Crane Co (CR) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to Crane's fourth quarter 2013 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. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to our fourth quarter 2013 earnings release conference call. I am Dick Koch, Director of Investor Relations. On our call this morning we have Eric Fast, our Chief Executive Officer; Max Mitchell, our President and Chief Operating Officer; and Rich Maue, our Chief Financial Officer. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just a reminder: the comments we make on this call may include some forward-looking statements. We 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 at www.craneco.com in the investor relations section.

I would like you to invite you to attend our annual investor day program on February 27 from 8:30 AM to Noon, via the Internet or in person. Please contact me to reserve a place of the conference. Now but me turn the call over to Eric.

Thank you, Dick. As outlined in our press release last night, excluding special items, Crane's full-year earnings per share of $4.18 increased 13% over 2012 and represented a third consecutive year of record performance for the Company and in line with our most recent guidance. Our adjusted full-year operating margin was 14.5%, a substantial improvement over 13% last year with improvements generally broad-based and led by our Fluid Handling segment.

Our fourth-quarter results capped off a successful year in 2013 with core sales growth of 4.5% and operating profit, excluding special items, increasing 15.8% to $98 million and with margins improving to 14.4%, a 100 basis point increase over 13.4% last year. I am pleased to say that every business segment had higher operating profits in the fourth quarter, reflecting continued strong execution.

As we commented on in our third-quarter conference call, while 2013 has been a difficult sales environment we drove earnings growth through significant productivity gains, cost savings from the 2012 repositioning, and a strong cost-conscious culture. Although we remain cautious we are expecting a gradual improvement in core sales in 2014 as 80% percent of our business is tied to the recovering economies in North America and Europe.

In addition to the record earnings that we delivered in 2013, we maintain a balanced capital deployment strategy, raising our quarterly dividend 7% to $0.30 in July and completing the acquisition of MEI, enabling a third large growth platform in our portfolio.

Before I turn the microphone over to Rich and Max, I would like to thank all of you in the investment community for your professionalism and support for the 13 years I have been Chief Executive Officer. During this time, Crane has become a significantly larger and stronger company with solid financial performance and a sound balance sheet which will support future growth.

I have been working with Max Mitchell, who succeeds me as Chief Executive Officer, for almost 10 years. He has contributed greatly to the success of Crane Co. during that time, first as Vice President of Operational Excellence, then as Group President of the Fluid Handling segment and more recently as President and Chief Operating Officer. The Board of Directors has assisted us in preparing for some two years for a seamless transition and the Board and I are confident that the Company is in good hands.

Rich Maue will now take you through the businesses, provide some additional financial information, and Max will provide comments on 2014 and the future.

Thank you, Eric. I will turn now to segment comments, which compare the fourth quarter of 2013 to 2012, excluding special items. Aerospace & Electronic Sales increased 6% to $187 million, compared to $176 million in the fourth quarter of 2012. Segment operating profit increased 14% to $45 million and operating margins increased 160 basis points to 23.9% from 22.3% in the prior year. Revenues and operating profit increased in both businesses.

Sales from the aerospace group were $116 million compared to $111 million last year. Commercial OEM sales increased 11%, driven by strong sales to large aircraft manufacturers. Total aftermarket sales increased 4% with a 12% increase in commercial aftermarket sales, more than offsetting lower commercial and military modernization and upgrade sales. The OEM aftermarket mix was 60% to 40% in both the fourth quarter of 2012 and 2013. Operating profit in the aerospace group increased approximately $3 million compared to the same quarter last year, driven by the higher sales, strong productivity, and lower engineering spending.

The 2014 the International Air Transport Association is forecasting global passenger air traffic to increase 6% while cargo traffic will increase slightly. We continue to benefit from increasing OEM build rates across a broad range of platforms, and we remain cautiously optimistic about the aerospace aftermarket particularly in light of the strong finish in 2013.

The electronics group sales were $71 million in the fourth quarter of 2013, $5 million higher than last year. Operating profit margins improved as expected during the fourth quarter driven by the impact of the higher sales, cost actions taken in the second quarter, and strong productivity. Aerospace and electronics backlog was $361 million at the end of the fourth quarter compared to $378 million in December 2012. The decline in backlog was largely due to the timing of defense-related orders in our electronics group.

