Crane Co (CR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Crane fourth-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to your host, Jason Feldman, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to our fourth-quarter 2014 earnings release conference call. I am Jason Feldman, Director of Investor Relations.

On our call this morning we have Max Mitchell, our President and Chief Executive 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 tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.CraneCo.com in the investor relations section.

I would also like to invite you to attend our annual investor day event on the morning of February 26. Please contact me directly if you would like to reserve a place at the conference.

Now let me turn this call over to Max.

Thank you, Jason. As outlined in our press release last night, excluding special items, Crane's fourth-quarter EPS was $1.13, up 9% compared to the fourth quarter of 2013 and in line with the revised guidance we provided last quarter.

Sales of $731 million increased 7.2%, driven primarily by the acquisition of MEI, with slightly positive core growth partially offset by a 2.8% negative impact from foreign exchange. Operating margins, excluding special items, improved 30 basis points from last year to 14.7%.

On a full-year basis, 2014 EPS, excluding special items, was $4.45, up 7% compared to 2013. Total sales increased 12.7% to $2.9 billion, driven primarily by the acquisition of MEI, accompanied by core growth of 0.3% and a modest negative impact from foreign exchange.

Operating margins, excluding special items, improved 10 basis points to 14.6%.

The fourth quarter unfolded largely as expected. As we explained on the last quarter's conference call, there were two primary factors that drove our revised guidance for the year.: a change in fluid handling organic growth rates, and lower margins in aerospace and electronics.

I will provide an update regarding those two matters before commenting on our outlook for 2015.

First, specific to aerospace and electronics, margins rebounded as expected, with fourth-quarter performance at the highest level of the year and 300 basis points above third-quarter results.

The primary issue in the third quarter related to incremental one-time costs associated with an accelerated product launch in our cabin business. This is now resolved.

Segment margins, while above 22% in the fourth quarter, remain impacted by planned and encouraged incremental investment spending that we have communicated all year. We remain excited about the long-term prospects for this business given the pace of new program wins and the number of new opportunities we continue to pursue.

We will be sharing more about our successes at our investor day in February.

Defense sales remained weak in the quarter primarily due to timing, although our order intake was very strong in the fourth quarter.

Moving on to fluid handling. As we discussed on last quarter's conference call, the first half of 2014 developed generally as expected, with our process valve orders increasing in the mid-single digit range in the second quarter.

Importantly at that time, our funnel of outstanding quotes was very strong. Further, the lag or velocity between quote and firm order was shortened. During the third quarter we saw a pronounced reversal of the second-quarter trends. Specifically, while quote activity remained solid and the backlog of open quotes continued to build, the average time between quote and firm order lengthened materially through the third quarter, increasing approximately 35% compared to what we experienced in the first half of 2014.

This was the primary driver of last quarter's guidance revision. This trend continued into the fourth quarter, with the lag between quote and firm order extending an additional 11% as projects continued to shift to the right. This decline in velocity was most pronounced in our refining vertical, followed by the chemical markets.

Order lag times in our power vertical were stable in the fourth quarter. As a result, our year-end backlog at fluid handling was down approximately 9% since the end of September. While the long-term outlook remains attractive, we believe that current macro uncertainty from the decline in oil prices, weakness in Europe, currency volatility and geopolitical risks have delayed business investments across our process valve verticals.

We expect that projects will continue to slip to the right and that we will see soft process valve orders at least through the first half of 2015. Based on discussions with EPCs and customers and our own internal market analysis, we expect some of the larger capital projects to begin to convert to orders in the second half of 2015, particularly in China and the United States.

We continue to monitor market developments, and we'll provide a more detailed review of market conditions at our investor day next month. Rich will provide some additional color on what we're seeing by end market and help frame our exposure to those markets.

Turning briefly to our other two segments, we had a very strong quarter in payment and merchandising technologies, although organic sales declined on tough comparisons. We expect growth across this segment in 2015, and margins will continue to expand, driven by MEI's integration synergies and strong operating leverage on higher sales.

Engineered materials also finished the year strong, with continued top-line growth and solid margin performance. While we will see continued growth in 2015, we expect growth to moderate, considering the very strong sales to RV customers in 2014.

Now turning to our guidance for 2015. We expect EPS, excluding special items, in a range of $445 million to $465 million, resulting in EPS that is flat to up 5% compared to 2014. This is below our goal of 10% EPS growth per year for a few notable reasons.

First, guidance assumes core sales growth of flat to up 2% in 2015. We do expect all of our businesses to grow on a core basis in 2015 with the exception of our process valve business within fluid handling, which will decline based on the market conditions I previously discussed.

Second, for 2015 we are also facing a substantial unfavorable foreign exchange impact.

And third, we expect higher pension expense pursuant to changes in actuarial assumptions.

In response to these headwinds, as outlined in our press release last night, we announced additional repositioning in our fluid handling business to ensure our cost structure is aligned to current order trends and sustained continued strong margin performance. We continue to have a strong focus on productivity and remain flexible and responsive in a changing economic environment.

