Crane Co (CR) 2006 Q3 法說會逐字稿

Good day, and welcome everyone to the Crane Co. third quarter 2006 earnings analyst conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Richard E. Koch.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone. Welcome to Crane's third quarter 2006 earnings release conference call. I'm Dick Koch, Director of Investor Relations. On our call this morning, we have Eric Fast, our President and CEO; and Bob Vipond, our Vice President and CFO. We will start off our call with a few prepared remarks after which we will respond to questions.

Just as a reminder, 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 release and also in our annual report 10-K and subsequent filings pertaining to forward-looking statements. Also during the call we will be using some non-GAAP numbers which are reconciled to the comparable GAAP numbers in the table at the end of our press release, which is available on our website, www.craneco.com, in the investor relations section.

Now let me turn this call over to Eric.

Thank you, Dick.

I'm pleased with the company's' performance in the third quarter. Earnings per share of $0.74 were in line with our guidance and up 12% in the third quarter of 2005. Operating profit increased 15%, with strong performances in Fluid Handling, Merchandising Systems and Aerospace.

The increase in operating profit in the Merchandising Systems segment was primarily due to the results from the recently acquired CashCode and Telequip businesses which offset a reduction in our vending solution results. Operating margin increased to 12.5%, up from 11.8%.

Including Dixie-Narco acquired yesterday, we have spent $281 million for four important acquisitions in our Merchandising Systems segment and Noble Composites and Engineering Material. In January we acquired CashCode and in June we acquired certain assets of Automatic Products International in the stock of Telequip Corporation. We made our second and final payment of approximately $8 million for AP at the end of the third quarter.

Earlier this week we acquired Dixie-Narco for $46 million. We repurchased 25 million of our common stock in the first half and an additional 12.5 million in the third quarter.

As I said at our December investor conference, we feel we're in a position to more aggressively deploy our capital and we have done what we said we would do.

Turning now to specific segment comments, first the Aerospace and Electronics, and focusing first on the Aerospace group.

In the Aerospace group, OEM and aftermarket sales were higher than last year, excluding Resistoflex Aerospace which was sold in May. The OEM aftermarket mix was 58/42 compared with last year's mix of 62% and 38%.

We have been successful in growing our aftermarket sales, particularly our monetization and upgrade. OEM sales grew 5% and the aftermarket was very strong compared to the third quarter of 2005.

Excluding Resistoflex, Aerospace bookings in the quarter were strong, up 8% overall, with OEM and aftermarket both contributing to the increase, providing a solid base for future growth. Aerospace backlog at the end of the third quarter of 2006 is up 20%.

The Electronics group continues to focus on meeting customer requirements on several large programs at low margins, which are being delivered over the next nine months. Our year-to-date bookings are lower than last year, principally due to weak electronic manufacturing services orders and delays in awards of several large custom power orders that we expect to partially recover in the fourth quarter. The Electronics group fourth quarter sales are forecasted to be approximately the same as the third quarter.

In Engineering Materials, revenues decreased 5% but operating profit was off $6 million or 38%. Our sales for the quarter were noticeably lower in recreational vehicles, with building products and transportation about flat with last year's third quarter. We experienced a sharp decline in RV orders about midway through the quarter as the RV industry sharply curtailed production in response to a fall-off in demand from their customers.

The industry generally attributes this downturn to higher gas prices and interest rates and an inventory reduction on dealer lots. While the short-term is uncertain, in the longer term the demographic fundamentals continue to be positive for the growth of RV sales. The decline in operating profit reflected RV product support costs, lower RV volume and higher material costs.

Our acquisition of Noble Composites on September 29th provides us with a high gloss exterior finished product for RV sidewalls, which we were unable to make on our continuous process. We are very pleased to have been able to acquire this quality company and broaden our product offering to the RV industry.

As we discussed in our April and July conference calls, we have been providing product support costs to several of our RV customers who have been experiencing distortion. Distortion affects the exterior panels of RVs and has been caused, in our view, by either a poor gluing process of the FRP panels to the substrate material and/or a higher than normal moisture content in the substrate material, which is typically a plywood type material called Luann.

We've embarked on this program to team with the OEMs to provide solutions to the industry-wide distortion problem. The root causes and actions to address these issues involve teams of our production people and technical experts, along with our customers who are reviewing production methods including adhesive processes, substrate sources and inspection processes.

Elise Kopczick our Corporate Vice President for Human Resources, has replaced Dan Colbert, who was the President of Composite Material and will be the Interim President of that division while we search for a replacement. Elise started her Crane career in this business, and, as you know, has successfully run a number of Crane operations in the United States and Canada.

Merchandising Systems. In the third quarter, the strong overall earnings performance of our payment solutions business more than offset significantly lower earnings from our vending business. CashCode and Telequip have driven the higher earnings in payment systems and more than met our original plan.