As we look into 2014, we expect total segment sales to be slightly higher with aerospace sales growing as a result of increasing OEM build rates and electronics sales declining modestly due to continued defense spending pressures. We expect segment operating profits will increase slightly with volume-driven profit in aerospace more than offsetting the impact of the lower sales in electronics, as well as the higher engineering expense related to new program wins and new product development initiatives in both businesses.

Engineered Materials sales increased $5 million or 12% to $52 million. Sales of our R&D related applications increased 27% versus the prior year as RV OEM build rates continued strong, both with dealers and retail demand continuing through the quarter. Building products related sales increased 1%, reflecting slowly recovering commercial construction markets and transportation related sales decreased 6%. Operating profit increased to $5.8 million and operating margins grew 110 basis points to 11.1% compared to 10% in the fourth quarter of 2012.

The improvement was due primarily to higher sales and strong productivity. RVIA estimates that 316,000 wholesale unit shipments were built in 2013, a 9.4% increase compared to 2012. For 2014, the RVIA is estimating wholesale shipments of just over 335,000 units, a 6% increase over 2013.

For 2014, we expect the Engineered Materials segment to show continued improvement in sales driven by modest growth in RV-related applications and a gradual improvement in building product shipments of the course of the year. We expect to be able to leverage this growth together with the additional productivity initiatives to drive operating profit and margin improvement.

Merchandising Systems sales of $122 million increased $29 million, or 30% versus the prior year, driven by $25 million of sales related to the acquisition of MEI and higher sales in payment solutions. Vending sales were flat with the prior year. The higher sales in payment solutions were driven by strength in our retail, vending, transportation, and casino gaming vertical markets.

Segment operating profit of $14 million increased $1.9 million, reflecting continued solid performance in Crane's core payment solutions business, profits from MEI, and strong productivity across the segment, which more than offset the lower vending solutions operating profit. Operating margin decreased 11.2% compared to 12.6% in the same quarter of last year with higher margins and payment solutions offset by lower margins in vending solutions.

The combination of MEI and our legacy payment systems business brings together two leading unattended payment systems providers to create Crane Payment Innovations, or CPI. Integration activities at CPI are well underway and are on track to deliver $0.20 of accretion in 2014. In 2014, we anticipate segment level revenue to increase to approximately $750 million, comprised of $575 million from CPI and $180 million from our vending solutions business. CPI revenues reflect the addition of MEI as well as the impact of the divested product line as required by the European commission.

Operating margin for this segment is expected to increase to approximately 11.4% compared to 10.7% last year. As expected, the impact of intangible amortization and, to a lesser extent, lost profits associated with the divested product line have an unfavorable impact on the segment margin.

In the fourth quarter, Fluid Handling sales increased 2.3% to $320 million, driven by a core sales increase of 2.7%, partially offset by a unfavorable foreign exchange of 0.4%. Backlog was $334 million at the end of December compared to $343 million at the end of December 2012, driven primarily by the timing of nuclear project-based services.

With respect to key end markets for our process valves, despite ongoing market uncertainty in Europe, order and quote activity continued to be strong during the quarter. While chemical industry demand in North America remains soft, investments in the Middle East and China continue to move forward. US refineries continue their turnaround and upgrade activities and demand from power markets in China and Europe is relatively strong, while the Americas and India remain soft. With respect to our commercial valves business, commercial construction and mining activity in Canada continues to be soft. However, our UK-based commercial valves business showed solid order momentum in the quarter.

Fluid Handling operating profit increased 12% to $48.2 million and operating margins increased to 15.1% compared to 13.7% in the same quarter last year. The improvement in operating profit margins reflected effective leverage at the higher volume, improved productivity, and the benefits of the European repositioning actions that we took in 2012.

We expect low-single-digit sales growth for Fluid Handling in 2014, with anticipated strength in our core process valve business in the second half, reflecting an expected improving economy in North America and Europe. We expect to continue to grow operating profit and margins driven by leverage on the higher sales and a continued focus on productivity.

Now, turning to more detail on our total company results and forecasts. Foreign currency translation had a negligible impact on EPS in the fourth quarter. As a reminder, the operating profit impact on foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact. Our fourth quarter tax rate was 38% on a GAAP basis compared to 34.4% in the fourth quarter of 2012. Excluding the impact of the special items, our fourth-quarter tax rate was approximately 33.3%, which compares to 31.4% in the prior year.

