Crane Co (CR) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to Crane's first-quarter 2011 earnings 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 Koch. Sir, please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to Crane's first-quarter 2011 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, Andrew Krawitt, our Principle Financial Officer, and Richard Maue, our Principal Accounting Officer. We will start off the call with a few prepared remarks, after which we'll respond to questions.

Just as a reminder the comments we will 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 a table at the end of the press release which is available on our website at www.craneco.com in the investor relations section. Now let me turn the call over to Eric.

Thank you, Dick. I am pleased with our first-quarter results as strong core revenue growth and solid execution produced a quarter that was considerably better than we anticipated. Sales grew 15% in the quarter driven by a core sales increase of 11% which compares favorably to the 4% and 9% core growth achieved in the third and fourth quarter of 2010 respectively. The results reflected strengthening across our segments and notably in our later cycle Aerospace and Fluid Handling businesses. The significant sequential improvement in our monthly sales and for earnings along with a stronger than expected 11.9% operating margin has increased our confidence about 2011 and accordingly we have raised our full year sales, EPS and cash flow guidance.

For 2011 our sales are now expected to increase in a range of 10% to 12% compared to our prior estimate of 7% to 9% reflecting higher core growth expectations and a slightly more favorable foreign exchange benefit versus our guidance last February. We have increased our 2011 EPS guidance from the range of $2.80 to $3 to $3.05 to $3.25 as a result of the strong first-quarter performance, higher projected core sales and improved backlogs in our later cycle Aerospace and Fluid Handling businesses.

Aerospace demand was stronger than expected in the first quarter as both OEM and aftermarket orders exceeded our forecast. The increase in Aerospace orders which was broad based has increased our confidence that 2011 sales will surpass our previous guidance.

In Fluid Handling, continued core sales growth and an improving backlog positions us well to expand our margins. Fluid Handling operating margin was 13.4% in the first quarter versus 11.3% in the first quarter of 2010. We successfully implemented price increases in the first quarter but oil prices remain elevated and raw material cost pressures persist. While the natural disasters in Japan have caused some supply chain disruptions, we currently believe their impact on our businesses will be relatively minor.

Our first quarter 2011 operating margin was 11.9% compared to 10% in the first quarter of 2010 and we are tracking ahead of our full-year margin guidance of 11.5%. Longer term I am confident we will meet or exceed our 13% margin target when our core sales reach $2.6 billion with a corresponding EPS in the range of $3.50 to $3.75. Our strong financial position during the recent downturn allowed us to fund key growth initiatives which are continuing in 2011. The favorable impact of higher sales, marketing and new product development spending is reading through across the Company as we capitalize on improving market conditions.

The integration of Money Controls into our high growth and high-margin global payment solutions business is progressing very well. As stated previously, reflecting purchase accounting adjustments, we expect Money Controls will be dilutive to our earnings in the first half of 2011 and then accretive as we move through the year with an overall slightly positive impact to our full-year 2011 earnings. Andrew will now take you through the businesses and provide some additional financial information.

Thank you, Eric. I'll turn now to segment comments which compare the first quarter of 2011 to 2010. Aerospace and Electronic sales increased 21% to $162 million while operating profit rose 39% to $34 million and operating margins for the entire segment increased to 21.0% in the first quarter of 2011. Backlog strengthened to $455 million at the end of the quarter as compared to $431 million at the end of 2010. Aerospace sales increased $20 million, or 25% during the quarter. OEM sales increased 20% reflecting higher revenues associated with large commercial transports, regional and business jets. Aftermarket sales increased 34% reflecting higher spares and repair and overhaul revenues as well as modernization and upgrade sales primarily for the C-130 carbon brake control upgrade. Sales related to the more traditional aftermarket of spares, repair and overhaul increased 20% compared to the first quarter of 2010 as airlines continued to replenish inventories from trough levels. The OEM aftermarket mix was 59% to 41% in the first quarter of 2011 compared to 62% to 38% in the first quarter of 2010.