On September 30th, the automatic products, AP plant, was closed and is being moved into the St. Louis facility during October and November. We built AP inventory this summer to transition this move.

Third quarter 2006 vending sales, excluding the acquisition of AP, were flat with the second quarter 2006. But we continued to see weak demand for vending machines. The 9% decline in shipments in the third quarter reflected less of a decline quarter-over-quarter than in the second quarter of 2005.

Dixie-Narco is a manufacturer of can and bottle vending machines primarily for well known companies such as Coca-Cola, PepsiCo and Dr. Pepper/Seven Up. This acquisition expands our served market to include the can and bottle industry, adding to our product offerings in the snack, food and coffee segments, and positions us as the industry leader in North America.

Dixie-Narco has and is continuing to incur meaningful operating losses, and significant changes to its current business practices will be required to return to profitability. Short-term that means we must, first, improve selling prices with key customers; second, substantially improve productivity and reduce costs to our lean activities, including value engineering, product line pruning and reductions in inventory; and third, execute our synergy opportunities in material purchases, infrastructure costs and new sales opportunities.

Long-term strategically, as the industry leader, we intend to substantially reduce operator costs by changing the current anachronistic fulfillment system via streamware software, [pre-cleaning] fulfillment and the ability to change pricing with a computer stroke. We also intend to grow operator revenue by introducing products that generate more revenues per machine, with features that include glass fronts, added capacity, flexibility for different bottle sizes, faster delivery systems and new and improved payment systems.

While these changes will take a number of months to implement and will be a drag on our fourth quarter 2006 earnings, we are confident about the longer term attractiveness of this acquisition. I should add that we have carefully considered the acquisition of Dixie-Narco several times over the past decade and now feel that we have made a very attractive long-term investment.

These acquisitions are expected to increase our total Merchandising Systems sales to over $425 million in 2007. These acquisitions fit our strategy of highly engineered products serving the niche market that leverage and strengthen our existing businesses. While we are looking for strong earnings growth from these acquisitions in 2007, our fourth quarter 2006 results will be impacted by the onetime AP consolidation costs and the Dixie-Narco operating losses.

Fluid Handling, representing 45% of Crane sales, had a very good quarter following strong first half results. We had broad-based growth in operating profit across the business units in the segment. Most importantly, we believe that the current level of demand will continue well into the future, as our backlog at September 30th is 18% above a year ago level.

Our core sales in Fluid Handling increased 3%, reflecting stable demand in the late cycle nature of our markets, which include the chemical process industry, power and nonresidential construction. Operating profit was 29 million, up 39% from the 21 million on the third quarter of 2005.

All three major groups in the Fluid Handling segment showed improved operating profit in the third quarter, with the Valve group and Crane supply being the largest contributors to the gain. Our third quarter margins of 11.5% were substantially improved versus 8.7% in the third quarter last year. As I have said in the past, our progress in fluid handling has been a journey, reflecting strength in management teams, improving markets, excellent brands, reduced physical footprint, low-cost country sourcing, and improved planning and manufacturing processes.

These broad-based improvements and orders which were up 13% in the quarter provide a solid foundation for future growth. Within fluid handling, Valve group had sales, excluding Westad, up 8%. Operating profit increased 42% over the third quarter of 2005. And margins increased from 8% in '05 to 11% this year. Improved results were broad-based across units and product line.

Crane Pumps & Systems' operating profit was up slightly ahead of '05, and margins increased from 7% to 8%. Crane supply continues to post solid results with stronger sales and a favorable sales mix.

Briefly, our controls business continues to grow excellent markets in oil and gas and transportation. Strength in management teams and a real focus on customer metrics and new products are driving the improved result.

Turning to our fourth quarter guidance, we expect our earnings per share to be in the range of 58 --$0.64 versus $0.58 in the fourth quarter of 2005. This guidance includes about $0.02 for option expense and anticipated costs of about $0.06 for the one-time costs of the AP plant consolidation and the expected losses from Dixie-Narco and a higher forecast tax rate which will depress EPS around $0.02 compared to the fourth quarter of 2005.

We are narrowing our total earnings per share guidance from the range of 2.60 to 2.70 to a range of 2.64 to 2.70. I would remind you that we have raised our earnings guidance twice this year from 2.45 to 2.60 to 2.50 to 2.60 in April. And in July, we again raised our earnings guidance to 2.60 to 2.70. We remain on track to post our second consecutive year of record earnings per share and are positioned to grow our earnings in 2007.

Now, let me turn the call over to Bob Vipond, our CFO.

Thank you, Eric. Good morning, everybody.