We expect our 2014 full-year tax rate to be 31%, which includes the assumption that legislation will be enacted during 2014 that extends the US federal research tax credit retroactive to January 1, 2014. Our estimated 2014 tax rate, which is higher than our 2013 tax rate of 29.7%, excluding special items, reflects increased earnings in the US and Japan as a result of the acquisition of MEI.

Overall cash flow was $138 million in the fourth quarter of 2013 compared to $146 million in the fourth quarter of 2012. In addition, capital spending in the fourth quarter of 2013 was $10.4 million compared to $9.4 million last year. For the full year 2013, free cash flow was $210 million, coming in at the top end of our guidance range and compared to $205 million last year, reflecting improved operating results and strong working capital management. For the year, capital expenditures were $29 million, just slightly below the high end of our most recent guidance range of $25 million to $30 million.

We ended the quarter with $271 million in cash, down from $424 million at year end 2012. The reduction was driven by cash used for the acquisition of MEI. During the quarter, we also issued $550 million of bonds in connection with the acquisition.

As described in our earnings release last night, for 2014 sales are expected to be $3 billion, driven by a core sales increase of 1% to 3% and the impact of the MEI acquisition. Our 2014 earnings guidance in the range of $4.55 to $4.75 per diluted share, excluding special items. This guidance reflects leverage on the core sales increase, $0.20 of accretion contributed from the MEI acquisition, and lower pension expense.

I would note that while our first-quarter earnings are generally the lowest of the year, the MEI business brings additional unfavorable seasonality to the quarter. Furthermore, the $0.07 of integration synergies are expected to be largely realized in the second half of 2014. Finally, as a reminder, our first quarter of 2013 included a $0.05 tax benefit associated with the reinstatement of the R&D tax credit.

Also in connection with the recent acquisition of MEI, we expect to incur transaction and integration related costs and inventory step-up amortization charges in a range of $18 million to $21 million in 2014. In addition, we expect modest repositioning actions reflecting our continued focus on margin expansion. The costs associated with these proactive repositioning actions are expected to be in the range of $10 million to $13 million and will be largely offset by gains from expected sales of certain real estate.

Savings associated with these repositioning actions are estimated to be $5 million in 2015 and will increase to $10 million on an annual basis beginning in 2016. Additional information will be provided at our investor conference in February.

We expect 2014 free cash flow to be in a range of $225 million to $250 million. While free cash flow will benefit from higher earnings, we have a number of headwinds, including the impact of integration-related costs, higher pension contributions, and higher capital expenditures to support a variety of growth initiatives that we will also share with you in February.

Now let me turn the microphone over to Max Mitchell.

Thank you, Rich. I would first like to express my thanks to Eric Fast who, for the past 14 years with Crane, including 13 years as CEO, has led this organization to substantially higher levels of performance. During this time sales have almost doubled, earnings per share increased 130%, dividends per share tripled, and our stock price has risen over 200% versus 26% for the S&P.

It has been a privilege to have worked by Eric's side these past 10 years, and along with an outstanding team in place today, I am honored to lead Crane with its strong heritage, its culture, and record of accomplishments spanning 159 years. I wish to also thank our Chairman of the Board, Shell Evans, and the Board of Directors for their continued guidance and support. I look forward to our upcoming investor conference on February 27 where, along with our leadership team, we will update you on 2014 guidance and our actions to continue to drive shareholder value.

As Rich just said, our 2014 EPS is expected to be in a range of $4.55 to $4.75, representing an increase of 9% to 14% over 2013 earnings per diluted share of $4.18 before special items. With the acquisition of MEI now behind us after a lengthy regulatory approval process, we are now well into a successful integration plan. The combination of MEI with Crane's existing portfolio of strong businesses will help drive another year of record earnings in 2014.

And, as Rich mentioned, the expected sales and earnings growth in 2014 will also be driven by increasing commercial OEM build rates, worldwide infrastructure investments that will benefit Fluid Handling, the continued adoption of un-unattended payment systems, and the recovery in nonresidential construction.

As I look to 2015 and 2016, we will have tailwinds from further synergies from MEI and expected continuing global economic recovery, and incremental savings from the earlier-mentioned repositioning activities. In addition, we are increasing our investments in new product development. With these initiatives, along with a continued focus on productivity and cost reduction, we continue to target earnings per share growth of 10% per year.

We look forward to sharing more about our plans and initiatives at our investor day on February 27. Now I would like to turn it back over to Dick.

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

(Operator Instructions). Matt McConnell, Citi Research.

