Crane Co (CR) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Crane Co. second quarter 2015 earnings conference call.

(Operator Instructions)

I would now like to introduce your host for today's conference, The Director of Investor Relations Jason Feldman. Sir, you may now begin

Thank you operator, and good morning everyone. Welcome to our second-quarter 2015 earnings release conference call. I'm 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'll respond to questions.

Just a quick 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 and 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. Now the return the call over to Max.

Thank you, Jason.

In spite of strong execution across most of our businesses, we continue to face difficult market conditions within our process valve business and fluid handling. Customer capital spending patterns across the oil and gas, chemical power, and general industrial end markets continue to result in a high level of uncertainty and lack of predictability.

As outlined in our press release last night, excluding special items, Crane's second-quarter EPS was $1.06, down 8% compared to the second quarter of 2014. Sales of $711 million decreased 5%. Driven by unfavorable foreign exchange and a 1% impact from divestitures. Partially offset by positive core growth of 0.6%.

Operating (technical difficulties) with 13.9% of decline of 70 basis points compared to last year, reflecting lower volume, negative mix, and the impact of foreign exchange. That said margins were up 60 basis points sequentially from the first quarter.

Starting with fluid handling. The sequential order improvement we saw during the first quarter stalled over the last few months. Second-quarter orders were not consistent with the level of sales pick up we had forecast to support the second half of the year.

We don't believe conditions are worsening. Rather, customer activity levels seem statement at fairly low levels. We still aren't seeing outright project cancellations, but project delays are being extended in the timing of project releases is proving very difficult to predict in this environment.

Further, we're seeing continued pricing challenges. Particularly for projects in the emerging markets. We now expect sales in our process valve business in fluid handling in the second have to be down slightly compared to the first half of this year. In response to the challenges, we are taking appropriate cost actions and have initiated incremental repositioning.

Our other three segments are on track to achieve their full year February guidance targets. But given our revised outlook for fluid handling, we are reducing our full year EPS guidance excluding special items by $0.20. While we are disappointed that we are reducing guidance, the weakness in our primary fluid markets is broad-based and consistent with information we're seeing impacting the entire industry. While market softness is lasting longer than we had expected, we do remain confident in our long-term prospects.

We continue to be very pleased with the performance of payment and merchandising technologies. We saw continued sales strength across both our payment and merchandising platforms. And margin improvement was driven by higher sales, integration synergies and productivity. Payments saw particular strength in China, largely from the transportation vertical.

We're also very proud of the progress we have made at merchandising, where our product innovation and continued focus on productivity has improved the businesses' margin profile. Externally most of the focus on payment in related to the margin expansion story, however innovation and new product development is a critical part of this business.

Most recently we launched our SCR bill recycling product with applications across multiple verticals, including gaming and financial services. The product is a substantial improvement over earlier products. With improved liability, better security, lower costs of operations and two denomination recycling. The SCR product was launched in the first quarter of this year and we are very pleased with the adoption rates.

Important OE customers are marketing their adoption of SCR as a differentiating factor. This is only one example of the differentiated innovation that drives future growth for this business.

Growth rates of payment and merchandising will moderate over the next two quarters, but we continue to believe this business will deliver mid-single-digit sales growth over the long term. There are substantial margin opportunity from synergies, ongoing productivity initiatives and volume leverage. From in execution standpoint, we're slightly ahead of plan to realize $9 million of incremental synergies this year.

Aerospace Electronics performed as expected in the quarter. Last quarter we explained that the timing of after market sales would be weighted towards the second half. Overall, we are confident in sequential improvement over the next two quarters in both sales and margins.

At our investor day in February, we discussed having secured $5.3 billion of lifetime content value on major aerospace programs with another $1.5 billion in pursuit. I'm pleased to report substantial progress on the opportunities where we pursued with $460 million of additional lifetime content, recently secured across our power, fluid, sensing, break control, and cabin solutions.

In April, we announced the expansion of our Linwood, Washington facility. Where we're building a new testing and manufacturing facility for fuel flow transmitters, supporting some of these recent wins. Over the next couple of years, the current round of aircraft platform launches will be complete. And our market share for fuel flow transmitters with approximately double, as we have secured this content on all of the high-volume narrow body platforms.

