Crane Co (CR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Crane Co.'s fourth-quarter 2015 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

I would now like to turn the conference over to Jason Feldman, Director of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Welcome to our fourth-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 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 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.

I would also like to invite you to attend our annual Investor Day event on the morning of February 24th. Please contact me directly if you'd like to reserve a place in the conference.

Now let me turn the call over to Max.

Thank you, Jason. As outlined in our press release last night, excluding special items, I'm pleased to report that, in this challenging environment, Crane's fourth-quarter EPS was $1.12, down 1% compared to the fourth-quarter of 2014 and in line with the revised guidance we provided last quarter.

Sales of $681 million decreased 7%, driven primarily by 3% of unfavorable foreign exchange and the 3% core sales decline. Operating margins, excluding special items, improved 60 basis points from last year to 15.3%. On a full-year basis, 2015 EPS, excluding special items, was $4.13, a 7% decline compared to 2014. Total sales declined 6% to $2.7 billion, driven primarily by a 5% unfavorable foreign exchange impact, a modest 1% core sales decline, and a small divestiture impact.

Operating margins, excluding special items, declined 30 basis points to 14.3%. Our fourth-quarter results were generally as we expected when we provided updated guidance last quarter. As discussed in previous calls, throughout 2015, the year proved to be far more challenging than we originally anticipated.

At the beginning of 2015, we expected headwinds from a stronger US dollar, along with weaker fluid handling markets that were feeling the impact from declining oil and gas prices. As the year progressed, foreign exchange became more unfavorable, oil and gas prices fell further, and we saw additional regional weakness, particularly in China.

Neither we nor our peers anticipated that these factors would worsen to such degree. And clearly, since the start of this year, the financial markets and commodity prices have signaled continued concern over global growth prospects, the supply and demand and balances in the oil and gas markets, and the long-term direction on pricing and capital investments.

At Fluid Handling, we expect another difficult year in 2016. On our July earnings call, we commented that Fluid Handling end market conditions weren't worsening. Last quarter, we said that we were a little more cautious. Over the last few months, conditions have worsened in our chemical and oil and gas-related markets. And we saw a decline in order rates towards the very end of the fourth quarter, particularly in the US chemical and oil and gas markets.

At this point in time, it's unclear how much that drop-off was related to year-end capital spending delays to maximize cash flow and how much was related to deteriorating commodity prices and economic conditions. Given these factors, we see increased uncertainty in 2016 compared to our view last quarter, and our internal plans and 2016 guidance fully reflect our concerns. We now expect core Fluid Handling sales down in the mid-single-digit range in 2016. Our repositioning savings will help mitigate margin pressure from lower volumes and potential customer pricing pressure.

We believe that we are appropriately positioned and prepared for a 2016, consistent with our current, more cautious outlook. And we do remain optimistic about the long-term prospects for this business, given secular trends supporting future investment, particularly in the United States chemical and global power markets.

Despite current market headwinds, three of our four segments performed extremely well in 2015. And we believe that Fluid Handling's results were consistent with the reality of last year's market conditions. While most of investor attention has been focused on the process end markets over the last several quarters, I do think it's important to reflect on some of our numerous accomplishments last year in Fluid Handling as well as our other businesses before I turn to 2016 guidance.

First, we managed the total Crane cost base very carefully. Despite a 6% decline in full-year sales, we held our adjusted fee leverage rate to 19%, reflecting the benefits of our repositioning and synergy savings along with our ongoing focus on productivity. We believe that we have appropriately balanced cost measures with growth investments, and our portfolio is appropriately positioned for the future.

At Fluid Handling, we continue to introduce new products across the segment. In 2015, we expanded our addressable market by $500 million with a new line of low pressure gate, globe, and check valves. And the SH32 frame pump for wastewater applications increases our served market for municipal pumps by approximately one-third.

The Fluid Handling segment also made further improvements to its cost structure with three rounds of repositioning actions over the last 18 months. While many of you are familiar with these recent repositioning actions, we have worked diligently to improve the cost structure of this business for more than a decade. Over that time, margins expanded from approximately 6% in 2004 to 15% in 2013 and 2014. We remain committed to our long-term margin target of 14% to 19%.

At Payment and Merchandising Technologies, we had a very successful year. Full-year core growth was 6% with a 240 basis point improvement in adjusted operating margins to 15.4%. We are on track to realize $33 million of MEI-related synergy savings by the end of 2016, and we remain optimistic about the prospects for growth of both sales and margins in this segment.