Great, thank you very much. Good morning and first, congrats again to both Eric and Max. If I could start on Fluid, I think Rich mentioned US chemical has stayed soft in 4Q. I wonder if that was a reference to orders or to revenue. Are you seeing any more strength in quoting activity there? Is there any contrast?

Yes. You want me to take markets a little bit?

Sure.

So I'll hit chemical as well, Matt, and I'll give you just some color on regions overall. So, if I pull back and look at process valves overall by region, Americas year over year and then on a sequential basis. We were a little soft, a little flat in Americas overall. Project and funnel activity improving and improving sequentially, so we are seeing some signs of recovery. Where we have continued to see strength is China, Europe, Middle East -- strong and continued improving trends sequentially. India, Asia Pacific with Australia, has been our weakest on a year-over-year basis.

If you look specifically by key end markets, chemical has been overall flat year over year. Americas a little soft here, but improving sequentially, so we are seeing some slight momentum. China, Europe continues strong; India, Asia Pac soft, so that's a common theme as we have had from a regional standpoint.

From a refining and a petrochem standpoint, we are up slightly year over year; Americas improving trends has increased projects that we have in the funnel related to refining turnaround work. China, Europe, Middle East, strong. And, again, India, Asia Pac weak.

Power for us has been up year over year mid-single-digits. America, flat to weak with, again, signs of recovery. China, Europe, Middle East, strong. And, again, India, Asia Pac kind of soft. So hopefully that gives you a little bit of end-market color on orders as it relates to the process valve side.

Yes, I would just follow on that, Matt, with some comments that we have made on a couple of previous calls and consistent with some discussions that we have had specific to chemical in the Americas. We do anticipate that still. I think we haven't -- we are not coming off our position that we see that being a little bit soft, and it echoes a little bit of what Max mentioned and starting to pick up in the latter half of the year. And it's really aimed at where our products fit with severe service applications. Just to kind of go off of Max's point there.

Some of the planned investments that we'll see the capacity that is being added will translate into some expected volume later when that goes further downstream.

Okay, great. Thanks. And then of the low-single-digit revenue increase you are looking for with Fluid, would that be stronger in the back half of the year?

Yes. We would see it being more gradual of an improvement when you look at each of those pieces. Chemical, as we just said, sort of improving as you look toward the second half of the year. When we look at the exposures that we have on the commercial side, we see the improving end-markets in North America helping pull through the balance of the year as well. More of a gradual improvement.

Okay, great. Thank you. And then if I could touch on the free cash flow guidance. You are modeling about a $30 million year-over-year increase at the midpoint. I thought MEI was doing about $85 million of EBITDA on a standalone basis, so are there any other important offsets to be aware of, either CapEx or working capital?

The largest piece there would be the incremental interest expense associated with the issuance of the bonds. So when you reflect that or put the impact of the interest against that, it comes back down to this -- what we have been going out with was about $55 million to $60 million of free cash after the impact of interest.

The other headwinds that I mentioned on the call relate to pension, which is going to be an increase next year. As well as just the integration costs associated with getting the synergies that we expect to get over the next couple of years. A lot of those costs happening -- and cash costs happening in 2014.

Okay, great. Thanks very much.

I would also -- and I did mention them on the prepared remarks, Matt, that there is going to be a decent amount of incremental CapEx that we expect to see this year. And we have a lot of exciting things that we are going to share with you all on Investor Day specific to those initiatives.

Which businesses would be the bulk of that CapEx investment?

Sure. Again, we will provide more details at Investor Day, but it's going to be largely around -- when we look at our aerospace group in particular, with a lot of the new program wins that we have recently had and others that we are hopeful to achieve. There will be a bulk of that reading through in our aerospace group, and the second-largest would be in our Fluid Handling group with a variety of different new product development introductions and opportunities that we are going after.

Okay, great. Thanks.

Matt Summerville, KeyBanc.

Morning. Can you just give a little more granularity in terms of the repositioning actions you are taking? Which business units that is going to impact?

Matt, we would rather provide a little bit more color in that regard on Investor Day in terms of the actions that we are taking there. We would like to stay a little bit more broad at this point and would ask that you hang on until Investor Day, where we will provide the details.

We need to talk to our own people, too.

Sure. Understood. Can you give a little bit more granularity in terms of your expectations within Aerospace & Electronics, just from a product mix standpoint, when you think about the OE versus aftermarket dimension? 2014 versus 2013, and then the civilian versus military dimension as well, how we should be thinking about that?

