Crane Co (CR) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Crane Co. fourth-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, Ms. Pamela Styles. Please go ahead, ma'am.

Thank you very much, Abe, and good morning, everyone. Welcome to our Crane Co. fourth-quarter 2004 earnings conference call. As you know, I'm Pam Styles, Director of Investor Relations and Corporate Communications. 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 will respond to your questions. We also have in the room with us today Tom Noonan, our VP of Tax, and Joan Nano, our VP and Corporate Controller.

Before I turn the call over to Eric, let me note that this call will include comments on our fourth-quarter performance from operations, as well as brief remarks on our termination of the master settlement agreement related to asbestos. Also, I need to remind everyone that the comments we make on this call may include some forward-looking statements. We would refer you to the cautionary language at the bottom of our earnings press release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements.

With that, let me turn the call over to Eric.

Thank you, Pam. As we shared at our annual conference in December, we anticipated that the fourth quarter of 2004 performance would be difficult, compared against the strong fourth quarter of 2003. I was encouraged that we met the operating guidance we provided after the third quarter. At our December investor conference, we noted operating profit would be down approximately 15 percent, and it was actually off 13 percent. In addition to performance from operations in the fourth quarter, we completed the sale of the Victaulic trademark and related assets that had limited growth potential. This trademark became a part of our brand portfolio when we purchased the Viking Johnson and Wask brands from Etex in June of '03 at a total purchase price of $29 million. We sold Victaulic alone for $15 million, which essentially paid for half the original acquisition, and we retained the other 2 brands that have much greater potential for us. We recorded a $9.5 million gain from the asset sale, which was 6.5 million after tax, or $0.11 per share. I would note that miscellaneous income of 15.2 million was 13 million higher than the 2.2 million last year, of which 9.5 was the sale of Victaulic. Again, as we highlighted in the December meeting, the sale of the vital real estate, reduced legal reserves and higher JV income made up the rest. We also recorded a $0.15 per share benefit in the quarter because of the net effects of terminating our asbestos settlement agreement, driven by the Combustion Engineering decision from the Third Circuit Court of Appeals.

I'd like to take a few minutes to talk about asbestos before I address our operating performance. At our Board of Directors -- our Board of Directors voted yesterday at a regularly-scheduled board meeting to terminate our participation in the master settlement agreement related to our asbestos liability. The termination decision was the result of the Third Circuit opinion in the Combustion Engineering case , which constituted a material change in the case law regarding settlement transactions using 524(g) of the Bankruptcy Code. The court found that the two-trust structure used by CE treated pre-petition claims differently from the post-petition claims, and the Bankruptcy Code requires these settlements to be on a substantially similar terms. While there are significant differences between the terms of the CE settlement and the proposed terms of our master settlement agreement, we did not -- we did use the two-trust structure, and the outcome for our transaction was too uncertain to go forward. Although this decision does not foreclose the possibility of a modified settlement transaction, it clearly makes this form of settlement transaction more difficult.

We have also renewed our credit facility for 5 years, with a 300 million revolver available for general corporate purposes, and a 150 million term loan component that is in -- that's in addition that is available only to fund the settlement transaction for the asbestos liability and only after it is approved by the court. With the termination of the master settlement agreement, we have re-evaluated our asbestos liability in the context of -- of the tort system, with the assistance of outside experts. Our estimate of the liability for settlement and defense costs through 2011, with certain related fees and expenses, is $649.7 million, before insurance and tax effects. While this gross liability is $83.8 million higher than the liability based on the comprehensive settlement transaction, the net liability after insurance is actually 14 million lower. The key differences between the estimates are under GAAP, the tort system estimate is expressed in nominal dollars while the settlement transaction liability was discounted to present value. Secondly, the tort system estimate includes a substantial amount for legal fees to defend the Company. The settlement transaction estimate did not. Approximately one-half of -- of -- of the 50 to 70 million cash payments for asbestos estimated in '05 are for these legal -- or -- legal defense fees. The insurance recoveries under the tort system are estimated to be approximately 40 percent, as it was prior to our master settlement agreement. We estimated recoveries for the settlement transaction, with its accelerated payments, to be only 30 percent. Tort system estimates covers key claims and costs through 2011. The settlement transaction would have been a full and final closure of the liability.