These businesses each have an extensive new product development roadmap, and they are pursuing new opportunities across numerous end markets around the world. Importantly, we saw strength in both of this segment's businesses in 2015. Payment and Merchandising each had core sales growth in the mid-single-digits.

Further, after many years of hard work on both productivity and growth initiatives, the Merchandising business hit its long-standing double-digit operating margin target. Merchandising's vision of Internet-enabled and fully-connected machines with digital media and advertising capabilities, and associated data analytics to improve the profitability of our customers, is a reality. Both our Payment and Merchandising businesses are well-positioned for another year of mid-single-digit core growth in 2016, along with further margin expansion.

At Aerospace & Electronics, full-year sales growth fell modestly below our expectations. We, along with much of the aerospace industry, saw a settling into a new normal range of aftermarket demand as airlines continued to improve their supply chain efficiency. However, operating performance was strong, and we delivered 21% full-year adjusted operating margins despite the commercial aftermarket's shortfall -- approximately in line with our original guidance.

This business is now ramping up for 2016 delivery of the large Space Fence contract I discussed last quarter, while actively working on numerous engineering projects in support of the new platforms our customers will be launching over the next few years. Aerospace & Electronics has a busy year ahead and it is well-positioned for years of mid-single-digit growth. We expect a consistent margin profile in 2016, with pressure from incremental investment spending ahead of the new narrowbody platform launches, as well as from unfavorable mix related to the Space Fence contract.

Engineered Materials sales increased slightly in 2015 and margins expanded 450 basis points to 19% last year. While lower resin prices did help, this business remained disciplined on pricing and generated substantial savings from productivity initiatives. Margins are likely to moderate somewhat in 2016, and we expect demand to remain consistent with last year's levels.

Now, turning to our guidance for 2016. We expect EPS in a range of $3.85 to $4.15. While the midpoint of guidance does reflect a 3% EPS decline, we expect free cash flow flat to up 16% compared to 2015. The primary driver of the higher cash flow is substantially lower payments related to repositioning and acquisition integration. Excluding asbestos, the midpoint of our guidance range reflects 100% free cash conversion. Including net asbestos payments, conversion is forecast at approximately 86%.

Our EPS guidance range is wider than we typically provide, reflecting volatility and uncertainty in today's Fluid Handling end markets, which has been heightened over the last few weeks. Guidance assumes core sales growth of negative 1.5% to positive 1.5%, with an approximate 2% impact from unfavorable foreign exchange. As I commented earlier, we expect a mid-single-digit core sales decline at Fluid Handling; mid-single digit core sales growth at Payment and Merchandising, and Aerospace & Electronics; and approximately flat core sales at Engineered Materials.

We will provide additional details of guidance at our February 24th Annual Investor Conference. And let me now turn it over to Rich Maue, who will take you through the businesses and provide some additional financial information.

Thank you, Max. I'll turn now to segment comments, which compare the fourth quarter of 2015 to 2014, 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 2016 outlook.

In the fourth quarter, Fluid Handling sales of $259 million declined 17%, reflecting a core sales decline of 12% and a 6% impact from unfavorable foreign exchange. Fluid Handling operating profit declined 36% to $30 million. Operating margins were 11.6%, down 340 basis points compared to last year, reflecting lower volumes and, to a lesser extent, competitive pricing.

Fluid Handling backlog was $267 million at the end of December compared to $311 million at the end of 2014. After adjusting for foreign exchange, the backlog declined 9% compared to the prior year and declined 3% sequentially.

Moving now to Payment and Merchandising Technologies, sales of $174 million decreased 2% versus the prior year. Core sales improved 4% but were more than offset by unfavorable foreign exchange currency translation of 3% and a modest divestiture impact. Segment operating profit of $30 million increased 22% from last year, with operating margins up 340 basis points to 17.1%.

The margin improvement was driven by MEI integration synergies, along with higher volumes and productivity benefits, at both the Payment and Merchandising businesses. MEI synergy realization in 2015 was modestly ahead of our targets. And the $9 million of incremental synergies we expect in 2016 will bring cumulative synergies to our $33 million target.

Aerospace & Electronics sales increased 5% to $191 million. Segment operating margins improved to 23.5%, up 120 basis points from last year. The margin improvement reflects higher volumes, more favorable product mix and productivity, partially offset by higher engineering spending. Total aftermarket sales increased 12%, driven primarily by stronger military aftermarket sales. OE sales increased approximately 2%.