Operating profit in Aerospace increased by $7 million, reflecting good leverage of our higher sales. In the first quarter of 2011, Aerospace engineering spending was $11 million, equal to the first quarter of 2010 and consistent with our targeted amount for 2011. We believe our Aerospace sales for 2011 will exceed our February Investor Day guidance of $365 million. Build rates for large transports are projected to increase over 2010 levels and we continue to anticipate a rebound in business and regional jet activity. Aftermarket sales are also expected to increase more rapidly than our previous guidance given recent positive trends in spares and repair and overhaul activity. We note that supply chain concerns may be causing some customers to order in advance to protect against possible supply chain disruptions. We are also cautious about the effects of increasing airline fuel costs and the economic effects related to Japan. Passenger and freight load factors have softened a bit recently so we are watching the situation carefully.

Electronics group sales in the first quarter increased $8 million, or 16%, with power solutions and microelectronics contributing to the sales increase. Electronics operating profit increased $2.5 million compared to the first quarter of 2010 with good leverage and continued solid operating margins. For 2011, we continue to expect higher Electronics sales based on projected growth in both our military and commercial business. Several programs are transitioning from development to production creating positive momentum for sales. In the commercial portion of our business, which comprises roughly one-third of Electronics, we continue to expect strong sales growth primarily associated with demand for power solutions from the commercial aviation market. In the defense portion of our business, which comprises approximately two-thirds of Electronics, we are focused on intelligence, surveillance and reconnaissance, or ISR, and we expect our business to grow despite worries of overall reductions in government spending. With a healthy backlog and sound execution, we expect Electronics to have a good year.

Engineered Materials sales increased 15% during the first quarter. Transportation-related sales increased 53% compared to the first quarter of 2010 as a result of significantly higher industry build rates for refrigerated and dry trailers. Demand for our RV-related applications increased 11% as OEM shipments to RV dealers were more robust than expected. Building product sales were 7% higher than the prior year. Operating margins in the first quarter were 16.4% compared to 15.9% in the first quarter of 2010 as increased volumes and the impact of the first quarter price increase slightly more than offset continuing raw material cost pressures. Operating profit increased to $10.1 million from $8.5 million. As we discussed on last quarter's conference call, we implemented price increases across all markets that took effect throughout the first quarter of 2011. We continue to monitor the price of oil and its impact on raw material costs and demand for our products and will implement price increases as appropriate.

Overall in 2011 we project an increase in sales and profits in our Engineered Materials segment. We expect our RV-related sales to grow only slightly in 2011 as we believe that RV manufacturers will adjust OEM build rates to reflect modest retail RV sales increases. Demand from transportation-related customers continues to be strong and we are reiterating our view that building product sales bottomed in 2010 and will show an increase in 2011.

We are continuing our new product development initiatives. These include AeroSkirts to reduce fuel consumption on large trailers, lighter weight FRP walls and floors for the next generation of fuel efficient step fans and imaged panels for building product applications.

Merchandising Systems sales of $95 million increased $25 million, or 35%, primarily reflecting $16 million of sales associated with the December 2010 acquisition of Money Controls as well as positive core sales growth in our payment solutions and vending businesses. Merchandising Systems operating profit of $4.7 million declined slightly primarily due to the purchase accounting charges associated with Money Controls which more than offset the impact of higher total sales.

The integration of the Money Controls acquisition into our global payment solutions business is on track and our results are ahead of expectations. We are achieving the synergies and vision and leveraging our collective expertise to develop new products for retail, gaming, transportation and vending applications. Our vending business is tracking within expectations with sales modestly higher in the first quarter. We continue to drive operational improvements and the development of new products as well as services to improve route operator profitability.

Fluid Handling sales increased 6.6% to $264 million in the first quarter with a core sales increase of 4.4% and a favorable foreign currency impact of 2.2%. This marks the second consecutive quarter that core sales in Fluid Handling have increased on a year-over-year basis. MRO business continues to grow steadily while project orders are beginning to rebound. Project quote activity continues to improve, particularly in emerging markets but also somewhat in developed markets. Market conditions continue to strengthen on a global basis for our ChemPharma business. Within our Energy business, the outlook for refineries worldwide is also generally improving. North American and Asian power markets are also beginning to recover and we are confident that the global economic recovery remains on track.

