Crane Co (CR) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Crane Co second quarter 2004 earnings conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to the Director of Investor Relations and Corporate Communications, Pam Styles. Please go ahead maam.

Thank you very much Phillip, and good morning, everyone. Welcome to our Crane Co second quarter 2004 earnings release conference call. This morning on our call we have Eric Fast, our President and CEO and acting CFO, who has a few prepared remarks, after which we'll open up the call for questions. We also have in our room with us today Joan Nano, our VP and Corporate Controller.

Before we get into our prepared remarks, just as a reminder, the comments we make on the call may include some forward-looking statements. We would refer you to the disclaimer language at the bottom our earnings press release, also in our annual report 10K and subsequent filings pertaining to forward-looking statements.

Now let me turn this call over to Eric.

Thank you, Pam.

As is our practice, I don't intend to recite the numbers or details provided in our earnings release in form 8K. I will use the time on this call to share some overall observations and briefly comment on the segments.

Overall, I am pleased with the second quarter results with earnings per share up 18% to 52 cents at the upper end of our guidance range. In many of our markets we are experiencing a modest increase in demand for the first time in several years. Pricing, however, remains extremely competitive, making it difficult to offset the sharp increase in material costs experienced in the quarter. New development programs and product introductions are at the highest levels experienced in several years. New leadership in Merchandising Systems, the Controls group and for our Operational Excellence program is accelerating the pace of improvement.

While certain of our Fluid Handling businesses have begun to perform at improved levels, notably pumps, Crane Supply and Resistaflex, we continue to have unsatisfactory margins in our core valve systems and Crane Limited in the United Kingdom. In the quarter, material costs increases, delays in implementing price increases and supply chains disruptions impacted results.

The first quarter 2004 acquisitions of PL Porter for the Aerospace group and the Hattersly brand for Crane Limited continue to perform as expected, PL Porter in particular has performed better than planned as airlines are ramping up spending, particularly for premium seat refurbishments to reattract the business traveler. During the quarter we purchased 632,000 shares at a total coast of $19.3 million and year-to-date 1,388,000 shares for $42.7 million to mitigate dilutions from option exercises and because we believe it is a good investment. Average operating working capital, that is receivables and inventory, less payables as a percent of sales was 21.8% in the first six months of 2004 compared with 23.1% for the full-year 2003.

Turning now to some brief comments on the segments. Excluding the PL Porter acquisition, sales in the Aerospace group increased $3.5 million or 5% from the prior year, as increased OEM orders, particularly for regional and business jets offset lower after-market spares, repairs, and overhaul activities. Military orders for OEM and spares mirrored commercial activity. The after market in certain products is benefiting from higher utilization rates, however, this is being offset by the retirement of older planes such as the DC8, 9 and the MD-10's, where we have had high pump and brake content. The success of the low-cost carriers continues to accelerate these retirements. Margins remain at challenged due to the higher mix of OEM versus after-market. Customer price pressures, and higher engineering costs to support program wins for the new Tire Pressure Sensing system, modernization and upgrade programs, such as our brake controls upgrade for Federal Express and of course support for [inaudible] new regional jets.

Our content on 737 NG and A-320 workhorses and strong positions in regional jets position us well for the changes occurring in the end markets and shift to low-cost carriers. The sales increase in the Electronics group was solely a reflection of the incremental impact of the Signal acquisition. Late receipt of orders in Power Solutions impacted second quarter efficiencies, but provide a strong backlog in the Custom Power business for the remainder of the year. The microwave solutions business acquired in the Signal acquisition, disruption from the closure of the California plant and weaker order bookings than expected.

The second quarter overall for electronics was a challenging one operationally with increases in past due shipments and ordered delays. Our aerostation electronic sales mix in the second quarter was 53% commercial and 47% military. In the Aerospace & Electronics segment we are maintaining our guidance of moderately higher operating results to the full-year 2004. Our Engineering Materials segment experienced strong demand for FRP in each of its market segments with particular strength in Recreational Vehicles, although market strength in alternate competitive material displacement make up a majority of the sales increase, a portion can be attributed to new product sales in the RD and Commercial Building product markets that are on track to meet expectations.