Our cash flow for the quarter was lower than 2005, primarily because of the timing of asbestos payments and the planned inventory build for our automatic products line in advance of the relocation of that business to our St. Louis facility. Year-to-date cash flow from operations is slightly behind 2005.

As you will recall from last quarter's conference call, we said that the second quarter asbestos payments were lower than normal because of the change in our payment administrator and that the third quarter would see a catch-up in these payments. So our payments are coming in about as expected. For the total year, we continue to estimate that our net asbestos payments will be approximately 45 million.

We have modified our free cash flow guidance for the year to a range of 170 to 185 from our previous guidance of 185, primarily because we may not realize as much of a working capital reduction as we had previously expected.

As we approach the end of 2006, there are a couple of factors impacting the timing of our working capital flows. First, the inventory levels required to support customer demand in the fourth quarter are requiring higher inventory levels. And secondly, the timing of our sales into December are also having a pressure on our receivables. That's versus what we'd previously expected.

So we think citing a range now is more appropriate. At this point, we expect free cash flow to increase 10% to 20% over the 2005 level of 154 million.

Our tax rate for the third quarter was 32.2%, higher than the 30.3% tax rate in the third quarter of '05 and above the 31% to 32% guidance we had given for the second half of 2006. The rate was higher than our guidance in last year, primarily because Congress did not renew the federal research and development credit.

Since Congress is now adjourned and there's no guarantee whether or for how long they will return after the elections, we are doubtful about the passage of this legislation in this year. This lack of action has resulted in our no longer anticipating renewal during 2006. And therefore, we have removed it from our guidance.

The impact of the tax credit on a full-year basis would have been approximately $2.4 million. So removing it depresses our EPS by $0.04 for the year. Our fourth quarter tax rate is expected to be at 33% to 34%, assuming Congress does not act on this matter.

Our corporate expenses decreased 2.6 million from the third quarter of 2005, held primarily by the $4.9 million reimbursement from the US government for past environmental cleanup costs at our Goodyear, Arizona, site. This was partially offset by other corporate items, mainly our higher options expense, which affected us this year and obviously not last year.

This reimbursement from the government is part of an agreement we reached, which also provides that they will pay 21% for qualifying costs incurred after January 1, 2006. We are pleased to have been able to reach this agreement.

I also want to point out that primarily result of our acquisition -- our acquisitions -- our debt increased 72 million right at the end of the quarter. The overall result is that our net debt to capital ratio increased to 23% at the end of the third quarter, including 99 million of cash on the balance sheet compared to 13% at the end of the year in '05.

During the quarter, we also have reviews with our rating agencies, where Moody's reaffirmed our Baa2 rating and Standard & Poor's revised our outlook from negative to stable for our triple B rating.

I want to remind everyone that as is our practice, we do not intend to comment on our estimate of the company's asbestos liability beyond what we have said in our Form 8-K. I encourage you to read the disclosures carefully as we're making every effort to make them complete and informative.

Now back to you, Dick.

Thank you, Bob.

I would like to invite you to attend our Annual Investor Day on Tuesday, December 12th, at the Grand Hyatt in New York City from 8:30 in the morning until noon. This marks the end of our prepared comments.

Operator, we're now ready to take questions.

Thank you very much. [OPERATOR INSTRUCTIONS].

And our first question comes from Shannon O'Callaghan with Lehman Brothers.

Good morning, guys.

Good morning.

You know, on engineered materials, I mean you mention a few things with respect to the margins, you know, you mention the customer support, lower sales and higher material costs, I mean with the margin decline, you know, either sequentially or year-over-year, can you sort of walk us through what those pieces represent of the decline?

Shannon, we're not going to go into the details on the three pieces. I would say that in engineered materials we're very comfortable with our strategy. We're very comfortable that the customers are seeing the benefits of our product support strategy and our overall position.

I think that they're seeing that the distortion issues are not just a Crane issue but an industry issue. And that together we're working on a solution, working on the solution together. And clearly, our G3 new product is having a real success in the marketplace and is a major step forward on this issue.

I would say that, while we will continue to have these customers support costs, they should be at somewhat of a reduced rate.

That's a fourth quarter comment or an '07 comment?

That's a fourth quarter and '07 comment. Somewhat reduced.

Okay. And I mean would it be fair to say that that the support costs are the bulk of the margin decline?

I'm not really going to disclose that. I mean, we've got a number of customer discussions going on really. Also a lot of this depends on RV volume and where that settles out in terms of our ability to, you know, run that plant profitably.

Okay. And then just on merchandising systems, one, could you just say what the organic change was in there, I think you mentioned a little bit but I missed it. And also, just talk maybe a little bit about your strategy there. Looks like, you know, you've decided to stick with that business and add to it. Can you just talk about your view there?