Backlog has grown for the past 5 quarters increasing 12% over December 2010. We have growing confidence that we will continue to see moderate sales growth in 2011 aided by recovery in our later longer cycle process valves business and we now expect that Fluid Handling will exceed our February Investor Day guidance. Fluid Handling operating profit of $36 million was 27% higher than the prior year primarily reflecting effective leverage of higher sales. We have been disciplined in increasing prices in the first quarter where market conditions warranted, and we will proactively take action to raise prices again if appropriate. Our operating leverage was better than expected with operating margins of 13.4% in the first quarter of 2011, exceeding our guidance range at the low end of 12% to 13% for the quarter.

Lastly, our Energy business is on track to deliver improved results in each quarter of 2011. Orders in the first quarter were strong, price increases are in place and operational improvements continue to improve our ability to deliver on large complicated projects.

Turning now to more detail on our total corporate results and forecasts. During the quarter we sold a Crane supply Ontario office and distribution center. Personnel in the Toronto area will move into a newer building and larger distribution center that will better serve its growing operation. In addition, we divested a minor Fluid Handling product line consistent with our strategy of trimming smaller assets that do not have strategic importance to us. The associated gain of $4.3 million, or $0.05 per share, is included in miscellaneous income. Our tax rate in the first quarter of 2011 was 31% compared to 29% in the first quarter of 2010. As previously communicated, we expect our 2011 tax rate to be approximately 31% driven by a higher proportion of earnings generated by our US businesses this year. Foreign currency translation positively impacted EPS by approximately $0.01 in the quarter. As a reminder, the operating profit impact of foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact.

Overall free cash flow was negative $24 million in the first quarter of 2011 compared to positive $13 million in the first quarter of 2010 which was favorably impacted by $19 million of cash received in accordance with the Boeing agreement. We have increased our free cash flow guidance to a range of $130 million to $150 million compared to our initial guidance of $130 million, reflecting the potential upside associated with our higher EPS guidance somewhat tempered by our needs for higher working capital to support the higher projected sales.

Capital spending for the first quarter of 2011 was $8 million, a significant increase over the $4 million spent in first quarter of 2010 as we are funding projects to provide us with organic growth in 2012 and beyond. As stated on Investor Day, our capital expenditure guidance for 2011 is $40 million compared with $21 million in 2010.

During the first quarter of 2011 we repurchased approximately 635,000 shares of our common stock for about $30 million in accordance with our practice of managing dilution related to our stock incentive plans. Our policy is not to preannounce these purchases but to report them at the close of the quarter. Our balance sheet remains strong and we ended the quarter with $233 million in cash. We also have access to our $300 million revolving credit facility. We have no significant debt maturing in the near term as half our long-term debt of $400 million is due in 2013 and the other half is due in 2036. Now back to you, Dick.

Thank you, Eric and Andrew. This marks the end of our prepared comments. Operator, we are now ready to take questions.

Yes, sir. (Operator Instructions) Wendy Caplan of SunTrust Robinson.

It's Wendy Caplan from SunTrust Robinson Humphrey. Could you talk, Eric, a little bit more about the Aerospace strength in terms of demand, specifically addressing commercial, regional and business jet demand?

Well, I think, Wendy, we're seeing orders, some of the orders in the first quarter were clearly focused on regional and business jet. I think part of the successful sales increase was the fact that over the last several years we have increased our sales and marketing head count by something like 25% since the end of 2009. We've got much greater presence in the emerging markets, so this is covering the airlines, so we're just -- we feel like we're doing a much better job.

Okay. And is it -- can you address, do you think you're gaining share from anyone or is it simply strength in the end markets?

I think it's strength in the end markets. I think the share that we gained has been coming from -- is on our new OEM development programs that are either in engineering or coming out of engineering and you're going to start to see on OEM.