Recreational vehicle industry association revised its full-year 2004 growth expectations for RV's during the quarter from 2% to 8% for 2004. RV OEM manufacturers continue to run at capacity during the quarter. High gasoline prices this summer are not expected to curtail RV retail sales as consumers appear resigned to impacts on their recreational costs and appear to be favoring the RV life-style over economizing. In the transportation market, Chemlight currently expect refrigerated and dry van builds to increase about in line with industry expectations or 25%.

Our Chemlight business achieved outstanding results in the quarter with strong margins in spite of material price increases, discipline working capital management and renewed focus on key growth initiatives. We continue to expect operating profit from this segment to meet moderately higher in 2004.

Merchandising Systems end markets remained soft in North America, but saw modest improvement in demand four our vending machines and coin merchandisers in Europe. Improved employment data and the start of positive absorption of commercial office space should at some point lead to improved conditions here in North America. Substantial reductions in costs in the European coin-changing equipment business and North American vending, along with key productivity improvements from our operational excellence program are producing the sharp improvement in profits in spite of flat sales and material cost increases.

New product activity remains very high with Genesis, our new tabletop machine, introduced in Europe late this spring, a new refreshment center introduced in the second quarter and a new food machine to be introduced in the third quarter. Aggressive value engineering to reduce costs, improvements in working capital management, new disciplined sales initiatives and excellent customer metrics are all enhancing results.

Fluid Handling sales, excluding acquisitions and favorable foreign currency impacts increased 3% while overall profit margin declined to 6.8% from 7.3%. Our disappointment with this segment's results continued in the second quarter as higher commodity costs, a difficult pricing environment, and supply chain disruptions have pushed visibility of operating improvement further out into the second half of the year. We are and will continue to benefit throughout 2004 from aggressive actions taken last year to improve the cost structure of our Fluid Handling business. However, they are not evident in our results given the higher commodity costs at wins. These trends were particularly evident in our Valve businesses.

We do see some signs of increased activity in the Chemical Processing Industry, our largest market, particularly MRO activity in the U.S. Investment spending for capacity increases will lag until the industry experienced an extended period of strong conditions as the high energy prices will temper their appetite for such expansion.

In the Valve group, which accounted for 53% of segment sales, sales excluding fortune currency were essentially flat and profit margins declined to 6.2% from 6.9% last year, all be at a sequential improvement from 2.3% in the first quarter of this year. While the market tone was generally more firm to these businesses in the quarter, evidence by strengthening orders and backlog, our sales trailed expectations due to challenges encountered in our supply chains and our efforts to increase the scale of manufacturing and our low-cost manufacturing facilities. In particular, Supply Chain disruptions and short-term capacity issues delayed sales of Key Castillo and newly-introduced International Iron Products. Additionally, while certain higher commodity costs for scrap steel, iron and bronze may have peaked, we were unable to offset these costs through surcharges and price increases in the quarter. While price increases have begun to take effect, large projects continue to have aggressive, competitive pricing.

That being said, we are seeing encouraging signs of improved profitability and utilization at end users in the U.S. and Asian chemical processing industry. Improved market conditions, the absence of high costs of facility closures and head count reductions that occurred in the second half of 2003, and better pricing are expected to drive improved margins.

Crane Limited sales excluding acquisitions declined as it continued to face difficult domestic market and particularly competitive conditions across nearly all major product offerings. Besides lower volume, operating profit was further adversely impacted by higher raw material costs and delays in low-cost sourcing. We are pleased with our Crane Pumps & Systems business, which has seen more robust market conditions across key markets sand successfully leveraging the increased volume across all its facilities and optimizing its low-cost manufacturing facility in China.