In addition, we also announced incremental and accelerated actions of our Crane Payment Innovations business, enabled by the recent acquisition of MEI. Consequently, we are raising our total MEI synergy target by 30% to $33 million from $25 million. We expect an additional $9 million of those synergies in 2015.

All of these actions, combined with the benefits from our 2014 repositioning, will allow us to approximately offset the currency and pension headwinds and enable us to maintain a strong margin profile.

We continue to believe that our three large growth platforms in fluid handling, Crane Payment Innovations and aerospace & electronics position us well for improved growth in the years ahead. Reflecting our confidence in our longer-term outlook, we repurchased approximately 813,000 shares in the fourth quarter for $50 million.

I would like to reflect on some of our accomplishments in 2014, which was our fourth consecutive year of record performance at Crane. First, our execution was solid, as shown by our full-year margin improvement despite soft end markets and the impact of a stronger US dollar.

Second, at our aerospace & electronics business, we continue to pursue and win new programs. We are well-positioned on newer aircraft platforms, with more content on the 737Max, A320neo and 777X than the predecessors they will replace.

In the fourth quarter, we also won a large multi-year contract for a ground-based radar program, including content from both our microwave and power businesses and electronics.

At payment and merchandising technologies, the MEI integration continues to progress extremely well. And as I mentioned, we have identified incremental synergies beyond our original $25 million commitment. Importantly, we also exceeded our margin guidance in this segment despite soft market conditions in 2014. And while uncertain market conditions persist in Europe, Russia and China, businesses and governments continue to move to unattended payment solutions in pursuit of productivity benefits.

At fluid handling, we were pleased with our 50 basis points of operating margin expansion. While slightly short of our February margin guidance in this segment, end market conditions were far more challenging than we expected at the beginning of last year.

We continue to actively manage our cost structure and remain disciplined in our approach to pricing, as shown by 2014 margin performance as well as our newly announced repositioning actions.

I will now turn the call over to Rich Maue, who will take you through the businesses and provide some additional financial information. Rich?

Thank you, Max. I'll turn now to segment comments, which compare the fourth quarter of 2014 to 2013 excluding special items, as outlined in our press release, slide presentation and the accompanying non-GAAP tables. After the segment comments, I'll provide some additional detail on our 2015 outlook.

In the fourth quarter, fluid handling sales of $314 million declined 1.8%, reflecting a core sales increase of 2.8% that was more than offset by unfavorable foreign exchange and the impact of the second-quarter divestiture of Crane water.

Fluid handling operating profit declined 2% to $47 million. Operating margins remain generally strong at 15% but declined 10 basis points compared to last year, reflecting unfavorable foreign exchange and product mix, which was largely offset by productivity, higher core volume and lower pension expense.

Fluid handling backlog was $311 million at the end of December. After adjusting for the divestiture of Crane water, our backlog is down 5.3% versus the end of 2013 and down 11% to last quarter. Further adjusting for currency, backlog is flat compared to the end of 2013 and down 8.9% sequentially.

Max discussed our process valve business, where weakness was generally broad-based in the second half. We expect softness to continue into the first half of 2015, with orders picking up in Q3 in particular in China and the US. Again, at this time we are not seeing deterioration in project funnels or major cancellations. Rather, continued uncertainty on how fast projects will move forward.

Engineering and labor constraints in the US, combined with the lower oil prices, contribute to the uncertainty. We expect the impact from project delays and continued potential reduced spending to result in a mid-single-digit core revenue decline in 2015 specific to process valves. The remaining portions of fluid handling are expected to grow, resulting in a low-single-digit core revenue decline for all of fluid handling in 2015.

To provide additional clarity on what we are seeing, I will now discuss the size of our primary process valve end markets and discuss recent market trends as well as provide an overview of what we are seeing in our commercial valve businesses.

First, oil and gas. Our total direct oil and gas exposure is approximately 12% of fluid handling sales. A little more than half of this amount is downstream refining. The remainder is roughly split between various upstream and midstream applications. We saw a sharp slowdown in refining-related orders as we moved through the second half, most notably in the Americas.

We are seeing projects move to the right and believe the delays are largely attributable to deferred maintenance and turnaround activity driven by high rates of refinery utilization along with customers being more cautious with capital spending. We expect refining in the United States to recover over the course of 2015 as maintenance activities resume.

Refining activity in Europe is likely to remain weak given excess capacity, lower-cost competition and continued facility closures.

Our exposure to the chemical market comprises approximately 21% of fluid handling sales. Chemical demand has been weak all year. And while we expected the continued softness in the quarter in the Americas, China and Europe, declines accelerated. We believe the deterioration in orders is in part tied to uncertainty related to oil price volatility, which is causing delays as project economies are reassessed. This uncertainty is in addition to other pre-existing issues such as skilled labor shortages in certain markets which are also contributing to delays.