Yes. So we have had some nice -- we had nice performance overall in commercial OEM throughout 2013, as you know. There was a bit of a struggle with respect to aftermarket in particular in the earlier part of 2013. As we sort of cascaded through the balance over the second half of the year, we started to see some uptick in commercial aftermarket. We are cautiously optimistic that we will continue to see a nice trend in commercial aftermarket.

I would pause a little bit in that our fourth quarter was exceptional, and I would be careful about creating a run rate off of our Q4 performance. But overall we would continue to see the commercial OEM side continue to grow at a nice rate with some incremental growth as well coming from aftermarket.

On the defense side, we are going to continue to see headwinds here from our point of view. Now, we had notable headwind in 2013, if you recall, from the C-130 [MNU] program. That was in our aerospace group, where we had a massive -- well, massive -- we had a $10 million project that we satisfied largely last year. We had that headwind this year. But to just broadly characterize, continued I think trends in commercial OEM. A little bit of a step-up in aftermarket and continued -- I would call it modest headwinds in military.

And then just one more question on Merchandising Systems, or specifically the payment business. I think, Rich, you indicated that you expect a little more seasonality in that business than relative to what we are used to. Can you just provide a little more detail in terms of MEI? How much of their revenue you typically see in first half versus second half so we can think about modeling that appropriately?

Maybe we should think about --.

Yes, we tend to be -- we wanted to -- our policy here is not to provide quarterly guidance. I wanted to just provide some incremental insight into the fact that our first quarter is going to have a natural headwind associated with the seasonality of MEI. It's a little bit more aggressive than the seasonality that we see in the first quarter, I would say. We will provide -- as we move through the year, you will start to see it read through.

Okay. Thanks.

Brian Konigsberg, Vertical Research.

Yes, hello. Good morning. I just wanted to touch on the guidance first. So, just 1% to 3% organic growth for the year kind of strikes me as conservative, just given the fact we are looking at fairly easy comps. You were negative organically for the first three quarters of 2013; you had a solid Q4; Fluid seems to be okay; Aerospace, OE and aftermarket should be doing fairly well.

The defense piece you said is a modest headwind, which, to me, is actually a pleasant upside, or a surprise. The Engineered Materials business on commercial construction should be growing decently. I just don't understand why we are only talking about 1% to 3% growth. Maybe if you could just parse that apart a little bit more, just give us a better understanding of why it's not better than what you have got it to.

Sure. When you peel it back and you go by each of those elements, I would start off by saying we had flat growth through the first nine months. We saw some core growth here in the -- a decent amount of core growth here in the fourth quarter, but off of a comp that was perhaps just a little bit favorable.

As we think about next year, we do expect to see a decent amount of growth coming out of our aerospace group but being offset largely by defense. That puts headwinds against a growth rate that you would expect to otherwise see from that segment. Engineered Materials had a wonderful year in 2013 with core growth in the 7%, 8% range. Coming off, again, a comp that was difficult or positive, I guess, from a year-over-year perspective in 2013.

We just don't see a continuing expectation of that kind of growth again in 2014. Vending we see as largely being flat to slightly up, so we are not going to see a lot of traction through our vending business in 2014. Payments, we feel pretty good about. We are going to have to paint a picture for you at Investor Day that talks about the underlying growth that we would expect to see in those end markets, and it's not going to be terribly inconsistent with what we saw in 2013.

Fluid Handling -- we had some challenges this year with respect to our commercial valve business in particular. I'd point to Crane Supply up in Canada and some of our North American commercial valve businesses in the States, as well as some headwinds that we saw in the UK. In those areas we do hope to see some incremental growth, which is going to pull us into that, call it 2% range or 1% to 3% range.

We looked at it by business in a pretty detailed way, Brian, and the roll-off that we have would be fairly supportive of the comments I just made.

Okay. Seems a bit conservative, but okay. Just on the vending, I am just surprised that you are saying flat after you just had the severe downdrafts in capital spendings that you highlighted from your customers in Q2 and Q3. I think the previous couple of quarters you said you anticipated that spending to return. Has that not materialized (multiple speakers)?

Yes, on the last quarter we had said that we didn't expect a step change. That we felt like we were at bottom at that point. We actually did have some nice traction here in the fourth quarter. But it's too early to tell, frankly, and it's a very short cycle business. We are being a little bit cautious with respect to 2014 given what we saw and experienced in 2013.