And in Engineer Materials we deliver solid margins and good growth in the second quarter although sales will slow in the second half. Like our other segments, Engineered Materials continues to focus on the productive element. Earlier this year, we introduced our newest product with a proprietary formulation that delivers a higher gloss finish to the RV industry at an attractive price point.

Customer feedback has been excellent and we are midway through converting customers to this new product. Let me now turn the call over to Rich Maue, who will provide some additional information and details of our revised guidance.

Thank you Max. I'll now provide segment comments which compare the second quarter of 2015 to 2014 excluding special items as outlined in our press release, slide presentation, and the accompanying 9 gap tables. After the segment comments, I will provided some comments on our revised 2015 outlook.

In the second quarter, fluid handling sales of $292 million declined 10%, reflecting an 8% percent impact from unfavorable foreign exchange, a 1.6% core sales decline, and a 1% divestiture impact. Adjusted operating margins were 12.9%, with a 330 basis point decline primarily attributable to lower volumes, unfavorable foreign exchange, unfavorable product mix, and price.

Fluid Handling backlog was $287 million at the end of March. Sequentially, the backlog declined 6% or 7.5% adjusting for foreign exchange. Compared to the prior year, backlog declined 22% or 15% decline after adjusting for foreign exchange.

As Max discussed, incoming orders were weaker than expected. Demand for process valves remains uneven and uncertainty persists. Customers continue to defer capital spending, customer behavior is impacted by generally soft economic conditions, and lower commodity prices. And we're seeing some continued distributor destocking.

We still have not seen a trend of project cancellations. The timing of projects remains very unpredictable and pricing challenges persist. The market has not significantly worsened relative to the first quarter, but we now believe the modest demand improvement we expected in the second half will not materialize.

Weakness across the chemical markets is broad-based, particularly in China. There are a few pockets of activity in the Middle East but continued project delays in North America.

Power markets remained weak in Europe, The Middle East and particularly in China. We expect a modestly better year for power in the United States, related to coal to gas conversion products.

Refining markets remain soft across geographies, with the most pronounced year-to-date weakness in China and the Middle East. Europe appears stable at low levels but remains uncertain. North American turnaround work appears to have been further delayed, in we no longer expect a pickup in the second half.

Our commercial valve business performed reasonably well across most geographies with modest improvement in Canada and the Middle East other the UK was softer. Looking forward, we now expect Fluid Handling full-year organic sales down in the mid-single digit range with full-year margins in the 13% to 14% range given weaker volume, negative mix, and a more challenging pricing environment.

We have initiated incremental repositioning activities, reducing headcount at selected facilities. Incremental cost this year will be approximately $5 million. With $8 million in annualized savings most of which will be in 2016.

Moving now to payment and merchandising technologies. Sales of $187 million increased 1% versus the prior year. Core growth of 9% more than offset a 7% impact from unfavorable foreign exchange and a 1% divestiture impact. Core sales increased across both our payment and merchandising businesses.

We are very pleased with the performance in the quarter. A portion of the second quarter strength is timing related, although we do expect solid growth going forward. Adjusted operating margin of 15% increased 340 basis points from last year driven by the higher volumes, synergies, and productivity initiatives.

In the second half of 2015 organic sales growth for this business will moderate. However we are clearly trending toward full-year organic sales growth, nicely above the 3% we discussed in February. We expect second-half 2015 organic sales growth in the low to mid-single digit range, with margins slightly above the segment level guidance provided in February.

Aerospace and Electronics sales declined 6% to $167 million. And segment operating margins decreased to 19.4% from 21.1% in the prior year.

OEM sales decreased 7% driven primarily by lower shipments to defense-related customers. Total after market sales decreased 3% driven primarily by lower military after market sales. Commercial after market sales increased 1%.

The OEM to after market mix was 73% to 27% consistent with last quarter and compared to 74% to 26% in the second quarter of last year. The decline in segment margins is primarily a result of the lower volumes. Aerospace and Electronics backlog was $448 million at the end of the second quarter, compared to $397 million at the end of the second quarter of 2014.

Full-year organic growth is likely to be slightly weaker than the 3% we guided to in February. However, in the second half we do expect organic sales growth in the high single-digits given our after market backlog and the ramp up of the large defense contract we have discussed in the past. We expect full-year margins to be similar to what we provided in February.

