to - I don't want to say normal. I would say subdued levels, but -

Yeah. I think one of the things that makes it - historically this company has had sales - and I got to be careful with the - probably 35 to 40 million U.S. a year. And as I indicated they were running about a $24 million rate in the second quarter. The other thing that's difficult right now, not only because of the Euro conversion, is that the vending automated merchandising market in Europe is down on top of this thing. So there's two things - there's two dynamics affecting the marketplace right here now, and it's just very difficult to just size where we are in this thing.

Our current forecast is that it's going to be worse in the second half than it was in the first half.

Okay. That's great.

Again, a- and I don't want to beat a dead horse here, but again, a lot of the other companies that have been reporting have indicated that, you know, the after market is a little bit weaker or a little bit stronger than what you guys are seeing. Was there sort of maybe a little bit of overbuying or are the airlines reducing their inventory of aftermarket components that you guys had sold them? Is any of that going on, because again, it - you know, if flight hours are down 10, 15% and you guys are down 25, with the orders down 32, just trying to understand sort of all the dynamics that are going on in that number.

I honestly don't have an answer for that at this point. We'll do some more work, but I'm not aware - I'm not knowledgeable as to why our aftermarket would be down more than United - UT's or somebody else's at this point.

Okay. Actually, I think that's just about everything I have. Thank you very much and congratulations on a nice quarter.

Thank you.

We have no further questions at this time. I would like to turn the conference back over to Ms. Styles for any additional or closing marks.

Thank you, all, and thank you for your time and interest and investment in Crane. If you've got any further questions, please feel free to call us and have a great day.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.