In the United States, chemical projects continued shift to the right. In 2015, while we expect demand to improve modestly through the course of the year, we don't expect a substantial improvement in sales until projects progress into 2016 and 2017, driven by new projects for ethylene derivative facilities.

For China, we saw a slowdown in chemical projects during the second half of 2014. And in Europe, we continue to expect flat orders as a result of limited project activity in the region.

In the Middle East and North Africa, while we do expect some softness from budget constraints and the uncertainty related to oil prices, we expect to benefit from medium-term opportunities particularly for fertilizer plants.

The power vertical contributes approximately 11% of total fluid handling sales. Power orders were down in the third quarter, and the rate of decline deteriorated in the fourth quarter.

Specific to China, we are seeing project delays attributed to a slowdown in government funding and overcapacity as well as engineering constraints. There's been some movement on China nuclear projects, and RFQs have recently been issued for a number of new potential facilities.

In the United States, some power projects have been delayed, although the delays are more modest and we do expect an improvement in demand as we move through 2015.

In Europe, we expect orders to remain soft given weak underlying economic conditions in the region. And in the Middle East, we see projects continuing to move forward.

With respect to our commercial valve-related businesses, our Canadian non-residential construction business had a solid quarter, and we expect further modest improvements in 2015. And our UK and Middle East-based businesses continue to see modest positive order momentum.

Moving now to payment and merchandising technologies, sales of $177 million increased 45% versus the prior year, driven primarily by the MEI acquisition. Core sales declined 8% on tough year-over-year comparisons, and currency translation reduced sales by 5.5%.

The core sales decline is difficult to interpret directly, as core growth only measures the performance of our legacy business, while over half of the fourth-quarter segment revenue is from MEI.

In addition, we have transitioned customers in some markets from our legacy products to MEI product lines, further distorting this metric. In 2015, these distortions will no longer exist, as we will have a full year of operating performance from which to compare against.

Adjusting for the tough comparison to the fourth quarter of 2013, end markets and our revenue behaved largely as expected, with continued softness in the gaming and to a lesser extent retail end markets.

Segment operating profit of $24.3 million increased 78% from last year, primarily reflecting the impact of the MEI acquisition. Operating margin increased 250 basis points from last year to 13.7%.

The MEI integration is progressing well. Synergy realization in 2014 was approximately $10 million. We are raising our synergy target to an annual run rate of at least $33 million by 2016. In 2015, we expect incremental synergies of approximately $9 million.

Aerospace and electronics sales declined 2.4% to $182.3 million. Segment operating margins decreased to 22.3% from 23.9% in the prior year, although they improved just over 300 basis points compared to last quarter in line with our expectations.

Sales in the aerospace group were $116 million, down slightly from last year. Commercial OEM sales increased 5%, while total aftermarket sales declined 4%. Commercial spares declined in the mid-single-digit range on tough comparisons versus the prior year along with weaker military demand in 2014.

The OEM to aftermarket mix was 62% to 38%. We expect aftermarket activities to increase modestly as we move through 2015.

Electronics Group sales were $66.4 million, a 5.9% decline from the third quarter of 2013, driven primarily by weaker sales of defense-related products.

Aerospace and electronics backlog was $422.1 million at the end of the fourth quarter, compared to $361.3 million at December 31, 2013 and $404.8 million at September 30, 2014. The backlog includes a large, multi-year, ground-based radar order in our electronics group.

As we have discussed previously, we believe the defense markets are generally stable with the potential for periodic large projects. While we are pleased about winning this program, such large projects are typically competitively bid, and shipments will be spread over a multi-year period.

Engineered material sales increased 9.3% to $57.2 million. Sales of RV-related products increased 20% versus the prior year, while transportation rose 1% and building products declined 3%. Operating profit increased $1.4 million to $7.2 million, and operating margins were 12.6% versus 11.1% in the fourth quarter of last year.

Margin improvement primarily reflects leverage on the higher sales as well as productivity benefits and lower costs.

Turning now to more detail on our total Company results and forecast. Foreign currency translation had a $0.03 unfavorable impact on EPS in the fourth quarter compared to our original guidance. This is consistent with what we outlined during our third-quarter conference call.

Our fourth-quarter tax rate was 32.5% on a GAAP basis compared to 37.8% in the fourth quarter of 2013. Excluding the impact of the special items, our fourth-quarter tax rate was 30.8%, which compares to 33.3% in the fourth quarter of 2013. The fourth quarter of 2014 includes a $0.05 benefit from the extension of the R&D tax credit, consistent with our guidance.

In the quarter, free cash flow was up slightly from the prior year to $139 million. On a full-year basis, free cash flow increased approximately 5% to $220 million. We ended the quarter with $346 million in cash, up $76 million from year-end 2013. Total debt at the end of September was $850 million compared to $875 million at December 31, 2013. And we repurchased approximately 813,000 shares in the fourth quarter for $50 million.