Engineered materials sales increased 4% to $66 million. Margins increased to 18.5% from 15.4% last year with the improvement attributable primarily to productivity, along with higher volumes and lower material costs. We expect the RV markets to flatten out in the second half of 2015 with difficult year-over-year second-half comparisons. Consequently we expect full-year organic growth to be approximately flat with margins modestly above February guidance.

Turning now to more detail on our total company results and forecasts. The total EPS impact of unfavorable foreign-exchange in the quarter was approximately $0.10 compared to the prior year. Our second-quarter tax rate was 31.5% on a GAAP basis, compared to 30.9% in the second quarter of 2014. Excluding the impact of the special items, our second-quarter tax rate was 31% which compares to 31.3% in the second quarter of 2014. Our full year tax rate assumptions remain unchanged.

In the quarter, free cash flow is $48 million, compared to $53 million in the same quarter last year. Historically, this substantial majority of our free cash flow is generated in the fourth quarter.

We ended the quarter with $326 million in cash, compared to $346 million at the end of 2014. Total debt at the end of June was $872 million compared to $850 million at the end of December.

As Max mentioned, we are reducing our 2015 EPS guidance, excluding special items, to a range of $4.10 to $4.30 per share. From our prior range of $4.30 to $4.50 per share. The $0.20 reduction primarily reflects a weaker outlook for fluid handling, as we are not seeing the improvement we had expected.

We now expect full year core growth of down 1% to up 1%, one point below our prior forecast. Free cash flow guidance was also reduced to $190 million to $220 million down from $200 million to $230 million, reflecting the lower earnings outlook, partially offset by solid working capital and CapEx management. Other elements of guidance are unchanged.

Given the current market weakness, we are taking all appropriate and necessary cost actions while continuing to invest for long-term growth. Now let me turn it back over to Jason.

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

(Operator Instructions)

Shannon O'Callaghan, UBS

Good morning. As you assess the most recent delays in fluid handling. Last year it started off, there was labor and engineering shortages, then we had the big drop in oil and in the currency swings. As you look at the uptick in 1Q and then the pullback, is there anything new that you're hearing from customers in terms of this most recent push out that's different from those things we have heard in the past? Can you give us the latest color you're hearing?

Yes, Shannon. As they look back we saw this early. We had a very strong quarter in 2014, Q2. Which gave us a strong hope on the balance of the year. We saw a softening beginning Q3, which we explained and we really saw it earlier. And brought that to light. We had a very soft Q4. We saw sequential improvement in Q1. What I'm continuing to look at, study, analyze, read, not only for ourselves but across the market is just this unpredictability in the release of projects and a timing that can impact one quarter to the next.

With that sequential improvement, as we expected in the results in Q1, my sense was that with project backlog that we have, projects that we don't see getting canceled, a momentum in the projects that we track, that we were going to see some improvement. That really didn't occur. There was not a worsening, however.

My sense is that we are at the bottom. That is my best guess. We are generally at a bottom and it's really a question of how long? How long will it extend and when do we see an increase and what's the ramp of that increase? We looked at the run rate from Q1 to Q2, and basically made some assumptions that it's not going to materially improve. This is what caused us to reduce our guidance for the balance of the year.

Okay. Great

I'm sorry, Shannon. The one thing I would add, as Max mentioned, coming out of the fourth quarter we saw sequentially the improvement I think on an FX neutral basis we said up 3% percent overall for Fluid Handling. Then the comment Max mentions here about it not worsening. It came down 3% on an FX neutral basis and excluding some seasonality that we typically see in valve services.

It's this bumpy. Is up a little bit here coming out of Q4 into Q1 and then came back down to that same level. That consistent level of demand is what we're seeing.

Okay. And on the commercial after market piece in Aerospace, there's been a lot of movement across different companies depending on platforms you're exposed to et cetera this quarter. Can you explain more the back half load there and if it is platform related or provisioning, or a little more color in terms of your visibility into the second half in the commercial after market?

Yes. Sure. Just to back up. At the beginning of the year we had guided to plus 3% overall for after market. I think we were appropriately conservative when we provided that guidance back in February. Stepping back or coming forward actually to today, and what we're experiencing, as I look at the quarter over quarter comparison, so Q2 to Q2 this year, where we saw the weakness it is more on the project related side.