Initiatives with large national counts and OEMs continue to be strong contributors as Crane Pumps & Systems is winning more projects and is adding wholesale channel partners. A 3 to 4% price increase to partially offset higher raw material costs was implemented in April. Our Canadian distributor, Crane Supply with improving market demand conditions is also effectively managing through this period of higher raw material costs. Strong sales, disciplined margin control, and effective supplier management contributed to holding solid 8 to 9% margins quarter over quarter. We continue to expect a strong increase in operating profit in 2004 from our Fluid Handling segment. The combined benefits of price increases, realization of cost reductions achieved through facility closures, and severance actions and our continued focus on productivity improvements should offset any negative impact from higher commodity costs.

The control segment is having improving conditions in the end markets, particularly oil and gas exploration and truck manufacturing. We continue to believe full-year 2004 operating profit from this segment will increase slightly.

As is our practice, we do not intend to comment on the estimate of the company's asbestos liability beyond what we have said in our press release in form 8-K. This also applies to the information on the 8-K on the EPA supper fund [SILENT] in Phoenix, which Crane has been remediating since the early 1900s -- early 1990s. I would note that we are maintaining our full-year earnings guidance of $1.90 to $2.05 and free cash flow guidances of $90 million to $110 million. We believe the third quarter 2004 earnings per share should be in the range of 50 to 55 cents.

With that, I'll turn the call back over to Pam.

Thank you, Eric. Before we open up the call for your questions, let me provide a few additional details. Cost of sales in the quarter was $324 million. SG&A was $104 million. Included within these categories was depreciation and amortization of $14.8 million. Goodwill as a percent of our total assets was 31.4%. Interest expense was higher for the quarter due to higher debt levels for acquisitions, share repurchases, and higher working capital requirements to support the higher sales volume.

With that, we are done with our prepared comments. Phillip, you may now open up the call for questions.

Thank you. (Caller instructions). We go first to Dean Drea with Goldman Sachs.

Good morning.

Good morning, Dean.

Can you address whether there's been any restructuring costs that you flowed through your operating results so we can then look at it on an apples to apples basis?

Not in the second quarter, Dean. I mean, this year -- none in the second quarter this year.

You made a reference to some delays in the California Plant closure, so those -- it was electronics -- there were no expenses associated with that?

Most of those expenses were in the first quarter.

Okay.

Or just at the end of last year.

And Eric, I'm interested in the comment on the Fluid Handling side. It sounded like you know, in all of Industrial America is up against the raw material costs, head winds and then either the ability or inability to get price.

Right.

And within the Fluid Handling, if I heard you correctly, it sounded like for Valves, you're not able to get price, but for Pumps, you were. Is that correct? And just kind of' give us a competitive dynamics there in Valves, why you're not able to get price.

I'd say -- I'm not sure I would differentiate Pumps from Valves, Dean. We clearly were not able to cover all the material cost increases with either surcharges or price increases in the quarter. Some of that's timing, and some of that's inability to get to prices. I would say generally where -- I would say generally, we are rolling through modest price increases both across Valves and Pumps, where we're not seeing any belief on pricing is on projects, on project activity we are finding the pricing to be -- continue to be extremely competitive.

Okay. I know you may not look at it this way, but if you aggregated your businesses and look in the total head winds you're getting for raw material costs.

Right.

Versus whatever sort of productivity initiatives and price increases, and net those out, how do you describe the net head wind that you're facing now on a company level? Do you have it on a dollar amount or on an EPS amount?

I can't -- I haven't quantified it that way. I'm not -- we clearly are gonna have to do a better job on productivity, and continue our low-cost sourcing, Dean, but I don't have a net/net number as a way to look at that. I would say that when it comes to pricing versus material costs, it's clearly Fluid Handling, where we've been most impacted. We have some of that in engineering materials, but I think that will correct itself. We're not really seeing any pricing relief in Merchandising Systems and we're just having to deal with that from a productivity improvement, and I think we're getting that. So it's primarily in Fluid Handling.