As Max mentioned, we are introducing 2015 EPS guidance, excluding special items, of $4.45 to $4.65 per share, which is flat to up 5% compared to 2014. Our guidance assumes total 2015 sales of approximately $2.85 billion, down 2.5% compared to 2014. This sales outlook includes a 2% to 4% negative impact from foreign exchange and a 0.5% unfavorable impact from a small divestiture in the first half of 2014, partially offset by organic sales of flat to up 2%. We expect our 2015 full-year tax rate before special items to be approximately 31%, which includes the assumption that legislation will be enacted during 2015 that extends the US federal research tax credit retroactive to January 1, 2015.

We expect free cash flow of $210 million to $240 million, up 2% at the midpoint compared to 2014.

There are two sizable earnings headwinds we expect in 2015. First, foreign currency is expected to have an approximate $0.17 per share negative impact on EPS, and higher pension expense will be another $0.04 impact. Given the magnitude of these headwinds, we have taken a few actions.

First, we identified and have begun work on incremental MEI-related synergies. After realizing $10 million of synergies in 2014, we expect an additional $9 million of synergies in 2015.

With the addition of the incremental actions, we now expect an annualized synergy run rate of $33 million by the end of 2016.

Second, we have initiated additional repositioning opportunities within our fluid handling business. Combined with the 2014 repositioning, we now expect $10 million of repositioning savings in 2015 with an additional $9 million of savings in 2016. These actions should roughly offset the pension and foreign exchange impacts, so earnings growth from the 2014 base will be driven by organic growth and associated operating leverage.

We do not give quarterly earnings guidance. However, please note that we expect the first quarter to be notably weaker than what can be implied from our historic seasonality. This weakness will be seen in both revenue and earnings.

As we highlighted earlier, our process valve business experienced significant projects slipping to the right in both Q3 and Q4 of 2014, and we expect to see that trend continuing into the first half of 2015, implying most of our core growth to come in the second half.

In addition, from an earnings perspective, we have clear line of sight to our synergies and repositioning benefits. However, those benefits are weighted disproportionately to the second half of the year. Further, we expect year-over-year currency impact to be much greater in the first half 2015, and this has both a revenue and margin impact.

We will provide additional detail on our guidance at our February 26 investor day event in New York City, including segment-level guidance.

Now let me turn it back over to Jason.

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

(Operator Instructions) Joe Radigan, KeyBanc.

Let me start with payment and merchandising. What type of growth rate does your guidance assume for this segment in 2015? And then what gives you confidence that MEI can return to growth? Because when you announced that deal in 2012, MEI had $400 million of -- it was a $400 million business. It was growing at a double-digit CAGR.

It doesn't look like it's had any top-line growth in the last two years. So what gives you confidence that that business will return to growth? And has anything changed in the growth profile there? Has the competitive dynamic changed at all, or is it more primarily end market driven?

So most of the end markets, as I reflect back on 2014, I think behaved largely as expected with the exception of casino gaming. We also faced some headwinds with respect to some exposures in Russia.

We are going to review in detail our segment-level guidance when we host our investor day in February. We do expect certainly an improvement in the segment's growth rate in 2015. Other items with respect to last year included some unusual comparisons. And again, as well as the challenges we saw in the gaming end markets.

We do continue to expect to see a mid-term growth rate in this business as we look forward. Some of the headwinds that we did start to experience in 2014 that we hope will abate as we move into 2015 include macro conditions that we started to see in Europe, Russia and China as well. But overall, I would characterize 2015 as a period where we'll start to see that momentum moving forward and seeing that low- to mid-single-digit growth rate that we expected.

Okay. Are you assuming any revenue synergies in that incremental $9 million in 2015 and the incremental $14 million in 2016, or is it all coming on the cost side?

All on the cost side.

Okay. And then fluid handling, the detail you gave there is actually very helpful, Rich. How much of your business is project related versus sort of the ongoing maintenance refinery turnaround type business? And do you expect there to be pent-up demand given that? Because you can only defer that maintenance for so long. So would you expect there to be pent-up demand that would eventually result in an accelerated growth rate? Or is it just -- it would just resume kind of at the normal run rate?

Yes, and so we look at it as 50-50 roughly between projects and MRO. And your question is right on and in particular with respect to refining. We have seen a slowdown in refining in particular in the US, with utilization rates being up at this, call it, 93% to 95%.

And so one of the comments that I did make in the prepared remarks was that we would expect, as we looked through 2015, to see, in particular in the US, demand start to come back a bit. And that one of those areas is in fact refining where that pent-up demand does in fact exist in our opinion.

And Joe, also, what we define as a project is not just a greenfield site or an extremely large new project aimed at additional capacity. In some cases, as we define projects, it can be for turnaround activity that is large, requires a quote, go through the same formal process. And to Rich's point, we would expect that turnaround work to pick back up at a slightly accelerated level.