The OE aftermarket mix was 71% to 29% compared to 73% to 27% last quarter and in the fourth quarter of last year. Revenue from the Space Fence contract was limited in the quarter with shipments expected to increase in 2016. Aerospace & Electronics backlog was $436 million at the end of 2015 compared to $422 million at the end of 2014.

Engineered Materials sales declined 1% to $56 million. Operating margins, however, improved 420 basis points to 16.8%, driven by productivity and lower material input costs.

Turning now to more detail on our total company results and guidance. The total EPS impact of unfavorable foreign exchange in the quarter was approximately $0.04 compared to last year. Our fourth-quarter tax rate was 30.5% on a GAAP basis compared to 32.5% in the fourth quarter of 2014. Excluding the impact of special items, our fourth-quarter tax rate was 30.6%, which compares to 30.7% in the fourth quarter of 2014.

In the quarter, free cash flow was $102 million, and we ended the quarter with $364 million in cash compared to $346 million at the end of 2014. Total debt at the end of December was $799 million compared to $850 million at December 31, 2014.

As Max mentioned, we are introducing 2016 EPS guidance of $3.85 to $4.15, approximately flat to down 7% compared to 2015 adjusted EPS. Our guidance assumes total 2016 sales of approximately $2.7 billion, down 2% compared to 2015. This sales outlook includes an approximately 2% negative impact from foreign exchange and core growth down 1.5% to up 1.5%.

Operating margins are forecast to be approximately flat compared to adjusted operating margins in 2015. We expect $27 million in repositioning benefits and MEI-related synergy savings. Share count, corporate expense and a modestly higher tax rate are combined to reduce earnings year-over-year by more than $0.10 per share.

We do not give quarterly earnings guidance, but please note that we expect the first quarter to contribute a smaller percentage of full-year earnings than it did in 2015. Again, a smaller percentage of full-year earnings in the first quarter than you saw last year. However, the first half overall should contribute a comparable portion of full-year earnings to what we delivered last year.

Let me turn it back over to Max.

Thank you, Rich. I look forward to seeing many of you on February 24th at our annual outlook meeting where we will review current market conditions in further detail, provide additional details of our guidance, and discuss our plans for the future.

Last year was challenging, but our overall strategy is unchanged. We have a diverse portfolio of great businesses paired with a solid balance sheet and a world-class business system. We will continue to be disciplined in everything we do -- deploying capital, managing costs, and investing for the future. In Crane's 160-year history, we've been through tough times before, and we are confident in how we are positioned for the eventual process industry market recovery, and to capitalize on today's growth opportunities in our other three segments.

At Fluid Handling, the 2015 revenue decline was entirely market-driven. We continue to win with new products, with new customer-facing initiatives, and with a daily focus on execution. We are determined to take advantage of the current environment. We will continue to invest prudently and attack gaps we see that some of our competitors have created.

At Payment and Merchandising, we have both growth and margin opportunities. Payment growth has been solid, and we see further opportunities, particularly in Financial Services and Transportation. Our product pipeline is robust, and we have the scale and technology to continue to outgrow the market.

At Merchandising, our strategy is working. We have brought to market numerous new technologies that help our customers' profitability, including fully Internet-enabled and connected machines, route management, efficiency software, media, advertising capabilities that drive consumer engagement, combined with our cash and cashless payment solutions -- a truly digitally-connected and enabled solution.

Aerospace & Electronics has secured substantial incremental content on all of the high-volume new narrowbody platforms. And this team continues to identify and pursue significant incremental opportunities. Our technology and application expertise are well-known and respected by our customers, and we expect years of solid growth ahead.

We will discuss all these topics in more detail next month. And this marks the end of our prepared comments. Operator, we are now ready to take questions.

(Operator Instructions) Brian Konigsberg, Vertical Research Partners.

Maybe this is more directed to Rich. Just pressing on guidance for a little bit. So the EPS range down -- what, like $0.13 -- $0.12, $0.13 year-over-year. But when I look at the revenue guidance, just making rough estimates, that should be about a $0.10 headwind; corporate, maybe another $0.05. But the restructuring you are talking about should add about $0.30.

I know you've kind of mentioned some additional engineering spend and possibly some mix. Can you just help kind of fill in the bridge that gets you down to the midpoint of the range?