While the termination of the MSA is disappointing, it does improve our balance sheet, lowers our interest expense, stretches out any cash flow obligations relating to asbestos and leaves us with much greater near-term flexibility to conduct our business, which will include a more aggressive acquisition posture. We continue to be hopeful that there will be other opportunities or legislative solutions to resolve the asbestos liability. We note there is significant renewed interest in federal legislation to deal with the asbestos litigation problem. Senator Specter plans to introduce a revised bill to establish a trust funded by companies and insurers. As is our practice, we do not intend to comment on our estimates of the Company's asbestos liability beyond what we have said in our press release and Form 8-K, which has considerable detail.

Reflective of -- reflective of the termination of the master settlement agreement, we are adjusting our 2005 full-year guidance to a new range of $2.10 to $2.25, from $2.05 to $2.15, reflecting lower anticipated interest expense from asbestos of $0.07 per share in 2005. We are also providing first-quarter guidance of $0.35 to $0.45 cents per share, compared with $0.37 last year. As you know, the first quarter is traditionally weak. As is our practice, I don't intend to recite the numbers or details provided in the earnings release or Form 8-K, rather, I will share additional observations and comments on segments and end markets served.

At Aerospace and Electronics, the Aerospace Group margins are being impacted by the OEM after-market mix. To give some perspective on a full-year basis, OEM made up 53 percent of sales in '04, up from 49 percent last year, with a converse change in the more profitable after-market. During the quarter, this business won numerous product and solutions awards. One award that is a particular milestone for the aerospace business and that shows the momentum we are building for future growth is the fact that we won the brake control system contract for the Airbus A400 military transport program. This is the first award for Crane on an Airbus aircraft brake and antiskid control system. During the fourth quarter, we invested 1.5 million more than in the prior year on engineering and R&D for new program awards, including the 77 and A380 that are key to our future growth. Even with the challenges of sales -- even with the challenges of sales mix, price deflation and increased investment spending, the Aerospace Group delivered profit margins approximating 20 percent for the quarter and full year, before including the acquired P.L. Porter business, whose margins are -- are lower. As planned, the P.L. Porter manufacturing facility will be consolidated into our Burbank facility during the first 6 months of '05, which will improve P.L. Porter margins.

Electronics Group margins in the fourth quarter were approximately 17 percent, down from the unusually high 26 percent the prior year. Our custom power business, which constitutes 40 percent of the Electronics Group, experienced strong orders, profitability and margins. The microwave business continued to be impacted by the California plant consolidation, which is expected to be largely resolved during the first quarter of 2005. Reflecting the reduced margins, operating profit was 36 percent below the fourth quarter last year. We expect -- expect the overall segment to show a modest increase in sales and operating profit, with margins remaining stable as compared to the full year '04. Several programs negatively impacting margins in the Electronics Group should be largely behind us in the -- after the first quarter.

At Engineered Materials, FRP sales for all our market segments were higher than '03, both on a fourth quarter and full-year basis. Sales to the RV OEMs increased 8 percent, and sales to transportation increased 24 percent in the quarter. We did experience some preorder -- preordering in transportation, building products and international to beat our scheduled price increases in January for these markets. Profit margin in the quarter declined 15 -- to 15.1 percent from 18.6, driven solely by higher raw material costs. Total Kemlite sales in 2005 are expected to surpass 2004 shipments by over 10 percent, the majority of this from price increases. Operating profit margins in 2005 are forecast to be flat with '04 in the 19 percent-plus range, as price increases, cost containment and productivity improvements are offsetting higher raw material costs.

At Merchandising Systems, this is a late-cycle business in that we are experiencing modest improvements in our end markets. North American vending substantially improved -- in -- in North American vending, substantially improved customer metrics, heavy new product investments, real productivity gains and refocused selling and marketing efforts are expected to accelerate to growth. Margins, while improved in the quarter, were held back by certain national account rebates and heavy new product introductions. The European coin changer businesses is experiencing slightly more favorable orders and reduced losses. In '05, a reduced cost base and the absence of severance charges will return it to profitability.

Fluid Handling -- by increased sales, Fluid Handling operating profit was up 16 percent on flat margins. Valve Group margins were 4.2 percent versus breakeven last year, as Xomox, the largest of our industrial valve businesses, had a $6 million improvement in operating profit approximately -- or approximately 3 million improvement excluding one-time costs for severance in 2003. The improved valve performance was in spite of continued poor performance at Crane Valve North America, that's our commodity -- one of our commodity valve businesses, and losses in the marine valve business. Both CVNA and Crane Limited in the U.K. are not -- together constituting primary -- our principal commodity valve businesses, continue to be negatively impacted by supply chain disruptions and -- and late product delivery from China. As we previously highlighted, we are in the process of changing the business model in these 2 businesses from one where we manufacture the valves in either the U.S. or U.K., to having them -- them supplied from China, both from our own plants and third-party suppliers.