Okay. And then are you -- just maybe lastly, food handling for me. How is the pricing environment and how is the margin profile of orders that are going in the backlog today kind of given this macro slowing? Are you seeing increased pricing pressure? And is there any risk that orders that are already in backlog get repriced lower considering this environment?

I think there's very little risk of repricing lower with what's in backlog. We get asked this question on every quarter, and I've always said that the competitive dynamics have always been one that's challenging, and we always step up the value prop.

I would say that this is -- we're seeing a more competitive environment for sure. And I think we are doing a fantastic job holding price and making sure that we don't make any silly moves. But it has become more competitive for sure.

I don't know, Rich, if you have anything else?

Yes, just considering the environment that we are in here with slowness and things moving to the right, and it does just encourage a little bit more in the way of pricing -- price competitiveness. But as Max points out, I think our discipline is really strong here. I think that's evidenced through the margin profile that we've been able to maintain over the last few quarters.

Got it, okay. Thank you very much, Max. Thanks, Rich.

Thanks, Joe.

Thanks, Joe.

Brian Konigsberg, Vertical Research Partners.

So actually just maybe following on the pricing question in fluid handling, maybe just the other side of things. We've seen commodity prices come up quite a bit. And I assume you guys are using quite a bit of steel and metal and copper and other things. Are you going to be able to, I guess, capture some of that benefit if you are able to keep the price fairly steady?

Yes, so your comment is specific to steel, copper -- in those areas, there has been areas where we've seen pressure. Right? Where we're seeing some input costs coming down are more on the resin-based or oil-based side.

But in terms of our responsiveness to price either way, in particular when it's raising here, we are very disciplined in terms of our approach in capturing that, in particular on the MRO side, frankly.

Okay. Do you expect that translate into improved margins, or do you expect that not to (multiple speakers) --

No, I would say it is to sustain.

Sustain, okay. Just curious on the guidance provided, I see there's a note saying you guys marked FX rates as of 12/31. We've had more strengthening of the dollar since then. Can you just give us maybe an updated view of where you stand now? What the incremental pressure might be on the earnings outlook if you marked it as of today?

Yes, so if you went down -- so our process is the same. So we use year-end rates to forecast or to establish our plan and our guidance for the succeeding year. Rates have moved considerably, as everybody knows, and pretty much a moving target, frankly.

In terms of the exposure as we look at it compared to what is in our guidance, it's probably in the realm of maybe $0.05 to $0.10, something like that. But we're not prepared to say that that is a full-year exposure that we have at this point. We feel like it's set correctly, and we'll monitor the changes as we move forward. And if we need to recast the guidance at some point depending on where the rates move, we'll go ahead and do that and be responsive.

But given the volatility in FX rates, we did feel the need to call that out, Brian.

Okay. But just to be clear, if you were to market as of today and carried it through the remainder of the year, that's an additional $0.05 to $0.10 versus what you've guided today?

Yes, I would say that's true. Yes.

Okay, all right. Fair enough. Going to aerospace and electronics, obviously the orders and backlog were very, very good. You mentioned the radar system order in the quarter. Maybe can you size that for us? I'm just kind of curious what the -- ex that large order, what the backlog has been. And if that's the case, I'm just trying to gauge what the core growth profile actually should be for that business. It seems like it should be fairly good.

Yes, I think we're going to try to put a little bit more color around this during investor day. The project, I would comment, includes technologies that are in both of our microwave and power businesses. We typically try not to -- we can't, in fact, comment on specific projects for various reasons with our customers. I would point out that our electronics business is a little bit more -- they have lower margins than our aerospace group. And with the size of the project, it's competitively bid. So from a margin perspective overall, I wouldn't see this as being overly accretive, but it's an excellent win for the business. It's an endorsement of the technology that we have to help us grow in other areas where we are pursuing new business, again, using these technologies.

So -- and I think we've disclosed previously as well that these tend to come in chunks sometimes. They are a little bit lumpy, in particular in the defense space. So a little bit of an aberration here in the quarter, but, again, it does also spread over the next couple of years.

If I could just sneak one last one in. So cash conversion, I think it's probably a little bit less than I was thinking, and I think maybe some others.

I did notice the CapEx is going higher in 2015. I think previously you indicated that would be grinding lower after some, I guess, discrete MEI spending was taking place in 2014. Maybe just can you talk to why that's moving higher and where the spending is occurring?

Sure. So when we moved up -- I'll just start with 2014. The primary increases that we saw in 2014 were related primarily to the acquisition of MEI because we bring in a pretty big new business there that contributed what you would expect from a business that size in the way of CapEx. As well as incremental investments for new product development, in particular, in our aerospace group and fluid handling.

As we looked at 2015 and completed our plans this year, and considering in particular a couple of very attractive new programs that we'll share more with you again in investor day, there's some incremental CapEx associated with those. And again, that is specific to our aerospace business.

So -- but overall, I would also point out that when I look at CapEx, we're going from $45 million to $50 million at the midpoint. So I'm really only going up $5 million. But that said, we do have some incremental investments that build to that $5 million, and we'll go through that with you at investor day. These are exciting programs, and I think it'll all come together for you when we talk.