The vending sales, we're talking about it in two forms. One is the payments business and the other one is the North American vending business. And payment systems every one of those acquisitions as well as our coin mech business are on target and actually doing better than what we had planned when we bought them. The core vending business, excluding the automatic products acquisition, sales were flat in the third quarter with the second quarter, which I was encouraged with.

And the comparison to the prior year's quarter was less negative, 8% or 9% versus 18%. We'll have to see how that develops, but assuming it stays flat, then we are starting to build a base that we can grow on.

Our view on this is that -- on the entire industry is that we could have spent a decade strategically planning to accomplish what we've just accomplished in the last nine months, which was to through the automatic products and the Dixie-Narco acquisition become the leader in the vending industry in North America.

And through our series of payment acquisitions we now are clearly one of the three or four major competitors in the payments business. And obviously, if you're going to be in the payments business in North America, the vending channel -- we have a natural leverage in the vending channel. It's a little bit over a $200 million market. And we now have global coverage for the gaming business.

So this really fits how we think about our acquisitions, which is to be the leading strategic player in these niche markets where there is not another familiar name that you would recognize in those markets. And we can again play a leading role. We've been pretty clear on that all the way through, I think.

Just the last one is, in terms of thinking about some of the items that have been in this year, I mean the environmental, you know, gain and you had some benefits from sales of businesses and things, are those things a headwind going into next year? I mean are they things that could come next year that are similar or that, you know, would also contribute to next year's earnings or should we think about these as a headwind or not in terms of earnings?

I don't think of them as a headwind. I mean we're moving towards a more integrated operating company, and when we consolidate plants we have extra plants to sell off and we do that. I think this is an ongoing, continuous process here that over time we get tighter, we get better. We have less variation and I just think this is business as usual for us.

The DOD suit, you know, this is not a bad thing. This is an important win for us where the government's acknowledged that they owed some of these expenses, all these expenses have been in our -- the legal expenses have been in our P&L and prior to the reserve on an ongoing basis in the P&L. So I just think it's an ongoing part of the process and as we set up our plans for next year, we incorporate our thinking in that.

So I mean is it reasonable to think that there would be a comparable amount of sort of favorable items that hit next year as there were this year?

On Monday morning I start my annual plan meetings and I'll be spending the next six weeks every day, except for three, on the road.

We'll talk about it December 12th.

At the December 12th meeting we'll lay that all out.

Okay. Thanks a lot guys.

I have said we're confident about the outlook for '07.

Okay. Thanks.

And our second question comes from Deane Dray with Goldman Sachs.

Thank you, good morning.

Hi, Deane.

Hi, Deane.

Eric, I think you started to say something about '07 just then. Did you finish your thought?

No. I just was paraphrasing what we said in the press release, you know, we think we're in a position to grow earnings in 2007 and feel confident about it, and at the December conference, as we do every year, we're going to have the groups present. We'll lay all this out in detail.

All right. Very good. And in terms of -- one of the metrics that we pay very close attention to on a quarterly basis is your organic growth.

Yes.

I know for the quarter you came in at 2% and you've got some, there's a fair spread across the segments there and that's a deceleration from 4% in the second quarter. Can you just give us some of the highlights by segment on the organic growth, because that will help us calibrate that 2%?

Well, let me -- okay. Couple things.

First off, sales growth at Crane is fine, but we talk about it in the context of profitable sales growth. And what I mean by that is I think we have the proper balance here between sales growth and price discipline. And you can see that in the dramatic improvement that we've had in our margins on a year-over-year and a quarter-over-quarter basis.

I think that's important to recognize, that as a core strategy we felt we needed to make sure we had that price discipline and to some extent that could hold down your growth.

I also feel that I couldn't be more encouraged by what we're seeing in our aerospace group, the backlog is up 20% from a year ago, sales were up 12% in the quarter.

I could also not be more encouraged by what I am seeing in fluid handling. The backlog's up 18% from the prior year. And in fact, if you look at the year-end backlog I did last night and this morning, thinking about it, just taking out, Westad is actually up 26%.

So timing quarter-to-quarter, but here is close to 70% -- 65% to 75% of our portfolio that is clearly late cycle, that we're doing a very good job in terms of volume orders and now starting to clearly leverage and get the impact in margin. You see margin success in both those businesses. And I think that's clearly one of the core strengths.

I think in merchandising systems we've been wrong on the economic cycle in that we thought that it should be doing well in this environment and clearly gas prices and interest rates have impacted the operator's cost. And as I indicated, sales have been flat in the core business for two quarters, and to the extent that that continues and all of our activities to stimulate the demand have some success, I can see that bottoming and starting to have some real improvement in '07.

I also feel that in engineered materials, I'd characterize that as more of a mid-cycle company. You're seeing that in RV sales, which is an industry issue, the issue is whether that's going to be temporary or not. And clearly our flat sales in transportation and building products were down from what we experienced in the second quarter last year.