Okay, and just one last question and then I'll circle back. Your comment on -- especially for Aerospace -- where you talk about year-over-year dollar amount operating profit growth, you've not really addressed margins. Can you address the margin hit that you're getting in that business and kind of separate out, you know, what the factors are there, how much is decreased volume, how much is price, and so forth?

I'm not gonna give the details, but as a characterization, our low-margin OEM business, regional business jets is up strongly, our Aerospace after-market, particularly in Brake Controls and Fuel Pumps is down, and as you know, that's extremely high margin. And at the same time, we have a number of wins in specific programs that are requiring some pretty heavy development costs in Engineering, all of which is our future, and as you know, all that development cost we expense. So, I've got the impact of lower high-margin after-market, higher development expense with the volume coming from the lower-margin OEM business.

Right, and is there a fourth factor in pricing at all?

Well, I just came back from -- I'm sorry, I missed you at the air show, but I spent two days at the air show and I didn't have a meeting with either an OEM or a Tier One supplier that wasn't talking about how do we reduce prices. I mean, that's just a fact of life! And we are planning on that, and in those negotiations, and we are aggressively moving for productivity improvements in our business.

Great, thank you.

Mmm hmm.

We go next to Ned Armstrong with Friedman Billings Ramsey.

Yes, good morning.

Good morning, Ned.

With regard to the supply chain disruptions that you alluded to, can you describe those again a little bit? I missed part of that.

I would say that -- I can't speak for all Industrial America, but I think the supply chains, particularly as it relates to southeast Asia, but also here domestically, because of a modest increase in demand, I think it caught the supply chains a little bit by surprise and supply chains generally are a stretch. Secondly, in our case in Fluid Handling, it's really two different situations. We have, part of the issue is an operational issue, and one of our own plants in China, which was to deliver our new cast steel product. Secondly, we were second sourcing that in the third party supplier who suffered, the foundry was wiped out with a tornado, so we got kind of a double whammy on a key new product introduction, and we are seeing delays in a third party suppliers, particularly in China on components and some of our new sourcing activities, and all of that is slowing our material cost improvements that we expected.

Do you attribute these delays and disruptions to just the facilities not being able to handle demand or do you think there are operational issues at the facilities?

I think both. I think in one of our facilities there are, for this cast steel. There were particularly management operational issues, but generally across the board, the supply chain is out of China is pretty stretched when it comes to Fluid Handling.

And did I also hear you say that you also had some difficulties domestically with some supply?

Well, I just--

Chain issues or--

As I go around our businesses, Ned, there's just a general comment on supplier on-time deliveries, missing parts, lead times being stretched out, it's an issue across the business.

Okay, that's helpful, thank you.

Mmm hmm.

We go next to Matt Summerville with Key Bank Capital.

Good morning, a couple questions. First, Eric, are any -- have you been put on allocation for any of your key raw materials at this point?

Matt, I'm not aware of any specific instances where that's an issue.

Okay, and then I'd love to get your thoughts on what you're thinking for steel prices in the back half of the year? You know, we've at least been hearing that it looks like they're moving higher, the last time I saw scrap costs they were between 300 and $350 a ton, and I think you commented earlier that perhaps you see things rolling over. I'd like to hear your thoughts on that.

Matt, there are so many more people more qualified to talk about that than me. I'd rather just back off on it. We're -- let me just say we're watching commodity costs very carefully for our surcharges, and both in terms of what we pass along and in terms of making sure that the people who have surcharged us as suppliers that, when they back off we go back to them to get their -- to reduce their surcharges. What I would say is in Fluid Handling, we have not yet seen any decline in basic commodity costs that would allow us to go back and say hey, take the surcharge off.

Okay. A follow-up to that. If you weren't able to get a lot of price -- if any, price that you needed in the second quarter, what I guess is structurally changed that will enable you to do that in the back half of the year? And I guess a follow-up in particular in Fluid Handling, how much in terms of price increases do you need to hit your forecast?