The other element I would point out is, excluding asbestos, we have asbestos payment that we need to make. But excluding that, we're at this 99% of free cash flow conversion which is, from my point of view, a fairly strong performance. And I think worth pointing out that that includes payments associated with repositioning actions that we announced here in the fourth quarter.

So when you look at the fourth quarter amounts that we had booked, which is largely around elements that will be paid in 2015, together with incremental costs with executing on those repositionings in 2015 that are not yet recorded because we haven't incurred the costs, and you back those items out -- again, you're then hovering around probably a 105% free cash flow conversion excluding asbestos. And probably like 92% or 93% on an as-reported basis.

And just previously, I think you mentioned maybe $35 million or $40 million is kind of where you'd expect to be at the run rate CapEx spend? Is that still the level, or do you anticipate kind of run rate would be -- a normalized run rate would be higher than that at this point?

Yes, I think it's early for -- it's about -- I think $50 million is not an unfair number, I would say. I think we are going to be at -- if at $50 million, we're at like 1.5% of total sales, so it's still at a fairly good ratio.

Certainly, we don't look at our ratios and say that's where we need to be. It's about how we manage CapEx and where we are investing and getting the most out of our assets and leveraging the Crane business system.

So I don't see it being unforeseeable that we would be down in that $40 million range at some point. Just right now, we do have a couple of critical programs that we're executing against in our aerospace group in particular.

I will pass it along. Thank you very much.

Ken Herbert, Cannaccord.

Hey, Max and Rich, I just first wanted to start again back on fluid handling. It sounds like for 2015 -- and I know we'll get more detail in the end of February -- but it sounds like you've got certainly a step up from first half to second half. Is there anything you can specifically point to maybe that you are seeing today to help give us more confidence that that step up will in fact happen?

I understand the commentary around pent-up demand, and I certainly agree that the outlook is there. But timing -- or clearly there are going to be questions heading through this year. Anything else you can say to specifically address timing of that step up and maybe things we should be looking for here as we go through the first half of 2015?

Ken, we track all of our projects in every stage from feed all the way through to our quote process. And the funnel is up significantly. So we see the activity; we see the projects.

The trend that we continue to see is, as we've described, as Rich described, in this environment of uncertainty, CapEx being carefully scrutinized. Positions being put off, pushed, recalculation of some certain projects. We are not seeing any major cancellations. We are seeing a solid backlog that would bode well for 2016 and 2017 and being released through the end of 2015. So we really have taken a careful look at this. And those are the trends that underlie our assumptions.

Okay, that's helpful. So you are -- I mean it is -- you're clearly starting to see some commentary and some maybe activity from your customers that underline some of that optimism, at least heading into the back half of 2015 and certainly into 2016 and 2017, it sounds like.

Correct, yes.

And then if I could on aerospace and electronics, can you specifically -- I mean, really nice sequential step up again in the margin from the third to the fourth quarter as those sort of one-time issues got addressed, what was the commercial aftermarket growth? I know you gave the spares number. Your total commercial aftermarket growth number in the fourth quarter and maybe the outlook there into 2015 as I view that as certainly a key part of the margin story.

Sure. So when I look at -- coming off of Q3, if I look at total commercial aftermarket was your question right, not spares?

Exactly, total commercial. Exactly.

If I look at total commercial aftermarket coming from Q3 to Q4, it was about a 6% increase in Q4 -- roughly, in order of magnitude. And a lot of that was -- it largely driven, frankly, by commercial spares.

By the spares growth. And year over year, maybe up low single digits?

No, year over year in Q4 is actually a little bit down, and that's because in the fourth quarter of last year we had a really strong performance spares in particular. So when I look at the projection, you look at the trajectory of what happened this year in the aftermarket space, in particular in spares, even if I start with Q4 of last year, Q4 was at the high point. Q1 came down just a little bit and then down a little bit more in Q2, and then it picked up from Q2 to Q3 to Q4 here.

We are starting to see some momentum here, frankly. We feel cautiously optimistic about the momentum that we're seeing in commercial spares mainly around replenishment. When you look at the initial provisioning components, we see some puts and takes, frankly, with 787 coming down but -- or going up and being offset by 747-8 and things like that. But it's really being driven by replenishment as we look out into 2015.

Okay, that's helpful. And then if I could just finally, you -- I appreciate that you've definitely stepped up some of the repositioning activities here in the fourth quarter in response to some of the changing market dynamics.

As you look into 2015, are there more opportunities and leverage you have at your disposal there? Is there maybe more upside as we go through the year from repositioning? Or how would you characterize the thought process around those activities?

I think for 2015, Ken, we have nothing else identified. We don't think we need anything else identified. There's nothing planned. Having said that, I think that we -- given the conditions, we will react accordingly as we have in the past, although we don't anticipate that requirement.