So we need to watch that and make sure that we're controlling our expenses and doing what we can to maintain margins in that segment.

And just if we can get the layer of detail. That was very helpful in terms of putting that in perspective. What were the organic growth rates for if we just picked two fluid handling, which has been a real success story. And that'll help.

Well, I think we disclosed that it was 3% on a core rate. A chunk of that is price. But I think we have disclosed it was 3%.

Good. And on engineering materials?

Engineering materials sales are down.

Five percent, right? Sales are down 5%.

Okay. Good.

And then, Bob, that is -- and Eric gave a nice lead-in there. If we look at organic at 2%. How much was price contributing to that topline.

I would characterize it this way. In every segment, except for fluid handling, our price versus material, material variance is scrap, material cost increases, it's about a wash, plus or minus. Where we got the most benefit is in fluid handling, and an important chunk of the 2% for the overall company is in price.

And when you talk about the material costs you're referring to the year-over-year raw material cost headwind?

That's clearly some of it. Look at copper prices, etcetera, etcetera. Some of it is scrap, some of it's re-work, some of it's what we call material variances. But most of it would be material costs.

But overall net price and productivity was enough to offset raw material costs?

Just price alone.

Just price alone. So productivity you're actually ahead of the game.

Yes.

Very good. All right. And then if we look at Dixie-Narco, a couple of things. If you go back and look at that business in 2002 when it was part of Whirlpool, their disclosed revenues were somewhere in that 200 million range.

That's right.

And now you're looting at 165. And by the way in '02 it was around a 2% EBIT. So they've struggled.

What is the run rate on an EBIT basis so we know where the low water mark is coming into Crane today?

I'm not going to disclose it.

Okay.

I will tell you, back in 2000, 2001, it made a lot more money than what you just mentioned at 2% margin.

Yes. That was reported. But how about for your fourth quarter guidance, which was very helpful how you've given us good clarity in terms of the AP additional inventory and that plant move and the Dixie piece together being $0.06?

Right.

How does that split?

I'm not disclosing that.

Okay. But that would be helpful in terms of being able to gauge the returns.

What's your return expectation on Dixie? Is it your return on invested capital by year three, by year five?

What we've said is it's going to be a number of months, not quantified before we get it to break even in a profit, and I'm going to leave it at that. I could not be - I think the management team here and in merchandising systems could not be more confident about the strategic importance of this acquisition and long-term a really significant opportunity to create value for the company?

I mean if we're successful, let's assume sales are flat at $165 million, and if you're successful to just generate a modest margin in relation to the 46 million that we paid, you can do the math yourself. But there's a heck of a lot of work to do before we get there.

Sure. And timing is everything. I think you said it correctly. If you had made this acquisition a year ago, there would be some skepticism about your ability to turn it around given the history in merchandising, but given the success you've had in the past year, you've shown the ability to take out costs and integrate and rationalize distribution and so forth.

Last question on Dixie. Will this be folded into the St. Louis operation, do you have capacity?

It will not be.

Okay.

The St. Louis plant, we leaned out the St. Louis plant to be able to put in AP, which we're putting in, you know, this month and next month. So St. Louis is full.

I would have expected that but there will still be enough of technology transfers and synergies and distribution purchasing and so forth.

I couldn't be more excited about the opportunity.

Great. Thank you.

And our next Question comes from Scott Graham with Bear Stearns.

Hi, Good morning.

Good morning.

Good morning.

If we take the environmental gain out we're essentially talking about a couple cents higher year-over-year in terms of earnings per share. And what I'm wondering is that would essentially put your earnings at the low end of your guidance range Eric. And I would just ask, at the margin, the way you are looking at things now in the third quarter in retrospect, what were the disappointments? What were the things that you liked? What's kind of kept things toward on an operating basis the low end of the range?

The first thing I would point out is taking the good stuff out, and you forgot to mention that we had $0.02 negative tax go against us. That for good reasons we have not disclosed what our customer assistance program is costing us. I mean there are some other issues that clearly are in there that go against us in terms of DOD, Department of Defense gain. That would be my first comment.

My second comment would be that you know, paraphrased, I would just, you know, paraphrase the comment that I just made to Deane about the performance of the portfolio. We clearly did not expect -- with the one exception we clearly did not expect engineered materials to see the RV downturn which we saw in the last six weeks. We did not expect this bump in material costs to your benzene and styrene, thought it would be softer than that. I would say that was the variances from the plan.

That's fair. And just to balance out that question, I mean, I certainly know that you have over the last two years beat numbers with restructuring charges that I think most of us would not have expected. So I know it goes both ways.