We are getting price increases. I -- we are not getting enough price increases to fully offset all of the material cost increases. What's happened is first off, in a lot of cases you have to get people 45, 60-day notices. So we're putting in price increases and you give them a notice and they book orders before your price increases go into effect. So we've got a delay. We've got a natural delay there, and in terms of when the notices went out and the price increases impact.

Secondly, in a number of our highly-engineered specification businesses, particularly in the big chemical processing companies, that's a individual company by company negotiation. Those take a while. They are -- we have been successful. Those companies understand that we've got these costs, and I'm seeing you know, major chemical company by major chemical company agree to a 3 or 4% price increase. So, a lot of this is timing and effective dates, which we should be getting more benefit from in the second half of the year.

Okay. Couple of questions on engineer materials. You hit on the RV, and I think truck-trailer. What sort of growth rates are you seeing in your building materials business and what's sort of the outlook for that piece of the pie in the back half of the year?

The positive thing in Engineer Materials was in the quarter all of their five markets were up. Clearly Recreational Vehicles led the way, followed by Transportation. The mass Merchandiser, the Two-Step Distributors, the Industrial business, it was all up, but not nearly as significantly. I would just say modestly.

Okay, then on the raw materials side then, Engineering Materials, I looked at prices a few weeks ago, as I recall it's a key input in the business. Are you able to get more price in Engineering Materials? Are you having more success there? And will the raw material issue become something more significant in this business looking out in the next couple months?

We are through productivity improvements and modest price increases able to offset the material cost increases that we're seeing. I would also add that in a number of cases we have long-term agreements with our suppliers and we have long-term agreements with our suppliers, which cap the price increase that provide us protection. So I think we're very comfortable in Engineering Materials.

Okay, thanks a lot.

We go next to David Smith with Smith Barney.

Good morning, guys.

Good morning, David.

Just one follow-up, and I won't bug you anymore on pricing, but just wondering if you can give us a net sense, say if you look at the enterprise as a whole, how is pricing on a net busier over year for the enterprise as a whole? And then specifically the Fluid Handling?

I don't have either one of those, David.

Was it up or down? Can you give us that?

We have five very different segments, David. We haven't aggregated it in that fashion.

I just have an -- haven't aggregated it. We do it business by business and go through and look at the detailed business by business and what's causing the margin impact. I just don't happen to have that number right here today, David.

Okay, so it's fair to say then just looking at three biggest segments, Fluid Handling was likely down, Aerospace was kind of flattish and Material Handling might have been up--

I would say that we're clearly -- you know, the -- price increases, productivity and material price increases in Engineering Materials we've handled well. I think in Fluid Handling we are, due to the timing delays, both in the notice period and getting people to agree, it's lagging, but should improve in the second half. And I think in Aerospace you live with price degradation for the next decade.

Okay. Getting on prices, on the backlog specifically, can you tell us how the backlog faired in total backlog, ex-acquisitions and currency, and Fluid Handling, again, ex-acquisitions and currency.

We don't break that out, obviously acquisition is up in Fluid Handling and electronics. The two businesses where backlog's important.

Dave, I might add that in some prior quarter calls we highlighted acquisition impacts the backlog. If you call me offline I can get that disclosure for you again and we can go back through it.

Okay, great. Third thing, on RV Market sustainability, I understand that the market are market forecast is up, but with rising gas produces, do you see things getting much better or is it really driven by -- I know you've talked until the past about content, improved content. And it sounds like you've got new products. Is that what's driving more optimism in that business or is it really a true belief that the market is actually getting better?

We have a strategy to -- our strategy here is to take market share against the alternate materials, in terms of the aluminum and steel and for the first time we've got a little bit better, favorable price comparison. Our second strategy is to make sure that we're continuing to maintain, if not improve, our FRP share against our competitors, and our third strategy is let's just don't ride the wave of you know, a powerful RV Transportation business and let's spend money here to invest both organizationally and in people and in new product development to drive some growth in alternate markets. So, we are doing that and that's a core part of our strategy.