Okay, great. Thank you very much.

Robert Barry, Susquehanna.

I will echo the comments earlier thanking you for all the color on the energy end markets. It's very much appreciated. And don't envy the position you're in trying to provide an outlook. It sounds like there's still a lot of moving pieces in trying to assemble that outlook.

Yes. We would agree.

Just to begin, a quick housekeeping. You refer to process valves. I guess given that's a 44% of revenues that you touched on, the oil and gas $12 million, the chemical $21 million and the power $11 million?

When you -- can you just repeat that? Housekeeping on --

Yes, just to clarify, you've been referring to within fluid the pressure being kind of concentrated in the process valves part of the business, which I think is about 45% of fluid. Is that right? Is it the oil and gas, chemical and power piece that you ran through in your prepared remarks?

That's correct, that's correct. So it's about a -- yes, it's 40%, 42%, to 44% something like that.

Right. And you mentioned that the rest of it, or a good chunk of the rest of it I guess, is Crane supply and the building services or non-res component of the business largely. In Canada, I think you mentioned you see some improvement there in 2015. I was curious what might be driving that.

Well, there's other components. We have -- yes, pumps and we have other parts of the business. General industrial, for example, is another component. And then so just to reconcile back, as we look at total chem, pharma, energy, there are other components that we speak to in this regard.

And I'm sorry, Rob, that second half of your question there was --?

I guess specifically there was, I thought, some mention of Canadian non-res looking a little better in 2015.

Yes.

And just given oil in that country, natural resource dependency, I was a little surprised about that expectation.

Yes, I think when we think of -- the direct oil and gas exposure for our Crane supply business is limited. It's less than $10 million. It could be even as close to $5 million of direct exposure.

Certainly to the extent that in certain regions, like for example in Alberta, if there is a slowdown in ICI starts, it's possible and as a result of what we're seeing in the way of oil prices.

But right now, we just haven't seen that. We haven't seen that coming out of Q3 into Q4 and where we're thinking the first half of this year is going to be at this point. But it is a risk that, as you point out, that the energy exposure or the energy nature of Canada could happen exposure. But we see it as minimal at this point.

Okay. And that's a non-res end market in Canada? It actually seems okay?

So far, yes.

Okay. And then as much color as you did provide on the energy end markets, I'm going to ask you perhaps for a little bit more. Just specifically about the downstream exposure and the refining because I think there is a view that generally if you've got upstream exposure, you're in trouble; and if you are mid-downstream, it's a more benign impact.

So a little more color perhaps there on the refining. I understand the utilization being high. There was also some commentary about project delays in refining or caution in refining. I just wanted to clarify that.

Well, I think CapEx considerations -- I think with what's occurring -- this is what we feel is occurring, Rob, is that there's just a careful cautiousness in any kind of CapEx spend. It's impacting everybody's decision-making.

Having said that also, we are also clearly getting a sense that to take advantage of the crack spreads that utilization is intentionally being kept very, very high right now. And we expect turnaround work that may be deferred to come back here. So it certainly would bode well.

Oil prices overall -- if you pull back on the macroeconomic conditions, depending on how you're thinking about things, clearly this is going to be a positive for the broader macroeconomic environment and how that continues to drive demand and demand into the refining, it should be positive. But, and this is -- what we're seeing is a immediate first-quarter kind of fourth-quarter/first-quarter trend. Does that help at all?

Yes, no, that's helpful.

Mainly that's the Americas largely. Right?

Correct.

Europe, we do not see the same thing with refining. Everything is just sort of closing or no growth in Europe from a refining point of view.

Okay. And then I just also wanted to clarify in MEI, I think you have talked kind of I think it was a general outlook for 2015 of low to mid single-digit growth. I know you have some headwind there related to I think it was some contract revenues that are going away that you've been serving at no margins or no EBIT impact but a revenue hit. Is that probably worth a couple of points -- is that part of that outlook, or is that low-single to mid-single excluding that?

No, no, no, that includes that outlook. It's a $15 million headwind from a revenue perspective. But that was an arrangement that we had that we manufactured at cost. So from a margin perspective, it will be a bit accretive; not dollars, but margin rate right is being accretive. But from a headwind perspective on the top line, yes, you're absolutely correct. And it's [$15 million].

Okay. Yes. So on an organic basis, I guess that would make your revenue there look a couple of points better, the growth.

Yes, yes.

In 2015, yes. Okay. And then just finally, maybe trying to see the silver lining in the oil on the engineered materials business and the resins, I would think that would be perhaps a meaningful tailwind. I don't know if you saw any of that in the quarter. It sounds like you attributed most of that margin expansion to volume leverage.

But can you talk about your resin buy and the size of it and whether there might be some impact there?

So in the quarter itself, we really didn't see much of an impact. It was fairly late, and there's a lead time associated with seeing that stuff actually read through to resin and styrene. So we didn't see much in the quarter.