The second question relates to fluid handling now. You know, continue to be impressed with the margin results there, but the last couple of quarters your organic growth there has been, I would argue, maybe very pedestrian, and maybe that's even overstating. And the reason I say that, Eric, is the end markets behind that business are just rip roaring right now. And I know that profitable sales is everything. But I'm wondering when will we start to see some of that the orders in the backlog start to read through here into better organic growth in that business?

Well, we do have the orders in the backlog and I'm confident about how they're priced. That is really important to begin with.

And I would say that if you ask the management team and Max Mitchell and the key leaders in the fluid handling, they would talk to you that making sure that we are getting our share of the organic growth is an important strategic priority moving forward.

The first strategic priority had been make sure we get the margins in place. And when you get this kind of 300%, 400% margin improvement -- I mean let's at least celebrate the fact of where we had margins here, right. So I think now part of the challenge is, okay, we want the margins, but we also want to grow. And we'll accept some criticism there that it should be more and we'd like to see more.

Very good. Last question relates to Dixie-Narco.

Having followed Maytag in my life prior to Bear Stearns. I know that this is a business that was operating at a 10% to 12% operating margin, in the '90s. Really my two questions are, number one, can you get back there?

And number two, you indicated that you were very comfortable with buying this thing now. And I assume that that means two things -- that the prices come down, because certainly the operations have not improved, and that you're more comfortable with your ability to integrate because of Brad Ellis running that business. Could you comment on the above?

I am -- we are a lot more comfortable that we've got a management team in place. There's a heck of a lot of work to do here. I think we are comfortable that we paid an honest price for what is clearly a broken business. And I think we believe that the risk here is the time it takes to get it to profitability, but we think that long-term strategically, and our ability to make money, we think we have a concrete game plan to do that.

Is there a situation here with Dixie that, you know, the sales might have to suffer for a little while before Brad and his people can get his arms around this thing?

Yes.

Okay. And what would you believe, if you had to say a time frame, should we see this business profitable in 12 months?

I'm not going to go beyond what we said which is, it's going to take a number of months.

Right.

What I would say to you is come to the December conference. And we're clearly have to be a little bit clearer and more articulate about some of the detailed action plans we're putting together and address just the question you asked.

Okay. Last question, if I may. The electronics business has been really kind of fits and starts. This quarter certainly coming in below what I was expecting.

What's the plan there, Eric? I know that there's a big push toward the customer. But sometimes that push toward the customer forgets about the margin.

And I'm wondering, how do you see that business. And over the next 12 months, and I know you're going to probably say that -- default again to your December conference. But that business has not seen the type of consistency that I know that you're looking for in it. Will we see more consistency in that business...

My first comment on the quarter would be, there's not really any new news here, which is why we didn't talk about it. We do feel like we're continuing to rebuild our team in terms of operational excellence leader, a couple site leaders. We feel that we're making considerable progress on some of these key big programs in terms of getting them out and meeting some deadlines with customers. Those programs have no margins associated with it.

So I consider from an operating point of view kind of steady as she goes, getting more and more and better control over our processes and business.

I feel just as strongly as does the team that the proper focus here is on the custom power, on the power business and on the microwave business. We're going to stay focused on that. And again we'll have some more to tell you in December.

But no real news there. We do need some better consistency, and, frankly, I think that long-term there's, you know, 500 more margin points there.

Very good. Thanks a lot.

Next question comes from Ned Armstrong with FBR and Company.

Yes. Good morning.

Good morning.

Good morning.

You had commented, I believe, in the engineered materials review that the commercial construction aspect of that business had remained flat year-over-year. Can you talk a little bit about areas that you're attacking other than the fast food arena and what kind of progress or lack of progress you may be making there and what your thoughts are about either magnifying that effort or reducing it?

Well, just in the building products area in engineered materials, which is about one-third of the volume in engineered materials, I would make a couple comments.

The first is that simply having our decorator products that we put in the front of the restaurants has helped us add distribution. So we have been successful in adding distribution there.

Secondly, we've brought on board seven or eight specifications salesmen to call on the architect firms to either get our white panel board or the decorator board specified. We are seeing some gains in our decorator panel, but not yet to the extent that we would like to see it.

Again, nothing big or of moment there.

Are those decorator panels being specified in areas of commercial structures other than restaurants, and if so which areas?

Sure. Hospitals, schools, you know, we're covering the gamut of commercial construction here. If you come up to the Crane headquarters you can see the Wainscoting in our hallway.

Okay. Thank you.

But nothing of size there yet.

And our next question comes from Wendy Caplan with Wachovia Securities.

Thanks. Good morning.

Merchandising systems, that business has, when I look back historically had a high teen margin back in the late '90s. One of the things that seems different to me is that -- and I'm not sure Eric, I'm not pointing at you because I'm not sure if this was pre you -- but Crane had never wanted to get into the cold beverage business in terms of Coke bottles and cans. But Dixie-Narco seems to be a departure from that strategy.