How do you see that play out as well -- I know you talked in the past, Eric, about the Truck/Trailer market. Sounds like obviously the market suppose. I'm hearing comments as a pack this morning, kind of 30, 40% on build rates, but in the trailer market certainly looks robust, if you look at Wabash, but are you gust kind of seeing that kind of similar market increase or is it driven by market share versus--

I would say that the bulk of this is all market improvement, but importantly to me, I think there's a little market share in there. There's clearly some material substitution, and we are at early days of trying to ramp up the new products. So I think it's all going for us, and I see -- it looks to me like a sustained period here in the Trailer/Transportation market. How long RV goes, I don't know, but we should be -- I'm pretty comfortable for outlook for this year certainly, and the challenge to us is put in some of these other initiatives and to drive them hard so that it will mitigate when some of those key markets turn down.

Okay, last point, on Merchandising Systems. You talked in the past about the excess supply of vending machines out there. And it doesn't sound like you're you know, really optimistic, about much of a turn in '04 as far as the market goes, but are you still seeing a huge excess supply of vending machines out there that sort of mitigates confidence?

As you know, David, we've never been able to exactly quantify it. But it's clear that there continues to be head winds with used machines, although with increasing employment and the utilization of commercial office space. They should be getting redeployed. We're not quite sure when we should see that increased demand in our own business, whether it's going to be in three months or six months, but we should start to see some of that. The improvement you're seeing in those businesses is really due to you know, management initiatives in our productivity, new products, et cetera, et cetera. A little help from demand in Europe.

How about factory utilization. Does that play into this whole game?

Well, we've got plenty of capacity.

Are you talking about the customers' needs for vending machines?

I'm talking more--

Oh, definitely -- definitely. As you see factory utilization ramp up here in industrial America, you will see people go to a second shift, and the second shift starts to you know, doubles the cash flow in the operators' vending machine business, that means he's got more money to spend on new machines.

Okay, great. Thanks, guys.

But we're not seeing an increased in demand yet.

Okay, that's what it sounds like, okay, thanks.

Thanks, David.

We go next to Scott Graham with Bear Stearns.

Good morning.

Good morning, Scott.

Two questions. Can you talk about, and to the extend that you can bring this down to the business unit level, I would appreciate it, the sales trends as the quarter progressed?

I'm not quite sure what you're getting at, Scott.

Well, was June the best month or the worst month of that kind of thing across the businesses? And maybe that's not even a fair way to look at it because of the dynamics of the different businesses, but I'm just trying to get a feel for the improvement in the end markets that you're talking about, if you saw that in the sales or more so in the back logs?

I would say -- if you wanted me to -- rather than characterize my business, what I would say overall is in characterizing industrial activity, I would say it was stronger earlier in the quarter than was at the end. That's not to say our results mirrored that. But I would just say in terms of order activity, a little bit stronger beginning of the quarter than at the end, but I don't want to make too much of it because it's more a gut feel than anything else.

Okay. All right. If we can go to the Fluid Handling business one more time--

Yep?

It sounds to me like the disruptions that you're talking about in the supply chain were as much as they were outside the company as inside the company, and I'm wondering if sequentially that's better than where it was six months ago?

That's a tough one, Scott.

What I would say, Scott, is that -- you mean just in terms of the supply chain? Or just in general?

Ah, call it the Eric Fast happiness factor with Fluid Handling.

Eric Fast is not happy.

Oh, I know in general, but are you less unhappy?

Let me say this, I feel we have some pieces of our Fluid Handling business -- Pumps, the return of very good margins in Resistaflex in North America, our Crane Supply activities that I feel encouraged by and pleased with. We continue to be disappointed by the results in our Valve business and in the, if you will, the old business at Crane Limited.