We expect to make significant -- we have and expect to make significant progress in improving supply chain performance during the first half of 2005, reflecting progress on dual sourcing and additional procurement resources, as well as -- as we begin to benefit from the central China supply office we set up in late 2004. We talked about these model changes in detail at our annual conference. Our other fluid-handling businesses, Pumps, Crane Supply and Resistoflex, performed well with a -- continued to perform well with acceptable margins. We would note we have -- we are closing the Salem pump plant and consolidating it into our Piqua operation, which cost approximately $1 million in the fourth quarter, and we'll have a 1.8 million negative impact in the first quarter of '05, a 1 million negative impact in the second quarter and -- and a positive contribution for the remainder of the year.

We are confident in our 2005 earnings per share guidance of $2.10 to -- to $2.25, up from $1.98 on an operating basis, or $2.09 including the gain from the Victaulic sale. I believe that -- that as we move into the second quarter of '05, the problem programs in electronics, many of the China supply disruptions on commodity valve, and the expenses from the pump facility consolidation will be largely behind us. Unlike 2004, we also believe our price increases will be recovering higher material costs. Our focus is on leveraging and accelerating our operational excellence program deliver -- to deliver those results.

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. As you'll note, we now include the cost of sales, SG&A and depreciation and amortization on the bottom of our attached income statements. Goodwill as a percentage of our total assets was 27.4 percent. Interest expense was lower year-over-year for the fourth quarter, due to lower borrowings and financing costs. We did not repurchase shares during the fourth quarter, but repurchased a total of 1.388 million shares for $42.7 million during the full year 2004. Average working capital, that is, receivables and inventories less payables, as a percentage of sales was 21.9 percent for the full year 2004, compared with 23.1 percent for the full year 2003.

Lastly, for those of you in queue to ask questions, we take a moment to ask that you limit the number of questions you ask at each time to allow the courtesy to your colleagues so that they can ask questions too. You're welcome to get back on line as you wish.

With that, we're done with our prepared comments and, Abe, let's open the call up now for questions.

Thank you, Ms. Styles. Our question-and-answer session will be conducted electronically. If you would like to signal to ask a question, please press the star key, followed by the digit 1 on your touchtone phone. Again, that's star, 1. If for any reason you've muted yourself, please make sure you unmute before you signal. If you are muted, that will block your signal. And we do have some questions in the queue. Our first question will come from Scott Graham at Bear Stearns.

Good morning, Eric. Good morning, Pam.

Good morning, Scott.

Would you, Eric, be able to quantify in the second half what the total cost, the excess cost was, within Fluid Handling for the supply chain issues, within Electronics for the plant consolidation, and within cash flows for anything that would have been out of the ordinary from asbestos, that we can maybe X out and try to get -- trying to get to a quarterly run rate cash outflow from asbestos going forward?

Scott, with all due -- with all due respect, I -- I don't have all that, you know, at my fingertips. We -- we have specifically tried to help with the asbestos guidance on next year by giving people a range of 50 to 70 million. That's pretax and pre the timing of the insurance recovery refund associated with that. I have not quantified or even attempted to quantify the plant consolidation issue, nor have I -- what was the other part of that? Material costs or --?

Supply chain.

Supply chain.

Okay. Fair enough.

I'm really -- I'm really focused on getting those issues behind us.

Okay. Can we expect in the first quarter or first half of the year an appointment of a CFO, do you think, Eric? Is that tracking within the first quarter or the first half of this year?

We -- we have a couple key searches here, of which the CFO, the new head of Fluid Handling, I had an interview scheduled for -- for this afternoon. I have a number of candidates that we're looking at. My goal is to get a CFO just as quickly as possible. I consider it a -- my number 1 priority, but I'm not going to compromise in terms of -- of what we're looking for. You -- you can be comfortable that it is, again, my number 1 priority and we are very focused on it.

We'll now go to Matt Summerville at McDonald Investments.