Okay, okay. Thank you. And can we talk a little bit about working capital? You mentioned it, you referred to it in your prepared remarks, Andrew, and our calculations if they're correct looks like -- obviously sales were up 15%, but working capital is up a bit more. Doesn't look like inventory turns were a bit higher but receivables were up and payables were down somewhat. Can you address what your expectation is for the full year and specifically how you're tackling the receivable issue?

Well first of all the working capital in the first quarter was within our expectations. I think, as you know, the first quarter for us is a seasonally, we tend to build working capital. On a full-year basis, we -- our goal is to reduce working capital as a percentage of sales by 1%, so that would continue to be our expectation as we go through the year. Obviously there is some working capital required to support the higher sales which offsets that a bit on an absolute dollar basis.

Okay. That's very helpful. Thank you very much.

Thank you. Robert Barry of UBS.

I was wondering if you could update us on what you're seeing in each of the principle end markets within Fluid and also where you're seeing the growth in the backlog in Fluid?

Well, Rob, it's -- as we kind of mentioned in the script we're seeing a fairly broad based improvement versus what we expected across Fluid Handling, but a good -- it's a modest improvement. A good part of the story in Fluid Handling is the fact that we are leveraging the sales effectively given the productivity improvements that we have in place. But we're seeing improvement across our ChemPharma business. We've got better than anticipated activity in refineries, Western Canada for example, and places outside of the US. And in terms of our other businesses in Fluid Handling, in Canada we have a pipe, valve and fitting distribution business which as you know has held up well throughout this downturn. And our water business in the UK is holding up well as well.

I would add that we're also seeing, in energy we saw some nice orders in power in North America, which we haven't -- which was really the cause for the down turn last year. And we're seeing power demand in China and the Middle East also, so.

Right.

Yes, I know about -- I think it's about a 20%, 22% of that valve business is levered to the commercial construction market. Any update on what you're seeing in that particular end market?

We have -- our North American, what we call our North American valve group which is part of energy, has had a terrific first quarter with very strong orders which I attribute to market share gains, maybe a little better market, but to market share gains and very solid margins. No question about it.

Okay. And when I look at the margins for the first quarter on Aerospace and Fluid, off to a very good start, pretty significantly above what you had guided to for the year. Just as we think about modeling the next few quarters and consider carrying that good momentum forward, I mean are there any thing -- are there any headwinds in particular that we should be keeping in mind or do you think that good momentum that we saw in the first quarter in Aerospace and Fluid will kind of flow over into the next few quarters?

Well, Rob, as we said on the script, we do anticipate that we'll exceed our Investor Day guidance for both Fluid Handling and Aerospace and Electronics. In terms of headwinds, I mean, we're clearly watching oil prices, but we have incorporated the impact of higher oil prices into our most recent forecast. And in terms of watching commodity prices, we have we feel a very disciplined approach to pricing to mitigate those impacts.

Okay. And then in the Aerospace after market I think you had mentioned that airlines were replenishing inventory from, I think you said from trough levels, but I am not sure. I guess my question is, where do you think inventory stands now at the airlines for after market parts?

Your guess is as good as ours on that. We would just note that in after market last year we had a particularly weak quarter in after market. So when you look at the year-over-year in after market, there's a much bigger improvement there than you're going to see on a quarter-to-quarter basis over the next 9 months. But clearly when we think of after market we include M&U. Wendy actually asked me about market share. I mean, we clearly with our expanded front end are -- on the M&U business with some of the military orders and what we're seeing in after market, feel very good about our penetration and progress there.

Great. Well very good quarter. Thanks very much.

Thank you.

Thank you, Rob.

Deane Dray of Citigroup.

Andrew, could you take us through the price cost dynamics in the quarter? I know in the prepared remarks Engineered Materials and Fluid Handling both had price increases and maybe just take us through for those, how much were the price increases a percent basis? Were you ahead on the price cost dynamics and you also -- [in a sense], how much pushback you've had from customers?