MNU products and commercial and military spares being really strong last year where as this year not as strong. But we expected that, frankly. It was not a surprise to us here in the quarter. From a commercial spares perspective, we did see growth from Q1 to Q2, which is nice to see. As we think about the balance of the year which is perhaps more directly related to your question, it is largely coming through programs, military retrofit, other OEM military projects, military spares, a lot of which is already booked.

If I look at my order book in Q2 versus what my order book was in Q1, I'm double digits higher from an orders perspective in the after market, in Q2 that helps us support our outlook for the balance of the year.

And that's more military driven than commercial?

There's also sequential improvement in commercial that we expect to see as well.

Okay. Great. Thanks.

A lot of that which is booked as well.

Brian Konigsberg, Vertical Research.

Good morning. Max, I wanted to follow up on the question previously asked in your comment about hopefully seeing a bottom, not certain when it will improve. Maybe you could talk about your thoughts just on price. Even if you think volume may have bottomed, do you think were added bottom from a price perspective as well?

Maybe also talk about the pressures you're seeing today. Do you anticipate that will be those pricing pressures will be realized this year, or are we going to see a lot of that going into 2016?

Yes. That's a good question.

As we look at price and the way we framed it up, in February we were one of the earliest once to talk about just even in all my years in the flow business and talking about price. I did see a change in some of the competitive pricing that we had to undertake. As we've looked at it, Brian, of the decline that we see in total margins, is probably estimated about 150 basis points of price impacting quarter two.

As I look forward, we think we're the same level through the balance of the year. So I don't necessarily see it worsening. I think its spot-based competitively. It's particularly challenging in some of the emerging markets, but to answer your question, I don't see it worsening, but I do see it having an impact through the balance of this year. Weather it impacts 2016 or not it's too early to tell, and I think we're going to have to wait a bit here to see how the rest of the year shapes up.

Okay. The backlog you have today. For the most part does it bleed in -- is it basically recognized in 2015 are you booking stuff for 2016 that will show some of the pricing pressure?

Most of it is 2015, right now.

Most of it's in 2015. Okay. And then on the guidance conceptually taking revenue down a point organically but taking out to $0.20 it just seems like the decremental is particularly large. If you could speak to the drivers there. Is it overhead absorption, price and fluid handling, what are the different components driving that?

Yes. Brian, it's Rich.

If you're going from guidance to guidance, yes, you're going to see a larger decremental. If you just looked at what's been delivered in the first half, and then compare that to what we're expecting to see in the balance of the year with our revised guidance, you'd see that decremental improving quite a bit from a guidance to guidance view. If you look at your first half, what did we actually performed look at your second half and what's the implied decrementals in that regard.

You'll find that's much improved. The reason for that is because we were a little bit weaker here in the second quarter than we anticipated, perhaps, coming out of the first quarter as it related to both price and some unfavorable mix.

If I could just make one last. With the expansion at the Linwood facility that you spoke to. Can you give a sense of the size of the spending you expect and how long would you anticipate that will continue for?

Yes.

Or is it incremental?

It's included in our CapEx Guidance that we set forth at the beginning of the year. So at our investor day we talked about investments in our Aerospace business in support of all these new program wins that we've had in our fluid solutions group within the aerospace group. We did incorporate that in our guidance profile. So it's nothing incremental to that figure in 2015. If that's your question.

Yes. Thank you. I will pass it on.

You're welcome.

Matt McConnell, RBC Capital.

Thank you, good morning.

A follow-up on the previous question and maybe specific to fluid handling, your sales are certainly holding up pretty well relative to what some peers reported, but the margin is down substantially. Is that strictly pricing, or could you talk about the mix or the effect that mix or absorption or other factors might be having on that Fluid Handling margin expectation for this year?

Sure. To start with the first part of your question which was on the quarter itself on the 330 basis points. It's a combination of elements, as I mentioned in my prepared remarks. Probably about 50 to 60 basis points of it is foreign-exchange, and the balance, I would say, is split fairly equally between volume price and mix.

On the mix side, we have some seasonality with respect to valve services that we always have to be mindful of. You're familiar with the outage seasons that we experience across the year and each of the years, that has an impact on us. That's part of the mix profile that was unfavorable in the quarter, but was completely expected. This business generate margins, very high margins and they read through as expected.