A -- a couple -- couple questions. Eric, can you talk about, on a sequential basis, why you saw the decline in your aerospace backlog? If I go back and look over the last couple of quarters, I don't think you've seen a decline since the latter part of the 2003. And then if you could, try and quantify the magnitude of pre-buy you thought you saw in your FRP business?

I -- I don't think that the pre-buy in the FRP businesses -- you -- I wanted to mention it because we -- we feel that there's a little but -- I -- I -- I wouldn't -- I don't think it's material, Matt. In -- in terms of the quarter-to-quarter change in the Aerospace and Electronics, that was the only part of our backlog that was down. The - the piece of that that has been weak is our microwave orders, which -- which are -- are less than last year. Our custom power business remains very strong. And I -- I -- I'm -- I'm going by memory here, but orders -- orders in aerospace are not -- not the issue.

Okay. And then just one -- one follow-up. In -- in terms of the guidance for the first quarter, can you sort of talk about what differentiates the high and the low end of the range? I don't remember you guys providing the $0.10 range typically when you give out quarterly guidance.

That -- that's a good question. We just -- I -- I made a decision to give the range a little bit wider only on the basis that I felt that it was important in the first quarter that if we had to spend money or do things to make sure that the -- we got either problems or supply chain issues or key hires or whatever behind us, that I wanted the flexibility to go ahead and do that. It -- it -- it doesn't really reflect my -- any -- any greater lack of confidence, if you will.

Next question, we'll go to Wendy Caplan at Wachovia Securities.

Thank you. You mentioned, Eric, a management change in Fluid Handling. Can you talk a little bit about that in terms of what you're specifically -- what sort of skill set you're particularly looking for, and whether we should expect any other significant management changes, other than the CFO position?

The -- it's not really a management change, Wendy. We have not had a -- a formal position as head of Fluid Handling. There's been 3 different people that reported directly to me in that -- in the Fluid Handling, and -- and I think the decision that we made is we needed to bring in a head of Fluid Handling, and given the metric -- the -- the metric issues and the business process, the improvements that need to be fixed there, we're specifically looking for someone with a strong operational, hands-on background. But it's -- it's not a -- it's a new position.

We'll now go to David Smith at Smith Barney.

Hi, guys.

Hi, David.

Good morning. Can you just talk briefly on pricing, I -- I -- especially in Engineered Materials? Do -- do you see getting back to the margins where you were at before? It sounds like the whole driver here is really coming down to pricing. Volume looks like it's pretty steady and -- and the outlook looks pretty good there.

We're -- with respect to Engineered Materials, I'm -- I'm confident about our pricing. We have price increases that were put in this fall. We implemented some the beginning of the year. We have announced more in February and then even later this spring, and I'm -- I'm confident that we're going to be able to fully recover the material costs here. A lot of the volume increase is -- is the annualization of the price increases there. So I -- I feel that we have a -- a very firm, solid handle on that and a market position that will allow us to do it, and frankly, customers that understand the high material content and what's happened to styrene and the -- the other components, so -- so I'm comfortable with that. We are spend some money and investments on new -- new products are -- in -- in the composites area that is all about how we grow that business, but as I said in my comments, we're looking for -- for the year, margins here to be approximately 19 percent, maybe a little bit better.

Okay. And just a quick follow-up, Eric, on -- on the commercial construction portion of that business, can you just comment about it? It sounded like in your release that you're seeing some better indications on that side.

We're seeing good demand across the board. We -- we expect a little bit less, though, in RVs, which -- which you know -- as you know, had a, you know, 25-year record last year, so that -- that might come off a little bit, although we don't see that yet. And strong transportation and -- and building -- building products has been fine.

We'll go now to Deane Dray at Goldman Sachs.

Thank you. Good morning. Our question relates to asbestos and it's a -- a three-part question, so please bear with me. The first question relates to your assumption regarding moving from 30 percent recovery to 40 percent, and was curious whether -- was this a result of an agreement with your insurance carriers to bring that percentage back up, or are you just assuming that they're willing to pay out that amount that was previously in place before the -- before the trust had been arranged? So that's the first question. The second one relates to unimpaired claims. You -- you made no reference to whether unimpaired claims are back included in your assumptions now going forward, because those are applicable under state law now, so where as before in your trust agreement you were excluding them. And then the third question is related to your time period. You've now said that you have visibility out to 2011, which would be implied a 2 additional years of -- of visibility, but that you're actually reducing your -- your balance sheet reserve. It just strikes us as a little optimistic. So if you can walk us through those 3 points, the insurance percent, unimpaired claims and then your visibility out to 2011, please?