So Deane, we did experience some raw material cost pressure in the quarter, but as we talked about, our disciplined approach to pricing as well as supplier negotiations have mitigated that impact. In the aggregate for the quarter, our increase in selling price did not quite offset material cost increases, but remember that most of our price increases took effect within the quarter. So as you noted in particular our Engineered Materials segment continued to experience headwinds impacted by the higher oil prices and we monitor this on a continuous basis to determine whether we need to raise prices again.

So, in aggregate it was a modest negative and look, there's a lot of industrial companies that, I would guess almost the majority, are in this first quarter in a negative price cost dynamic. Could you size for us the kind of price increases that have been put through and how receptive and whether competitors are matching?

Yes, Deane, this is Eric, I don't think we can give an aggregate amount. You almost have to go by business, right? But I think across the board as a Company we're good at it, we're disciplined about it, we tend -- we're the industry leader. They have a lot of custom, proprietary products which are hard to dislodge, and -- but at the same time we've got to be -- since we lead, we have to be sensitive about it. So, there are some end markets here where we've got to be careful about that next price increase and whether we can do it or not depending upon whether the competitor followed.

I would say it's particularly acute in Engineered Materials, so we're sensitive there. Actually we have just gone out with, I'm not going to give the amount, but some requests for some price increases in transportation, again, because of oil prices. But I would say, across the Company, certainly in Fluid Handling the vast majority we've got the price increases that -- after a lot of difficult negotiations, we got the price increases that we need. And I think the first quarter results prove that when you look at margins.

Good. That's helpful. And then I know in the prepared remarks there was -- you talked about the monthly progression of sales, and what was that in terms of how the months played out?

It was stronger sequentially each month with a very good March.

And indications on April?

Well let's not get ahead of ourselves.

All right. And then how about there was a reference about growth investments, new product development, some additional marketing, could you size for us where that was in the quarter and what you're thinking that is for the year and that is discretionary?

I just think, Deane, this is not about one quarter. This is about the last, really since the fall 2008, where we -- I mean, we never talked about the increase in the sales and marketing effort in Aerospace 'til we mentioned it today, and it is up 25% over the last 2 years. A very conscious program to do a better job of covering the airlines and the new opportunities. We talked extensively about the sales force in Fluid Handling in the emerging markets without -- while maintaining solid coverage in Western Europe and the United States. And what you're seeing here and when you combine that with stable Management teams, and maturation of the Crane business system, making sure we spend the CapEx that we need to spend so we don't have constraints. What you're seeing is it emerge in core growth rates which are better than frankly better than what we had anticipated. And I think this winning and making sure we're winning in the marketplace and we're just continuing to try to do that.

When we review the individual businesses almost on a monthly basis, the question I'm asking them actually is not about 2011, the question I'm asking them is are we making sufficient investment -- continuing to make sufficient investments today to accelerate our growth in 2012, right? And what you're seeing today is not because of the past quarter, it's because of the last 2 years. I want to make sure we stay ahead of that curve.

Got it. And then last question for me. I'm sorry, did I cut you off, Eric?

No, no.

Okay, last question for me goes back to cash flow. And just want to make sure, maybe this is for Andrew, on the cash flow guidance for the year, is that after asbestos?

Yes, Deane, that is after asbestos.

And then that number doesn't look like it has changed year-over-year, is it $65 million after insurance, is that correct?

That's our guidance for 2011 was $65 million after insurance for asbestos--

Pre-tax.

And after insurance but before tax.

And pre-tax. Terrific. Thank you.

Matt Summerville of KeyBanc.

A couple questions. You mentioned in the Merchandising business as expected Money Controls dilutive in the first half of the year. Can you give us some sort of sense as to how much the purchase accounting adjustments, the inventory step up would be weighing on margins here? That's really the only business where you're not seeing much in the way of leverage on what was a pretty good organic sales gain in that business, at least the best in many quarters.

Matt, so you're correct in that we were affected by the inventory step up associated with our Money Controls acquisition. The amount in the quarter was approximately $1.7 million--

For the inventory step up.

For the inventory step up--

Alone, not just the normal amortization.

Correct. And will the inventory, the magnitude of inventory step up be similar, Andrew, or less in magnitude in Q2 before it sounds like to me it goes away in the back half of the year?