The other two areas from a mix point of view that were a little bit more challenging, was on the project-based business that you'd expect, given the softer demand in the fluid space, and then and our building services and utilities business in the UK, commercial end markets are down there, and that's where we participate in some pretty high margin work. And so demand levels were softer, but in that same business was stronger in the Middle East where margins are weaker.

So it was really just the mix of projects across a number of our businesses that contributed to about 100 basis point degradation there in the quarter. Looking out, as Max pointed out, the balance of year we provided a guidance figure here of 13% to 14% overall for Fluid Handling margins, so if you pick a midpoint there of 13.5% on margins, that's a couple hundred basis points off our initial estimate for guidance in that business. I would say roughly 150 basis points of that is price, with the balance coming through from the volume and some incremental mix.

Okay. Rates. That's helpful. On that pricing pressure, is that specific two new projects or all you also starting to see pressure on MRO sales, as well?

New projects.

Okay. Great. Thanks very much.

Joe Radigan, KeyBanc.

Good morning. First question is on Aero on the OE Business. That was down I believe mid-single digits in the first half. Do you still expect modest growth there for the year?

Yes, we do. The primary OE improvement will come from the defense contract that we have in our defense electronics business.

Okay.

That's still on track

Okay, thanks Rich. There's been others in the space that have commented on the fact that the business jet market has weakened materially in the last few months. Have you seen that? I think you guided originally to growth in that market. Have you seen that at all, or does that pose any risk to that guidance?

No. It doesn't. This is not as significant as it is for others in the industry. It's just not a big component of our composition of sales. So it's not something that we see as a significant weakness for us as we think about the second half.

Okay. Lastly for me on payment merchandising, another really strong quarter there of high single-digit organic growth. I think you said that steps down in the back half. Why do you expect that to decelerate? Is that timing of project activity? Is it seasonality? Just a little bit of color around the back half?

A little bit of everything, Joe in terms of some project wins and timing. Some specific geographic strength in the first half versus expectations in the second half. The team's doing a fantastic job and really had a quite strong first half.

We don't expect that as we move forward. As we have talked about probably do feel strongly that this is a mid-single digit long-term growth rate business, and should come back down to those levels.

And Joe to your point also in fourth quarter we do experience seasonality in the business, so we would expect a natural decline, as well.

Okay. In terms of the profitability of that segment, Rich do you expect second quarter to be the peak for the year? Or some of the productivity actions you're taking there? Do you think this mid-teens margin -- I know longer-term there's upside to where it's at today, but for the back half of the year how should we think about it?

Yes. We feel pretty good about our back half of the year as well. With productivity continuing to read through, the synergies continuing to read through. We feel pretty good about the margin profile as we exit the year, as well.

Okay. Great.

We have some offset with some of the volume degradation, but it's just the core margin performance in that business, and execution, and achievement of synergies. We feel good.

Thanks.

Nathan Jones, Stifel.

Good morning, if we could go back to fluid handling and some of the implied guidance for the second half. 13% to 14% margin, if I pick the midpoint implies you're going from 13% in the first half to 14% in the second half, which is not only an acceleration from first have to second half, but the margin compression is less in year-over-year. Can you talk a little bit about, in the current pricing environment and demand environment, where the improvement in margins is coming in the second half?

Yes. It's coming from a couple different places. Again in the first half, we experienced a little bit more of some unfavorable mix in price and the price is going to continue as we move through the balance of the year, as we stated. It's about -- we are looking this is about an 80 basis point improvement in the second half to get to about that 13.5%. One of the big contributors of our valve services business is actually going to have a stronger second half just given the seasonality in that business and the type of products that we sell. The other side of it is the repositioning benefits that we expect to read through from all the good work that we started at the beginning -- at the end of last year an into the beginning of this year that will read through in the second half. That's probably the biggest component if I was to point to one thing driving that improvement in the second half versus the first half.

So it's repositioning benefits. You talked about not seeing any cancellations yet. Thinking you're kind of at the bottom. Things not getting any worse.

I don't mean to pick on you here, because a lot of companies have been wrong as have I in forecasting these kinds of things. But we've been taking down numbers and expectations for a couple, three quarters now. In the industry generally, not just at Crane in the fluid handling business, where does the confidence come from that things are not going to deteriorate further? And what could go right or wrong to get better than this is the bottom?