The -- the -- on -- on the insurance, under the master settlement agreement, it was we assumed 30 percent, and under the current reserve it's 40 percent, which is exactly what we had assumed when we were in the tort system before. There is no agreement with the insurance companies. The reason why we assumed 30 percent in the settlement agreement was strictly because we were going to be -- have to negotiate with all the insurance companies and there's clearly a present-value discount that needs to be taken into effect if they were -- if some of them had chosen to pass up front. So that -- that's the reason for the difference there. With respect to unimpaireds, you'll see in the 8-K, Deane, that we do include unimpaireds here in our reserve calculation, it constitutes about 16 percent of the liability. Oh, excuse me, that's futures. But -- but we -- it definitely includes un -- unimpaireds, all right? And with respect to 2011, I mean, it's 4 years longer than what our previous estimate -- estimate had been, and, you know, frankly, given my experience with the asbestos liability for -- I -- I don't -- I -- I certainly could never call a liability either conservative or liberal or aggressive because -- given the inherently uncertain nature of trying to estimate that liability.

Okay, and just last question, is any rating agency impact -- right now you're not going to go through with that 270 million note, so with that off the books is there going to be a rating agency review?

I -- I -- I wouldn't -- well, first off, the agencies are both now at mid-BBB, BAA2. S&P, Moody's. I would expect it to stay the same, although clearly the credit is substantially improved. I mean, we -- we have $280 million less in debt and a lot's, you know -- a lot less cash going out here near-term, so we've got a -- debt as percent of cap is 27 percent, I mean, an extraordinarily conservative balance sheet. But I wouldn't -- I wouldn't expect them to change it and frankly, I don't see any reason to, or -- for them to -- to move it one way or the other.

We'll now go to Kathleen Connelly at UBS.

Actually, Deane just asked my question, but thank you.

Great.

Thank you. And once again, that is star, 1 if you would like to ask a question, star, 1. We'll go to Ned Armstrong at FBR.

Good morning.

Good morning, Ned.

I had a couple quick questions regarding the -- some of your markets. In the Fluid Handling business you allude to some of the weak commercial -- some weak markets in the commercial valve business. Do you anticipate that any of those markets improve over the course of 2005, or is it weak for as far as the eye can see?

I -- I don't -- we -- we -- our profit improvement both in the -- in the commodity valve business here in the U.S., we -- we have a slight to modest improvement in sales there. And I think we're okay with that. It's -- it's not really enough to -- to talk about. And -- and we don't expect -- we -- with that slight improvement in shipments, we -- we can get the operating improvement that we count on. I 'm -- I remain a little bit more concerned about the U.K. market. There's disruptions with competition leaving distribution, new competition in distribution, very aggressive project kind of pricing. So I -- I do -- we do see weaker markets in the U.K., certainly as -- as far as the competitive environment, again there should be margin improvement there, just getting a -- a -- a supply of product in from China on a -- a more consistent basis.

Okay. And then with regard to the electronics business, I thought I heard in your remarks that you mentioned that the weakness in the -- or poor performance in the microwave arena was due to some of the activities going on at the California plant. Was that the sole cause of weakness in -- in that market?

The -- the -- our bookings in microwave are weaker than they should be. I think it relates to some sales force issues, where we had consolidated the sales force and now we've gone back and broken it apart, so microwave's got its own 10 dedicated sales people. You'll recall I did change the leadership here of the electronics segment this fall for some of those issues. I think also some of the -- the -- the lower shipments are caused by our -- in -- in problem programs that were transferred from California -- California's closed, but some of the problem programs that we inherited from California are still in the Arizona plant, and -- and I expect a -- a large of that -- amount of that to be behind us as we move into the second quarter.

We'll now go to Curt Woodworth at J.P. Morgan.

Hi. Good morning.

Hi, Curt.

A -- a few questions, financial questions. Can you quantify what the net raw material headwind was for you for 2004 and also in the fourth quarter? And I was also wondering if you could quantify the impact from the production disruptions at that California plant?