And then just on aerospace aftermarket, I am actually just surprised that you are saying Q4 was so extraordinary and don't straight line or carry that strength over into 2014. You really were one of the last in the aerospace components supply chain that has really seen the improvement in aftermarket. Q4 did seem to come through. I just don't understand why that strength wouldn't continue, given everything we are hearing. Just general macro commentary on aerospace from some of the big suppliers, it doesn't seem to be consistent with what you are suggesting.

Perhaps. The sequential improvement that we saw in commercial aftermarket through the year -- we were up 3% from Q1 to Q2; we were up 4% from Q2 to Q3; and then we jumped up 10%. So perhaps I am a little cautious to take that sort of a run rate into 2014. That's the basis of my comment. We do expect to see some improvement from 2013 to 2014.

Okay. And just lastly, how much is pension contributing to the earnings -- to the midpoint of 2014 guidance versus 2013 results?

Overall, pension -- we are seeing some tailwinds coming through from the discount rates, as most other companies are also going to see. We also took some of our own internal actions to address some of our internal pension plans, not unlike what we did last year domestically. Overall, I would estimate the number to be right around $10 million.

Got you. Excellent. All right. Thank you very much.

Ken Herbert, Canaccord.

Hello, good morning. Just first, it sounds like, specifically within Fluid Handling and perhaps across the organization, China was good in the fourth quarter. What kind of growth are you assuming in China maybe into 2014? It seems like it is been a mixed bag so far from a number of companies with maybe you doing better relative to some other of your peers out there. Anything in particular you saw in the quarter? And how do we extrapolate or think about that heading into 2014?

Well, Ken, just -- China has been strong all year and we certainly see some continued project strength that would indicate that it should continue into 2014. In terms of specific growth assumptions, I'm not sure we have that detail right now. Maybe we can help paint a picture in February on the investor conference, as well.

It's not just Fluid Handling, right? We've got all the work that is going on the 919. Electronics has had some success there. Composites on -- some composites.

Okay. So fairly broad-based, it sounds like?

Yes.

And if I could just -- I know obviously, you had a fairly protracted regulatory process regarding MEI. Now that you have had that for a short period of time now, anything changed relative to some of your initial expectations? Anything surprise you either positive or negatively with the asset? And as you have started the integration process?

You know, the two cultures are coming together very, very well. I think we have been surprised that there has been minimal surprises. Things have been planned well. The assumptions that we had before we could share data are pretty much on track and I think is going very smoothly.

Yes, I would just echo that in terms of what we would expect to see out of end markets and our planning for 2014, it all felt consistent with what we expected pre-close.

Okay, great. And then just finally on the commercial aftermarket, just one additional question there. It sounds like, Rich, some of the structural headwinds perhaps you saw through 2013 -- maybe, based on the tone of your comments, things are certainly looking better but you still perhaps see some impact maybe from inventory levels or surplus material in particular as relevant in 2014? Or do you see those mitigating now based on what you saw in the fourth quarter and the strength we saw?

I would say mitigating is probably a good word. There is still going to be the business model that has changed with the airlines being more careful in terms of how they source, and cooling, and things of that nature. I think that's always going to be in the backdrop, but from an inventory stocking level perspective in terms of what we communicated early in the year, I think a lot of that is behind us.

Great. Thank you very much and congratulations, Max and Eric.

Thank you.

Thanks, Ken.

Ron Epstein, Bank of America.

Yes, good morning, Max and Eric. Congratulations to both of you. A lot of the little detailed questions have been asked already, so I am going to go up to the 300,000 foot level. First one for Eric. As you are stepping into your new role in life and you think about where Crane got to over the last 13 years -- I remember when we sat down, I guess it almost 10 years ago, and talked about Crane. Is the Company where you expected it to be now at this point? You know what I mean?

I don't know. Look, I think we just have a much more mature, sophisticated company. We've got a Crane Business System that we have honed over the years that is tried and proven, that gives us a lot more consistent results. I think the portfolio of businesses is so substantially different than what it was, that in terms of where we are in process valves, where we are in aerospace, where we are in payment systems.

Engineered materials was a tiny little business then and now it's the leader and the number one guy in the business, so I think the portfolio is in a whole different place. I think that our Crane Business System has been -- is proven out. You see this in the consistent execution of the results and in a difficult revenue year like 2013.