Excellent question. I do feel a degree of confidence. How do I best to frame this up?

Again, Nathan, as we look at the projects that we continue to track that we expect to be released. We're taking a very realistic approach to what we've seen over the first two quarters of this year and extrapolating that. Looking at everything from chemical market barometers, to a plan investments by country, to oil rig count bottoming, oil prices okay, they're still hovering below $50 in WTI versus Brent from $55. If you look at the global macroeconomic environment that is going to continue to settle out at this level, and it's a matter of degrees of improvement. Not worsening.

What could change that? Global dislocation, shock, something else unforeseen. But in terms of foreseeable events right now based on all predictors, I think we feel better at this point.

The only thing I would add there is if you look at what we've done in Q1 with respect to fluid handling from a sales perspective, and compare that to what we did in Q2, and just look at the order trajectory Q1 to Q2 coming off of Q4. And look at the trending there's nothing that tells us based on what we're looking at that there's going to be material worsening. It's based on our experience in the last three quarters.

Okay. Thanks very much.

Robert Barry, Susquehanna.

Good morning. This is Fillippo Forlani. I'm on the call for Rob today. First question, I just wanted to clarify the change in EPS guidance of $0.20. Is that all in fluid or what percentage is in fluid? I'd expected the fluid impact is larger than $0.20, since there are some offsets such as a stronger payment?

Yes. The guidance takedown is in fluid handling. That's correct.

Is all in fluid?

All in fluid.

Okay. On fluid on the orders, how they are they tracking in 3Q? And if you can characterize the performance of the various businesses and end markets within fluid?

I'm sorry, can you repeat that question?

Sure. How are the orders tracking in 3Q and how would you characterize the performance within the different end market within fluid?

Were not going to comment on our 3Q to date order profile. We have a policy of not speaking about order trends prematurely.

I think I would just point to the prepared remarks in the comments that Max made a little earlier in terms of the weakness that we're seeing is generally broad-based. It's weakest perhaps in China but Europe is spotty and bouncing along with any bright spot at all being in North America, frankly, at this point.

Middle East being okay. It depends on which end markets are actually talking about within this geographies. Nothing different, I would say, from what Max characterized, and what we characterized in our prepared remarks.

Okay. Thank you. Finally in -- fluid how is the Canada supply business tracking and how was the performance in 2Q?

Canada, performing very well. End markets in Canada and commercial construction starts, which is where we participate, the end markets themselves are down anywhere between 6% and 8% as we read them. And we are winning frankly. Were showing core growth in Canada on a year-to-date basis.

Okay. Great. Thank you.

Ron Epstein, Bank of America.

Hi good morning it's actually Kristine Liwag calling in for Ron this morning. In the past few years it seems like your organic growth has been lagging global GDP growth. Can you talk about your portfolio and what you think has to happen so that growth will begin to exceed global GDP again?

I think we're well-positioned to exceed GDP growth. I think the things that we've done highlighted in our February investor conference and will continue to highlight and geographic expansion, new product innovation, winning on new platforms. I think we feel good. This is been a challenging environment, certainly most recently within the flow of space and think we're seeing the same impacts that everyone else is seeing as well, Kristine.

And as a follow up this quarter, it looks like macroeconomic outlook for emerging markets is getting weaker. And emerging markets is about 19% of fluid handling. Can you provide color on what your base case is for emerging markets? And if we are in a multi year emerging market downturn, how would you expect to offset this in the future?

I think the primary concern that we would have and others would have would be specific to China in particular. I'm not sure we're prepared to recognize all of emerging markets at this point, but China for sure is one that is concerning most of us. And if you look at Crane and its participation in terms of revenues in China, and specific to fluid handling, it's around a $60 million range. It's not an overwhelming significant component within our fluid handling business.

From that perspective we will just continue to monitor end market demand and adjust our cost base accordingly like we always do. As it relates to the rest of Crane, where we participate most heavily in China, it would be in our Crane Payment Innovations Business. In fact, in that business, even in the quarter here, in the second quarter, we've seen growth.

With particular applications in the transportation side of that business. You've got to look at a little bit across each of the verticals that we have. I would also point to our Aerospace and Electronics Business, where you have end-market demand coming from airlines out of China where we're delivering products to Boeing to support that demand.