After this quarter, Matt, the impact of the inventory step up should largely be gone.

Okay.

In other words, we shouldn't see further material impacts associated with inventory step up after this quarter.

In the second quarter.

Right.

Largely finished in the first.

Got it and thank you for clarifying that. And then can you talk just a little bit more about the businesses, the underlying growth you're seeing on the payments side versus the traditional vending business? And then maybe talk about within the 3 or 4 main verticals within payments what's driving that growth? Because, you have what's now kind of a double digit -- or you ended the quarter, or you generated, I should say, a nice double-digit organic growth in a business that really hasn't been doing much for you guys. The overall merchandising segment that is, so can you just provide a little more detail there?

So, just to clarify the question, Matt, you're interested in understanding the payment solutions by vertical as well as a sense of what's going on in vending?

Yes, I mean how much was payments up versus vending and then talk about what you're seeing in the 3 or 4 main payment verticals relative to that number.

Okay, Matt, I'll take a quick shot. First off, we haven't been segregating vending versus payment systems. We did acknowledge that both of them had core growth. I think the payment systems -- the only head wind we've got in payment systems is we're seeing a little bit slower orders coming from the retail side. But vending is strong, we feel good about our penetration of vending channel both here and in Europe. The same with transportation, same with the service kiosk globally. So, we have to watch this with all the global interruptions, but as we said, the demand is okay and Money Controls remains on target.

I think our vending business -- the vending business is a book and ship business with like 5 to 7 day lead times. So, it's hard to anticipate how orders are going to go here, because they can be quite lumpy, but I think, overall, our plans on vending are tracking. They're steady. We're making progress with the basic core business and the core business model. But really the excitement here is not really in Engineered Materials or vending the way I think about it, it's the over performance in our longer later cycle business, Aerospace, Electronics and Fluid Handling. I think we stay the course here in -- for 2011, in the Merchandising segment, and if we continue to execute well we should have very nice prospects for ourselves in 2012.

Based on, I mean talking about Fluids some more, based on the mix of business you're seeing there. Based on where you're at now exiting the quarter from a price versus raw standpoint, your incremental margins in the first quarter were well into the 40s in this business. How should we think about your incrementals there for the balance of the year, Eric?

Well I -- first off, I just couldn't be more pleased with how we executed on the volume that we had in the first quarter, and I would acknowledge it was a broad base across the Fluid Handling group, it wasn't just any one standout. I spent -- we spent a fair amount of time again making sure that our pricing is disciplined. So, we're winning because an overall value prop not just because of pricing. And I expect solid leverage here as we go through the remainder of the year. As I just said, I think the upside here is in these later longer cycle businesses, and we'll just have to watch that core demand.

As you saw, the core demand was about the same in the first quarter as it was in the fourth quarter and we'll have to see. But our backlogs are up, up almost 12%, so we'll have to see if that continues. I feel good about it, executed well.

Eric, and then one last question on Fluid. I think last quarter you talked about some Company-specific challenges you were having in some of your European Fluid businesses, also I believe something related to maybe an SAP upgrade or integration. Can you just update us on where you are in kind of working through those issues? And was the alleviation of some of that pressure also contributing factor to the very strong leverage you had in the quarter?

Yes. So this was one of the key plants in our energy business in Europe and, as I think I noted, it wasn't an SAP, thank God, it was a bond system that we put in place that is in place. There's a consolidation going on, that was largely finished in the first quarter it will be -- should be completed here in April. And really the process improvement we had quarter-over-quarter sequential improvement there was tracking on plan, and the process improvements that we are putting in place are taking hold. And we expect that plant and that business actually, energy business, to improve quarter-over-quarter sequentially each quarter for the rest of the year.

Great. Thanks a lot, Eric.

Thank you.

Thank you. Ajay Kejriwal of FBR Capital Markets.

Thank you. Just first on the guidance, a very nice increase here. I like seeing that. Just trying to understand what's driving the increase versus your mid-Feb Analyst Day. Is it that you're being conservative back then or are the data points you saw in March --? I know you said March was sequentially better than Feb, but any color on what data points giving you confidence to raise that guidance?