Can you talk about that specifically? And also is there any reason, given the mix of businesses today in that segment, the characteristics of those businesses, that we shouldn't see that kind of high teen margin when commercial construction and occupancy rates, office occupancy rates pick up?

Let me make a couple of comments.

First off, our business model selling to 2,000 operators is a lot more attractive than the Dixie-Narco business model selling to Coke, Pepsi and Seven-up, right?

Right.

Secondly, what is interesting strategically in the can and bottle business is the movement of Coke and Pepsi to no longer just selling a can or a standard sized bottle. As you know, Coke and Pepsi are going to -- I think Coke's got now 18 different products that with different shapes that need to be vended.

And if you go to the old enclosed can and bottle machines that were at your old gas stations where you couldn't see the product, they cannot vend those 18 different product shapes. The new glass fronts with a new patented delivery system can have the capability to vend all those shapes.

So there's the strategic opportunity here as Coke and Pepsi want to sell product, that where you start to see an acceleration of the glass front machines replacing the old enclosed machine. I think that's one of the key strategic differences.

The second one is, it makes it attractive to us as we're in the payment systems business now. There's a lot of volume here. We just think that there's a lot of different product opportunities, common electronics, common refrigeration, that we can now drive which we couldn't before.

And the margin question?

I have no doubt about in our traditional North American vending business that if we get volume you will see significant leverage and we clearly have the discipline to do it. We just haven't had the volume.

I think Coke and Pepsi is a different issue and it's going to depend upon very, you know, up close and personal price negotiations with Dixie and Pepsi -- I mean with Coke and Pepsi and our key customers moving forward.

Thanks very much.

You're welcome.

And moving on, we will hear from Matt Summerville with KeyBanc.

Couple of questions. First on the aerospace business, Eric, you mentioned how much OEM was up. If you mentioned aftermarket, I maybe missed it, but could you give that data point?

I didn't, and we're not going to share at this time. There's a lot of M&U in it. We did say it was stronger than the OEM, and we gave you the mix which shows, you know, 62.58. But we didn't disclose it, but it's very strong and continuing to be strong.

Okay. And then in engineered materials, can you talk about pricing trends in that business, since you had some raw material mismatch there during the quarter?

We did. We've got a price increase in the market in an effort to try to -- in parts of the market in an effort to try to offset those costs. We've been -- largely offset those costs in the quarter.

Okay. As far as the downturn you're seeing in RV, what are your thoughts in terms of the length of duration, or more importantly, maybe, what are your RV customers telling you?

And then you mentioned that there is an inventory correction that's been occurring is a function of this. How far through that are we? As I recall, you start to have a really tough comp in the RV business in Q4 and Q1 stemming from the hurricanes if I'm not mistaken.

The hurricanes are going to affect them a lot more than us because what they built for the FEMA units were the aluminum not the more expensive FRP.

Okay.

They built the cheap one.

The major show's in Louisville at the end of this month. A number of you guys -- you all are probably going to be there. I think that will be an indication of where it is. When I asked the industry I probably talked to seven or eight of the leaders in the industry here in the last 30 days of the CEOs and for the most part they're uncertain, but they would tell you let's see how the show goes and hopefully as we by next kind of late February-March, we should start to see a pickup as we get through this adjustment.

Okay. And then would you expect margins then because I think you mentioned your support costs should start to come down a little bit beginning in Q4, would you expect sequential margin expansion in this business?

Our goal is to -- we've run this business in the margins in the high-teens and our goal is to continue to run this business long-term with those margins. We are the industry leader, we're providing product support. We've got the best new product in the market. And given the volume that we sell in the market, our ability to buy material costs ought to be superior to anybody.

So our goal is to get margins back to the high teens there.

But not in the fourth quarter. I'm just looking out to Q4 right now.

I'm not addressing fourth quarter margins specifically.

Okay. And then at the December meeting will you at least start to give us color on how unprofitable Dixie is? And I guess I'm confused or confounded by why you won't give us detail on that now?

Well, first off, we would, we're, as I speak yesterday was the first day, putting together our detailed -- we've only owned it one day. There's always a tension between how much time they'll allow us to spend in the plant before we actually own it. There's a team on site led by [Brad Ellis], he's actually down to the NAMA show today, but putting together detailed action plans on all the initiatives that we've got broadly planned and we'll start to share those with you in December.

I think what's relevant is, is we felt the need to give you -- characterize the fourth quarter so you understood kind of what that overall impact is, and then we'll give you the detail as we lay out 2007 and as we're comfortable with it and in the context of all of Crane.

Okay. Thank you.

Okay.

Okay. Moving on to we'll hear from David Smith with Citigroup.