And I think even more importantly, the growth opportunities here and the amount of activity -- I can't think of in my 13 years as CEO when I have ever seen so many new product initiatives and growth activities going on throughout the Company. To me, this augurs well for the future. I feel good about it.

The Board and I have worked on succession planning and the team is in place where I feel good about going. We are good to go here.

Great, great. And, Max -- maybe that's a nice segue question for my next question for you. When we think about the portfolio that you have that you are getting, how do we think about it from maybe a longer-term perspective on organic growth? By investing back in the portfolio, in the new products, and some of the stuff I think you are probably going to talk about at the investor day, how do we think about Crane Co. today going forward? Ex future acquisitions, what can this portfolio grow at?

So, Ron, we continue to develop and execute on strategies that clearly understand where -- we start with market growth and looking at the initiatives that will outgrow the end markets that we are in. We have internal targets to clearly outgrow the market. That is how challenge ourselves -- we view strategy and prioritize our initiatives.

As I think about organic growth opportunities as we move forward, depending on where you are with GDP on a global basis, if you say 3%, we are targeting 4.5%, 5%. This is what we push ourselves, challenge ourselves for and this is what we'll continue to focus on as we move forward.

Is it realistic to characterize the goal -- and I'm not saying anything guidance, anything like that -- just the goal, that if global GDP is X, that Crane can do something like 1.5 times X?

I think at the February investor conference when we go through the portfolio and where are today, from aerospace in terms of long-term trends, what content we have won, we will lay this out for you in terms of what that reality looks like. Fluid Handling, the process valve space -- we love the end markets. We love our brands and the value that we bring.

There are certainly some end markets that are challenged more than others. So even if GDP is at 3%, we are going to be seeing some growth rates that are less than that. So, hopefully we bring some additional clarity and color at the investor day.

Okay, great. And maybe one last question for you, Max. In the new role, what do you see as maybe your one or two single biggest challenges in front of you?

As a leader of the business, and as Eric mentioned, the team has continued to -- we have always been good, we continue to get better and better and better. I think I would be remiss to not mention the people. It's all about the people driving customer satisfaction and valuing our important customer relationships. We will continue to grow and develop our own talent on a global basis, and that is probably, in my mind, always first and foremost. Yes.

Okay. Great. Well, thank you both. And, Max, look forward to working with you. And, Eric, it has been great, so congratulations.

Eric Fast Thanks, Ron.

(Operator Instructions). Jim Foung, Gabelli & Company.

Hello, good morning. Just want to offer my congratulations first to Eric for doing an outstanding job and to wish Max good luck.

Thank you, Jim.

Yes, I guess my question is that now that you have ended 2013, you once talked about having a lot of excess capacity at the firm and that you can leverage that capacity. Could you just update us in terms of where you are in terms of your capacity utilization? And then what we could expect in 2014, 2015?

In terms of -- we haven't come off our approach here with respect to leveraging. We look to leverage $0.25 on the dollar of every incremental sales dollar that we contribute. We are not coming off that. From a capacity perspective we are at that 55%, 60% level. That enables some of that leverage to read through for us. Not too much coming off our prior conversations and communications.

Yes, so you haven't really utilized anymore capacity since the beginning of the year, then. You expect 2014 to be a step up for you in that direction?

We had 0% core growth last year, Jimmy, so we have been running at this 60%, 65%, 55%, 65%, capacity. That's five days a week, two shifts, two full shifts. We think with an improving global economy and all the growth initiatives that we've got, that we can start to get some core sales. And we are confident and have demonstrated always that we can leverage that core sales $0.25 on the dollar.

We think this is a kind of environment we are going into. Our margin is at, what? 14.5%. That creates a constant, positive pressure on margins and we think that with the Central Bank's help in Europe and in the United States that we are going to see that kind of environment and we can leverage it.

Okay. Very good. And then just one question on your vending business. When do you expect that market to turn around and to improve?

As I mentioned a little bit earlier, we see it being a little bit of a slower transition. And as we move through 2014, one of our initiatives is going to be around continuing to push cashless, continuing to grow in Europe, as well as in emerging markets. Not necessarily coming off much in the way of vending from that point of view.

We could look to achieve some synergy with respect to how we integrate with payment solutions as well. And always we have an internal target here to get back to the 10% operating profit level as we move forward.

Okay. Great. Thanks so much.

And I am showing no further questions in queue. I would like to turn the conference back over to management for any closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.