Even as we think about next year, I would still say that there is some uncertainty, a little bit of caution with respect to price and ability to have it read through. But it's something that we are monitoring closely and we'll try to manage appropriately to ensure that we get as much as we can.

Our team does a nice job correlating to -- trying to correlate to market conditions. And there's not exact direct correlation to oil prices as it relates to benzene, styrene and some of the feedstock for our unsaturated polyester resin.

Having said that, we do expect some tailwinds as we move through the year. But as Rich mentioned, it's a little delayed right now, but we do anticipate some help later.

Okay, great. Thank you, guys. Thanks very much.

Thanks, Rob. Appreciate it.

Matt McConnell, RBC Capital Markets.

So on capital allocation, just thinking about the share buybacks in the quarter, were those mostly opportunistic based on the stock price? Or should we take this as an indication that leverage is maybe back to a comfort level now that you are a year past MEI? How should we think about that?

Yes, so we have not been in the market, as you know, for a little bit here because of the acquisition of MEI. I think we have a stated policy of wanting to return to shareholders roughly 50%. I think this is in line with that.

It also helps us with respect to keeping our go-forward dilutive impact of stock-based comp, I think, in check. So it's also consistent with respect to our other stated objective of offsetting dilution. So, yes, I think it was important that we did that and executed here in the fourth quarter.

Nothing has changed in our policy map, but clearly valuation had played a part in timing.

Okay, got it. Thanks. And then how about on the M&A pipeline? I wonder if there's anything active or of note. And would M&A have to be limited to international targets, or do you think you would have -- do you have US cash available at this point?

Well, as we think about it, we have capacity for both international and domestic. We are not constraining ourselves in terms of targets from that standpoint.

We continue to have a rich funnel within our businesses and at corporate. The activity around acquisitions is high, but there's nothing imminent. I have to be honest and say there's nothing close at this point due to valuations and due to opportunities materializing.

Okay, great. And then just a quick detail question on the aerospace and electronics backlog. Obviously that's up quite a bit. Under what circumstances do you put something into backlog? Does it have to be within one year or two years?

It's a firm order.

Okay. Firm order regardless of when you expect it to be delivered?

Correct.

Okay, got it. And then on the currency headwind, does that have a comparable impact on earnings, or do you have any revenue and cost and mismatches when you look at your currency exposures?

Do I have any revenue and cost mismatches?

So is there an operating margin impact --

Due to any transactional foreign exchange exposures?

Right.

Yes, so we monitor those as well. We do have them from time to time, depending. We have -- we understand them. In certain cases, we do hedge where we can, but that's included -- I think I would say that it's included in our overall guidance that we've provided.

Okay, great. Thanks very much.

Ajay Kejriwal, FBR Capital Markets.

I apologize if you already addressed this;, I joined late. On MEI, good to see you're taking up the synergy goals there. So how much of that is related to additional costs that you might be taking out? Or is there any benefit from relaunching of some of the product lines that you exited?

Yes, so this is entirely related to new projects and efficiency of our cost structure entirely.

We'll spell out more at the February investor conference, Ajay.

Okay, good. And Max, on your fluid comments, obviously some of your customers are kind of pushing out projects second half 2016/2017. So what is your sense -- when you see these customers, how much of that comeback expectation, if you will, is based or contingent upon oil coming back?

And what are those conversations? Is it like, hey, we are pushing these projects away from what oil does, or is it something different?

I think what we're hearing today is at these price levels, oil -- there are no major, long-term decision changes. Shale gas and the feedstock and the competitive advantage in the US, I think these investments will continue from a long-term planning standpoint.

We don't see significant changes. But as you know, this continues to play out on a daily, weekly, monthly basis. So we will continue to monitor closely, but we don't think it will have a significant impact on the right long-term decision that the majors have undertaken.

Okay, good. And then last one for me on payment solutions. Any update on what you're seeing in end markets in Europe, the customers in Germany and some of the other countries where you had issues in the last couple of quarters?

Actually it's stable, and in some cases in gaming, we're seeing some upside -- how would we answer?

Yes, no, I think when you say challenges, sometimes it's just timing of certain projects, and things might move from one quarter to the next. I wouldn't characterize it as any unique sort of customer issues that we had. It's just timing of projects. I think we'll continue to see lumpiness from period to period. But we feel good about all of our relationships with all of our customers. We haven't -- we are not losing any share, that's for sure. And we feel good about our prospects as we move into 2015.

Great. Thank you.

Thank you. I'll now turn the call back over to Max Mitchell for closing remarks.

Thank you, operator. While 2014 was a difficult year, we were pleased to deliver our fourth consecutive year of record performance at Crane as solid execution mitigated the impact of soft end markets. We expect another challenging revenue year in 2015 but believe we are and our portfolio is well-positioned for growth in the long-term. And we will remain focused on our productivity and repositioning efforts.

We look forward to seeing many of you next month at our February 26 investor day conference in New York City. Thank you all for your interest in Crane.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.