Yes. Hi guys. I think most has been answered. But can you just give us a sense on the other pieces of the engineered materials business. You talked about the RV, and you touched briefly on the commercial construction side, which sounds like it's doing okay. But the trailer piece, what you're seeing there as well.

Both trailers and building material, you know, nonresidential construction, which is the building materials, were flat in the third quarter versus the third quarter of a year ago. And what I will say is if you go back and look at the second quarter they were both up over the second quarter last year. So that is a concerning trend, is the way I would put.

Okay. Sorry, I'm getting a mixed message of what you're saying. So, you said it was up?

RV was down.

Right.

In the third quarter. And it really happened the last six weeks. Okay? And I see no reason why we should expect anything but soft sales in RV going forward here for a while.

The way I would -- rather than give you a forecast for transportation and building materials, I would just point out that we have said they were flat in the third quarter versus the third quarter of a year ago. And actually in the second quarter of this year they were up nicely over the second quarter of '06, which would suggest a slowdown in the rate of orders.

Okay. I got it.

Maybe then on the order book as far as the truck market goes; you talked about the control segment doing pretty well on that side as well. With the emissions issues kind of passing in October, what are you kind of seeing in the...

Again, the money is going to the truck share before the emissions control, and I would expect to see some money going to the trailers in 2007, all things being equal.

Right.

Other than what I've just said, I don't have any facts beyond that. I'll be a lot closer to this after we finish the plan review and we get some more current statistics here.

The historical ratio of trailers to trucks seems to be about 2 to 1. Is that sort of the direction that you think it moves in '07 as they make up the CapEx on the trailer side?

You know, I don't have a view on that, David.

One thing, just given the control segment is doing much better, and I know when two, three years ago you had talked about possibly this not being a core piece of the business. Given valuations would probably be maximized right now, is there any thought towards divesting that piece eventually?

No. I think we made, actually made the right decision here. There's a lot of people after us to, you know, sell the segment. This is three and four years ago.

As you know, we trimmed it up quite a bit. I mean we've got a very successful joint venture with the indexer business, with Emerson Electric; there were a couple of sales, powers process, etcetera, that we made out here. So we trimmed it up. It generates cash. And we've got some very interesting new products here that are now in the market that, in our view, represent really exciting growth prospects.

And as you look around, you know, we clearly don't have the need for the capital. So if you've got generating cash, you have that kind of exciting growth prospects and you don't need the capital, why would you sell it?

Okay. So is this something you could see doing acquisitions in eventually?

Well, it's not a priority, it's not a priority. If we saw something and it would strengthen them we would look at it for sure.

Okay. And then just quickly on Dixie-Narco, I'm not sure you've given this, I haven't heard it, but on the fourth quarter, can you give us a sense of the additional costs related to Dixie-Narco?

We've combined it with the AP move. AP and Dixie-Narco together are approximately $0.06 in the quarter. We didn't break them out.

Great, thanks.

You're welcome.

Next question comes from Ron Epstein with Merrill Lynch.

Yes, Good morning.

Good morning.

I just have a couple of quick questions.

When you look at the order activity in aerospace in the quarter, how was that, Eric?

I forget what the order rate was. Sales were up 12%, orders exceeded sales. How about that? That I know.

Fair enough.

There's nice momentum in the business.

When you look at engineered materials, what's the capacity utilization of that business now?

I don't have the answer off the top of my tongue. I'm happy to give it to you. We'll do the work and get it to you.

Okay. Fair enough.

Okay.

We have one more question in queue. [Operator Instructions]

Now we will hear from Matt Summerville with KeyBanc.

Just a quick follow-up on fluid handling. Based on your comments earlier to some questions, is it fair to assume that you would expect volume growth there to accelerate beginning in the fourth quarter given the order activity you've seen in that business?

I'm sorry, this is on what?

On fluid handling. It looks like your volume was not up all that much on a year-over-year basis, and I guess what I'm trying to get a feel for is based on the order activity, the visibility you have into your order book, would you expect the third quarter volume rate to be a near-term trough, thus reaccelerating beginning in Q4 in terms of volume there?

I don't know how to characterize. You know --

Well I mean if your --

I would say this to you. We feel good about the orders, sales and operating profit improvements continuing to happen in the fluid handling business.

Okay. But you can't give me any color on whether you expect volume growth to accelerate from here?

Not really.

Okay.

I mean, if you look at the backlog, and it's up 26% since the end of the year, one would expect the volume to be up, but I don't have it kind of quarter-to-quarter and I haven't spot through the seasonality of the fourth quarter, really.

Okay. Got you.

And there are no further questions in queue at this time I'll turn the call back over to Mr. Koch for any additional or closing remarks.

Thank you very much for joining us today and for your interest and investment in Crane.

And once again this does conclude today's conference call. Thank for joining us and have a great day.