That being said, I feel better about the people. I feel that we've got better people, better processes, our businesses are improved, but clearly, the operational excellence State of a number of those businesses is not yet where it needs to be. We have been surprised by the size of the material price increases and the supply chain disruptions, so we've had to fight that battle at the same time trying to improve our businesses. So, I'm encouraged. I remain confident about the direction, but I'm definitely disappointed and frustrated about the pace of it. I think to add to that, because it will be your next question, I expect a number of these businesses to continue to show improvement in the third quarter. I don't honestly expect much from the Valves. From the Valve group in the third quarter. They are talking about a very strong third quarter. We are expecting some modest improvement in Limited in both the third and fourth quarters.

Okay. Last question on operating working capital. You said it went down by over a point a quarter.

Yep.

Is that broad-based or was there some business?

We, we have a focus hear on working capital. We're just getting outstanding results in Merchandising Systems, where they continue to improve. We're getting outstanding results in Chemwide, which continues to drive improvement. Less so at the moment in Fluid Handling and in Aerospace because we've got some of the volumes there without getting the margin improvement, and there's some working capital tied up in some of that past due activity. But overall, it's getting better and I expect to continue to drive it so we can meet our cash flow forecast.

Okay, thank you.

We go next to Wendy Kaplan with Wachovia Securities.

Good morning.

Good morning.

You mentioned -- we've been talking about scrap costs, material costs, scrap steel costs in Fluid Handling. You mentioned something about April. How many surcharges, given the lag team between the time you put in the surcharges and the time you realize it, if it's a 3-month period then one would assume we'd start to see some improvement in July. Number one, have you seen any? And also, how many surcharges have we put in? Do we assume that given that scrap prices seem to be going even higher in the second half that we'll be putting in more surcharges? How should we be thinking about that?

First off, to quantify all that on a call like this I think is extremely difficult. What I would say to you is generally we have tried to move to price increases as opposed to surcharges. Secondly, we follow every week, every major commodity it goes out to every unit President, and that unit President gets a report weekly from the supply chain that says here's where this commodity chart is and you need to think about surcharges or price increases. So, we really delegate that down to the President and the people close to that market and don't dictate it.

And thank you. And also, Eric, you mentioned, you said something about having to do a better job on productivity in the Fluid Handling segment. Can you give us some examples of some of the improvements that you're working on now that you expect will make a difference in terms--

This is no silver bullet here, Wendy. This is all about driving our operational excellence program. It's about understanding root cause, it's about mapping the process and then driving the kyzans (phonetic) to get the improvement in space, shorter lead time, on-time deliveries, and of course, productivity, and it's driving that sustained improvement across the businesses.

Okay, thank you. And I have one other question. In the second quarter, core growth across the board for the company as a whole was 7 percentage points of the 18.

Right.

All of the core growth in the various segments were below this except for Engineered Materials and the tiny Controls business. Should we conclude that the only way we had 7 percentage point core growth in the quarter was strength in RV's and Trailers?

Wendy, there is no question that our end -- look at orders and shipments. I would add Aerospace to the orders, by the way, in terms of growth and orders. But generally in a lot of our markets, particularly Fluid Handling, while there's a firming, there's certainly no growth there.

Thanks very much.

We go next to Matt Summerville with Key Bank Capital.

Eric, question on Aerospace. As far as given the order activity that you saw in the quarter, what are your expectations as far as the product mix as we move into the back half of the year? Are you seeing something similar to what you saw in the first half? And then can you re-visit military and also talk about what sort of growth you're seeing in that area?

I would -- we expect to see the same kind of activity, improving OEM and a challenging after-market in our Pumps and Brake Controls businesses as those planes are retired. Offset by after-market in certain of the other products like sensing, and I continue to see higher development costs given our -- you know, my mandate to the Aerospace group management team was if you get the orders, then we'll fund the development programs and by God, they got the orders and we're funding the development programs because these are important initiatives that provide future growth and they impact the PNL.

That being said, we are managing all of that with improved productivity to make sure that we are gonna hit our earnings expectations.

Can you maybe provide a little color on some of the development programs you're working on?