I'm -- I'm -- I'm not -- I haven't really -- we haven't really done that. What we have -- we have done that. But -- but I think the -- we quantified it internally, and by each of our businesses. What we have done is to make sure that the -- that -- that as we move into '05 across the board in our units, that there is pricing in place or planned to be in place to recover these material costs. Now, that's not to say we -- we don't see additional material costs here in -- in '05 that we'll have to increase prices further on. But -- but contrary to last year, where we -- our pricing lag and -- and our execution on getting that pricing in place, in a -- a number of the units, I expect us to be much more on our game and on top of this, and I've just reviewed it for every one of the businesses here last week, and I think we'll -- we're clearly going to be far superior than what we were last year.

Yes, I mean, just -- just trying to think about it in terms of -- can -- can you provide any range in -- in terms of the hit to you this year? Would it be over, you know, $0.15, $0.10?

The only thing I've said is -- I haven't -- I have pointed out that one- half of that equation, which was direct material variances greater than planned at Crane this year were, I don't know, $26 or $27 million for the full year in '04. Now, to some extent that was offset by pricing, but it also means that all our substantial procurement activities, which were supposed to be another $10 million of savings, didn't -- we -- we might have got them, but they were more than overwhelmed by the material. But it -- it's that kind of magnitude.

We have a couple of follow-up questions. We'll go to Wendy Caplan, Wachovia.

First, I just wanted to get the second part of my question answered that I got cut off on, which was the management question, whether there are any other significant management changes planned. And secondly, my follow-up is on Engineered Materials, as you look toward a flat kind of 19 percent-plus operating margin in '05, is it simply pricing and how does that square with the negative mix, given that RV is going to be down?

Engineered Materials, I mean, again, RV's going to be down just a touch, transportation's going to be up, building materials are going to be okay, up a little bit. We've got a lot of pricing that's going to come through here, and we feel like we're on top of it and confident about it, and -- and over the course of the year you'll see that given that market scenario, you'll see the 19 percent margin. There -- there -- again, this is one of the areas where we have absolutely outstanding, consistent operational results in -- we have a lot of confidence in Kemlite. The -- with respect to Fluid Handling, I -- I don't have other -- any management changes contemplated. I did, as -- as you know from the December investment -- investor conference, I did reduce the scope of Dennis Hewko's responsibility to allow him to focus on the marine valve business -- particularly the marine value business and make sure that we have the turnaround there, as well as our commodity valve business in the United States, both of which are important turnarounds for us in 2005.

Anything else from Ms. Caplan?

Thank you, no.

Thank you. We'll go back to Matt Summerville at McDonald Investments.

A question on Fluid Handling. I think you mention in the press release the -- that business segment experienced 8 percent organic growth in the quarter. I was wondering how much of that is volume versus price. And we've talked about price increases in some of the other business. I mean, what do you guys need in Fluid Handling in 2005?

In terms of price increase?

Yes.

Well, I haven't aggregated it for all Fluid Handling. I have done it for each -- each one of the businesses, and I don't honestly know what -- how much it was price, of the 8 percent. We clearly have improving markets in Fluid Handling. I would -- we -- we do not expect markets to be the issue in 2005. I think they'll be okay, slightly better. We -- we're seeing activity in desalinization, power's coming back in China, chemical processing, MRO is clearly stable and giving us a nice base. That being said, project pricing globally remains extremely competitive. I think the, you know -- the -- a -- a margin improvement which we expect is coming from, again, the price versus material issue, better execution and throughput to our plants and -- and -- and lack of supply chain disruptions coming from China.

All right. Maybe another way to talk about it is, you've gone through and I would assume by now most of your raw material contracts have been renegotiated for 2005. On average, how much do you think your steel cost is up in '05 versus '04?

Oh, I haven't -- I haven't looked at it that way for any aggregate facility. I mean, the -- the -- it -- it -- look at foundries globally are running at capacity. They are not hesitating to -- to call you up and say, "here's your price increase and if you don't like it, then go try to find it for -- from somebody else." Well, that's difficult if your patterns are in there and if that foundry has your patterns. And I think the key here in '05 is I think we're okay where we're currently positioned in Fluid Handling. I've gone through this just last week for every one of the businesses in terms of price versus material, as long as material costs don't run away from us here again -- again. And that's what we have to watch.

Are your raw material contracts, then, can I conclude, subject to some sort of reset based on an index?

Very -- very few -- very few of the Fluid Handling contracts are -- are with suppliers globally or for, you know, long-term for a year or 6 months. They've all -- in this environment, they've all got price escalation to them.