Again -- first off, we try to be careful and conservative on our guidance but not overly so. Secondly, as we said businesses kind of strengthened each month as we went through the quarter, so by far March was the strongest. I think that the longer late-cycle businesses we've been pleasantly surprised by orders in after market and our M&U success in the Aerospace, excellent results at Electronics, including orders. And you can see the Fluid Handling kind of -- I think our guidance on Fluid Handling was 4% core growth, and we came in at 6.6% in the quarter and a chunk of that was foreign exchange.

So, the pleasant surprise and, shouldn't call it a surprise, but the upside in Fluid Handling really came from how we're executing as a Company in Fluid Handling and leveraging the margins. I think that's the story, that's the way I would characterize it. I mean -- and our early short cycle businesses are kind of tracking as we suggested. Merchandising Systems, Engineered Materials, with a very good job in Engineered Materials on price covering materials.

Okay, that's fair. So just following up on Rob's earlier question on Aero margins, so it sounded like you've incorporated oil prices in your assumptions for the full year. And then just looking back historically, Aero margins you've kind of built on to what you've done in the first quarter. So, is the take away the 20% margins we saw in the first quarter is kind of the base and then you build off of that in the following quarters or would it be something different?

Well Ajay, I think what we said is that when things -- we expect to be able to achieve 20% margins in the segment when things are going well, and times when things are going very well we obviously can exceed that 20% margin level. So, part of this will be demand related, but we'll see where we go from here.

There's nothing going on unusual in the first quarter. If you keep this OEM after market mix we're going to drive these margins, and to the extent we get better volume we're going to leverage that volume.

And you have good visibility, right, you have the backlog, so--?

We have the backlog.

Good. Just one last question on the comp change, so I like seeing the move towards performance-based metrics and move towards EPS growth and all of those good metrics. So, what's the driver, any thoughts there? Then, how would that play into how you think about acquisitions?

I think on the comp change the -- not everybody may be familiar with that. We have changed from an economic value-added compensation to designing the compensation plans for the operating groups around 75% OP, 70% OP, operating profit, 15% cash flow and then 15% of one other measure, often times a growth measure. The reason we did that is to sometimes on an economic value-added program you can make your targets by harvesting and not continuing to vest in the growth programs. And we set up a new program now around the plans and it requires people to make their plans without cutting the growth initiatives. And I just think it's -- this is making it simpler, much more visible, and it doesn't allow for people to cut the growth initiatives, because I'll reduce their comp if they do. And I just think we've got a -- I think it's having quite a positive impact and it's also aligning us around my prior comment which is we want to make sure that we're continuing to make these growth investments today for 2012. So I just think it all aligns to our strategic goal of having the portfolio demonstrate better core growth than frankly what people have expected from it.

Good. Thank you. That's very helpful.

(Operator Instructions) Del Warmington of Delwar Capital.

Yes, if I may I'd like to ask question about your DSO and cash conversion cycle. How does your first quarter of 2011 reflects what we should most like anticipate in terms of DSO and cash conversion cycle for the rest of the year?

I'm sorry, Del, could you just repeat the question, please?

Yes, I was asking about I mean your DSO for the first quarter so, [it's] alright, how does it reflect what your DSO will look like throughout the rest of the year?

Our DSO for the -- I mean we're comfortable with where we are from a DSO perspective, and it's consistent with what we've built into our forecast. Maybe I'm not understanding exactly the question, Del.

Well because there are some [accents on] the tables in quarter and so forth and working capital and so forth. So, I'm trying to find exactly, going forward, like will DSO and cash -- will DSO decrease going forward or should we expect DSO to remain the same for the rest of the year?

We're within a normal range of what we would expect, Del.

Okay. Thanks.

Thank you. I'm showing no further questions at this time, sir.

Thank you very much for joining us today. We appreciate your continued interest in Crane. Thank you. Bye now.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all now disconnect. Thank you and have a nice day.