Well, again, we've got a lot of work going on in 77. Activities? I mentioned the, a new retrofit of the MD-10's at Federal Express that we're doing with Honeywell and Boeing to put brake controls on their Fed-Ex MD-10's. We're starting to ship all that in. We're spending all that money today and don't ship it until January of '05. We got a weight and balance work for -- this is the weight and balance technology to automatically weigh regional jets. And you know, there's a broad cross section of activities going on there.

How much content do you expect to have on the 77?

We have some wins, but we have some losses. Frankly, the game is one of the things I was doing over at Farmborough was pitching additional content. I think so far okay, and but there's a lot still outstanding. Tier one players decide, you know, what they want to keep and what they want to outsource.

Okay. As far as one follow-up on Fluid Handing, can you talk about what your utilization rates in that business looked like and then compare the valves to the segment as a whole?

In terms of the capacity utilization -- I don't really know what an overall -- it's not an issue I'm dealing with now, Matt.

Okay. Thanks.

Mmm hmm.

We go next to Kurt Woodworth with JP Morgan.

Good morning.

Good morning, Kurt, welcome.

I have a question on the Valve group. With sales that were basically flat year on year, excluding the fortune currency, but I assume you got some pricing benefit in the quarter. That would imply down core growth? In terms of volume?

Yes.

So given that this segment is more than half of the Fluid Handling group sales, you know, what do you need to happen either on the pricing side or demand side you know, to get the margins back up to higher levels for the segment?

Again, the -- today what's happening is that material cost increases and our ability to get pricing as quickly is offsetting a lot of the costs that we took out of the business in 2003. So what we need to do is to see smooth product flowing from China through our facilities so that we've got these new products, and that they're flowing through, and that we are driving the productivity improvements so we can improve margins. It's that simple.

Are demand trends still down right now?

I would say that they're firmer.

Okay.

I would say that overall they are improving in the sense, particularly MRO activity in North America in the industrial process areas, particularly chemical processing, but certainly in paper and sugar industry and a number of the other industrial processes. A little bit less so in Europe. Project pricing is for the Middle East, and in Asia, and it is very competitive on a price point of view.

Okay, great, thank you.

Once again, if you would like to ask a question today, please press the star key followed by the digit 1. We go next to Dean Drea with Goldman Sacks.

Thank you. Just to circle up on asbestos just for a moment. What's interesting about your disclosures now, Eric, is you began last quarter with what was in part of your outlook, a comment to say that there may be some increases in exposure claims filed, and so forth. And the exact same disclosure now appears in the second quarter. So I just wanted to know whether this is -- and we haven't seen any change necessarily or alarming changes in any of the claims filed and settlements and so forth -- so, is this new disclosure that now gets repeated in the second quarter, this more -- should we view this more as legal boiler plate or as opposed to a signal that conditions are worsening?

We're -- Dean, I'm gonna -- we go to enormous lengths to provide the extraordinary and careful exposure on asbestos in the 8-K, and I'm just not gonna characterize it other than what's in there.

Okay, so just to rephrase it. If we look at what you've disclosed on a regular basis in the 8-K, and in terms of the companies that we follow and have asbestos, you're absolutely at the forefront in terms of the number of claims filed, what you disclose in the settlements and so forth. So from that standpoint, you know, we can track it quarter to quarter, but the only thing that has changed is a 3-cent, almost like a disclaimer that shows up now in your outlook, and it was the same one that appeared last quarter. And I just want to get a sense of whether this is just boiler plate legal advice from your attorneys to say you know, you need to include this just to say that conditions could worsen? Is that a fair assessment?

We are disclose -- I wouldn't describe anything as legal boiler plate. We put in here what we think is the issue and represents a truthful and straight-forward articulation of what the issues are, and I would ask that you treat it like that.

Okay, fair enough, thank you.

There are no further questions at this time. I'd like to turn the call back over to senior management for any additional closing comments.

Thank you so much for your help today and everyone, thank you for your time and attention and the good questions. And for your investment in Crane Co. Call me directly if you have any questions and have a great day.

That concludes today's conference call. Thank you for your participation.