We have another follow-up from Scott Graham, Bear Stearns. Mr. -- Mr. Graham, we're not hearing you.

Yes, hi. Eric with the small divestiture, the plant consolidations taking place within the Company, the shifts to China, it looks like, you know, you're really trying hard to get back on the -- the sort of -- the one-company track, and I was wondering with respect to additional divestitures and now with the asbestos MSA terminated and the freedom that that gives you on the balance sheet, what can we expect from Crane in 2005 perhaps from a merger or acquisition or divestiture standpoint? Is there more portfolio cleanup to come here, and do you see yourself back in the market immediately on acquisitions?

I do see us immediately back in the market on acquisitions. We clearly have been out of it, really since second quarter of last year. And -- and so I don't -- I don't think we can just, you know, turn on a dime and give nice exchange here. But clearly our posture and attitude on acquisitions is to be aggressive to -- in -- in terms of the opportunities, and you can expect to see that realized in 2005. The one company theme here we've never left, we've never waivered on, you will constantly see trimming around the edges, whether it's -- this is the EBA discipline, whether it's the excess real estate, whether it's a Victaulic, where we had a buyer who -- it -- it was worth a -- a heck of a lot more important to them than it was to -- to us, and it was not strategic to us. We -- we will move to again trim around the edges, as we move to the -- the one-co philosophy. I would also point out that a lot of the one-co activities are in the segments. In aerospace, we are seeing -- we are -- we have been putting in that common ERP system, which will give us productivity gains. We are planning on consolidating some -- some additional facilities here in '05. We've got -- again, leveraging procurement even more aggressively through the whole aerospace group, as opposed to the 5 sites. So, the -- the one-co themes, a fewer number of larger units, we continue to drive and we continue to see opportunities for gain even within individual segments.

Oh, and just a -- can I ask a follow-up here before I get cut off?

Sure.

Okay, great. I'm looking at your cash flow guidance of 175 pre-asbestos, but it all -- it looks -- the -- the 175, I -- from what I'm reading here, contemplates the 25 million of -- of CapEx?

The -- we're -- we're going to try to lay out cash flow in 2005 on a consistent basis. You'll see cash flow of -- from what I call from operations, which is the 175. After you take out 25 million of CapEx, you will get 150, all right? That -- that 175 is up from 149, 150 this year, which was, you know, $9 or $10 million short of where we thought it would be, all right?

Right.

So we're looking for about a $25 million increase in cash flow from operations. CapEx is 25, which gets you to 150, and then you have dividends, which are 24 million, and then you have whatever the asbestos payments are. Since it's extraordinarily difficult for us to forecast asbestos payments, we felt if we laid it out that way, you -- it would be better able for you to track it and we'll be reporting on that basis.

So it's fair to say that within this guidance , you're expecting to pull cash out of working capital, yes?

Yes.

Okay.

I've got -- I've got solid improvements in turns, I'm hoping to get a day better in receivables and we're -- we're looking for cash here.

Thanks.

We'll now go to Curt Woodworth at J.P. Morgan.

In terms of the repositioning of your commodity valve business that's sourced from China, can you just talk a little bit more about that in terms of how much you're sourcing now, how much you want to be sourcing in, say, the next 1 to 2 years, and also how you can insure supply? Are you going to look to -- to buy or build some capacity in China? And just -- maybe just talk -- talk more about that. Thank you.

Well, in the U.S. we -- we've gone from a, you know, very large percentage. I think we -- we -- we made everything here domestically except for the Center line, which was in -- in -- [inaudible], so call it 75% domestically, and we're moving so that that will almost be entirely coming in -- in from China. It be coming in from some of our own JVs as well as third -- third parties. We initially moved it so that it was single-sourced. We ran into some problems with some of those sources, including one of our own JVs, and we've been aggressively spending money to put in dual sourcing to make sure that we can get the cast steel and the iron coming in from China in the quantities that we want and the reliability, and I think a lot of that is going to be behind it. In the -- in the U.K. 2 years ago, we probably made 100 percent of our -- or 85 percent of our requirements in the U.K. We had our own bronze foundry, we have our own malleable iron foundry. We've closed the bronze, and we have a JV that does that now in China, and we are sourcing an extraordinarily high percentage. I don't -- I don't know exactly what it is but it's got to be 80 percent from -- from China into the U.K. on that commodity bow. Again, there's been the disruptions there.