Depending on how you look at it, again by each of the different businesses that we have, we would respond accordingly. Big picture here is it's about a $60 million exposure in our fluid handling business, and we see growth in China in our CPI business. And feel good about growth in our Aerospace and Electronics Business.

Great. Thank you.

You're welcome.

Ken Herbert, Canaccord.

Hi, good morning. Rich and Max, I wanted to first ask you, you alluded to this earlier. You brought the free cash flow guidance down a little bit. You typically have very good second half, fourth quarter in particular free cash. And really see some, as we go through the year significant improvement in working capital. With the concerns around, obviously fluid, and some of the other segments, do you see any additional risk beside with the guidance change captures in free cash? Or do we see a seasonal trend this year like we've seen in prior years?

Yes. We see it being a consistent seasonal theme as in prior years. Nothing suggests to us through our forecast process and reviews with the teams that we would have any incremental exposure given our guidance for the balance of the year as it relates to free cash flow.

Working capital continues to be something that we look at very hard in Crane, as you know. We're not seeing -- we're very careful on receivables, bad debt, and are very disciplined and have specific actions around that by business. We feel pretty good about the programs we have to make sure we're managing working capital appropriately in response to changes in demand as we move through the balance of the year.

Okay. Is it fair to say a lot of the change -- I know it is a slight change, but the change in cash for the year is largely related to the Fluid Handling change?

Yes.

Okay. That's helpful. I know you focus, obviously, very closely on working capital, and usually you have great performance as we go through the year, so good to hear that. If I could Max, you alluded early in the call to some of the wins relative to what you talked about in Aerospace early in the year, to where you are in capturing those. Can you provide any more detail on programs and where those wins are coming from? Would you say that is tracking to plan, or are you doing a little better than you perhaps expected 3 to 6 months ago?

We can't disclose yet, Ken. We look forward to adding a lot of color at our next February investor day, as well. I would say that it's tracking to expectations, to slightly to the upside, as well as the projects that we are -- still have in pursuit. It remains exciting.

Okay. That's helpful. And then if I could just finally great quarter again. It's been talked about on payment and merchandising. It looks like nice incremental margins in the mid-30%s. I know you have talked about a little bit of a slowdown there in the second half of the year is terms of the growth. Is it fair to think of this business, even in a mid-single l digit growth as an above 30% sort of incremental margin business?

Is that to aggressive? Not just for the second half of this year but moving forward? You've taken a lot of cost out of this business. Is that the right way to think about this business? Or is it maybe smaller number?

Are you referring to this whole segment, right? Potentially, I think that's probably a good number. What was the number, 30% you said?

Yes, about 35% in the quarter, but I know, obviously, you had so maybe one-time benefits in the quarter.

No, we didn't have any one-time benefits in this quarter. I think you have to keep in mind the vending business has a slightly lower, or a lower leverage rate on sales. It will be higher in payments. That probably sounds about right. As we look at it. Even at a 3% level in terms of core growth. If that was your data point there.

Yes. Exactly. Great. Thank you very much.

Brian Konigsberg, Vertical Research.

Thanks for taking my final question. Another question on the comment on cancellations. We've heard that from almost everybody in this space that a lot of delays, not many cancellations. Historically, when you look back to the 2008 period and the periods before that where you had declines in oil, have you seen significant delays in projects? Or is traditionally the trends within the market more about delays? And does revenue continue to get pushed to the right and eventually comes back. But certainly that could take a while to come back into the system. Can you make some comment on that, and what you've seen historically, and how it compares to what you're seeing today?

That's a good question, to be honest with you, I do not have a reference point. That's a good challenge to go back and take a look at. I don't know how to respond on an historical basis.

And correlate to what we have today

Okay. I will follow up with you on that. Thanks.

Would you? That would be great.

Yes.

This concludes today Q&A session. I would now like to turn the call over to Mr. Mitchell for any closing remarks

Super. Thank you operator. As Rich and I discussed, our fluid handling end markets are challenging. However, we're pleased with our execution both in Fluid Handling and across our other segments. We remain focused what we can control and we will take all necessary cost actions while continuing to invest for long-term growth.

Thank you all for your time this morning and your interest in Crane. I look to forward to speaking with you next quarter.

Ladies and gentlemen thank you for attending today's conference. This does conclude today's program. You may now disconnect. Everyone had a wonderful day.