I would note that when we bought Hattersley, which, again -- Hattersley had about 20 percent of the commodity valve market in the U.K. They made it 100 percent in the U.K. We only bought the brand and we bought some inventory. We did not buy the plant or any of the overhead. We've kept I think a total of 35 people from the Hattersley organization, which was -- which was enormous, because we've immediately moved to put tooling and patterns in China and 100 percent source that from China. It's not fully complete, but we are aggressively moving to get that supply chain set up and moving smoothly. So -- so it's been a -- a radical transformation, and I think we're starting to get to the end of the process to -- so we can start to see some results read through.

Great.

We'll go back to David Smith at Smith Barney.

I -- I'll get this percent.

Hi, guys. On a follow-up, as far as the pricing goes, it sounds like in the Engineered Materials business that you -- you are well on track to getting some pricing increases, but if I look to the Fluid Handling business, can you talk a bit about the ability to actually get the price increases? You did talk a bit about over in the U.K., how on the commodities side it's a little difficult -- a little bit more difficult and more competitive. Are you seeing a lot more from China or -- or a lot more competition that would maybe preclude you getting those price increases?

Well, I think -- I think at the end of the day our sourcing from China on the commodity valve businesses is going to assure that we're equal in terms of cost to compete globally and certainly in the U.K. and U.S. markets at that -- at that quality standard. So it's going to be all about brand and front end and product positioning, so I'm comfortable there. In those businesses we are -- we need to see -- when we move -- increase our prices, we need to see whether there -- our competition's going to follow. And I would say in the case of the U.S., generally the pricing has been going up there and we should be all right. I'm a little bit less certain in the -- in the -- in the U.K. I would say that in the industrial businesses, we -- both with Xomox and Pacific, price increases are -- while they've lagged and they've taken a fair amount of time to get in place, are generally holding in -- in -- in place.

Okay. That's great. Thanks.

Next we'll go to Matt Summerville at McDonald Investments.

Just one more follow-up on price increase, I mean, a housekeeping item. In the Engineered Materials business do I remember correctly that at the annual investor event in mid-December, did you guys say that you thought you'd get 20 percent price increases in that business essentially effective January 1? And if so, I guess your commentary earlier, Eric, would -- would lead me to believe that it's going to be more of a gradual ramp in terms of pricing in that business. And then lastly, what we should be factoring in for a tax rate in 2005, and corporate expense.

We expect to fully recover material costs for Kemlite in the first quarter, period, all right? And -- and -- we -- we did not announce that we're going to increase prices across the board 20 percent. It's the cumulative impact of the fourth quarter rolling in to benefit, as well as the price increases in the first quarter, but we should be fully recovered I'm -- I feel confident about it. I think the tax rate people should use for next year is 32 percent. What was the other question?

The corporate expense?

What did -- what did we say in the investor conference? Isn't that what we said in the investor conference? It was up a little bit.

If it -- if it's the same number, you -- then you [inaudible].

I haven't -- I haven't changed it. I think that's a -- we think that's a decent number.

Okay. Thanks.

You're welcome.

And we'll go back to Kathleen Connelly at UBS.

Hi. I have a follow-up -- follow-up question about the rating agencies. I wanted to know if you had a chance to actually speak with them yet, and I wanted to find out if you had a chance to particularly speak with S&P. I believe they have a negative outlook in -- in the press release from them. They had commented that ratings were -- their -- their ratings were predicated on an asbestos settlement or something to that effect [inaudible].

I -- I -- I -- I haven't personally talked to them, but I -- I know our treasurer has, and since the -- the credit -- from a credit standpoint we got materially better by canceling the agreement. I -- I frankly haven't worried about it.

Agreed. Okay. So discussions have already happened with the rating agencies?

I'm sure they have.

Okay. Thank you.

We -- we have -- the treasure's got a good dialogue with them.

Okay.

And once again, that is star, 1 to signal. And we have no other questions in the queue at this time, so I'll turn it back to the speakers for any closing comments.

Thank you very much, Abe, and our apologies if a few people got some of their questions cut off there from the operator end, but thank you all for honoring the keeping your questions limited to let your colleagues on and coming back on the call. Thank you again for your time and interest and investment in Crane, and if you have any further questions, please feel free to call me directly. Take care, and have a great day.

Thank you. That does conclude our call. We do appreciate your participation. At this time you may disconnect. Thank you.