Yes, sure, Brian. Thanks. So if I started with the beginning of your questions, we are expecting to see about $0.29 to read-through from the repositioning benefits and the synergy savings from MEI. Okay?

Now if I -- I'll provide some breakdown of that number for you too. So as you are thinking about segment guidance or your own modeling, hopefully will help. Of that $0.29, from a dollar perspective, we are going to get $12 million in OP from those repositioning within our Fluid Handling business; about $9 million in our CPI business -- so that's the synergies that we expect to continue to read-through from the integration of MEI; and then about a $5 million OP benefit in our Electronics business. And again, that's just executing on the initiatives that we started over the last 18 months or so.

So that -- that's that -- the numbers that actually roll up to that $0.29 of EPS benefit. I mentioned that we have a foreign exchange headwind year-over-year as well, which is about $0.10. So, pulling away from that $0.29, you would reduce that by about $0.10. And then from a corporate point of view were the nonoperational items -- I mentioned share count, tax rate, and corporate expense being at about, call it, $0.11 -- $0.11, $0.11 to $0.12 of additional headwind for us as we look to next year.

So, that's pretty much an equal combination, frankly, between an increase in corporate costs, which, really, it's a number of small items in there, but one of the bigger components is that incentive comp was substantially lower than normal in 2015, given our performance relative to guidance last year. So, that's an important component.

I would point out, however, in our corporate costs in total, we are running a little less than 2% as a percentage of sales. So, hopefully, not a concern. It's probably close to best practice, but it is a headwind for us nonetheless next year.

The other elements within those nonoperational items, as I mentioned, would be an increased tax rate. We see that being almost a full percentage point higher next year. And really, that's a reflection of the distribution of our earnings and where we are making those earnings across the globe. You know, with a lot of fluid handling presence overseas where we enjoy a lower tax rate, and unfortunately still have a higher tax rate here domestically in the states where we are generating a lot of our benefits next year, it gives us an arbitrage that unfortunately creates a headwind on the tax rate.

So -- and then, as I mentioned, share repurchase or shares outstanding being a bit higher and causing, again, a headwind. So I would say equally among those three being a headwind. And if I could just take a minute on -- as it relates to share repurchase and to perhaps head off the question. We did repurchase $75 million worth of shares over the last five quarters.

We think our total payout ratio is appropriate at given levels. And we do not believe that we are underleveraged in any way, as I think you guys all know. In fact, we are currently at the higher end of our range. And just to provide a little bit more context in terms of our capital deployment and how I think about it, and how Max thinks about it, in driving that increased shareholder value through the deployment of our capital.

First, we continue to win with our internal investments. Max mentioned already in his prepared remarks the success that we are having in particular in our Aerospace business, our Payment business, even in our Engineered Materials business, as well as in Fluid Handling, notwithstanding the end markets. Our margin profile in these businesses are better than they ever have been, outside of Fluid Handling, because of a lot of these internal investments that we are making.

The next priority is going to be growth through M&A, as we think about capital allocation. But we are going to be very disciplined in this environment. Without question, we're not going to overpay. Hopefully, with some dislocation that we are expecting to see in the flow markets that we potentially would see some opportunities. But again, we're not going to overpay.

And then getting back to the share repurchase, we believe in competitive returns to shareholders. And I think you know this -- 40% to 50% is our total targeted payout. And that means to us that growing dividends in line with the earnings and buying back shares opportunistically. So, this is something that's front-and-center for us and, of course, balancing all that against our constraints with respect to maintaining our investment grade rating.

Sorry for going on a little long on that, but it's important, I think, to convey that message as I outlined one of the headwinds being a higher number of outstanding shares. So those were two components, Brian. I apologize for going a little long here, but two important components -- corporate about $0.11; foreign exchange, $0.10. And that leaves me with about another $0.20 to get to that $4.00 midpoint.

Now if I peel that back a little bit, $0.15 of that is coming really from three different components -- about $5 million in headwind on price in our Fluid Handling segment. Now if you recall about halfway through the year last year, we started to talk about 150 basis point to 200 basis point pressure from a pricing perspective starting halfway through the year.

We don't see that incrementally getting worse, but on a year-over-year benefit -- on a year-over-year basis, we're going to see the full-year read-through. And that's about a $5 million impact. In addition, in Engineered Materials, we've been successful all year long in driving margins. And we have a sensitivity in our estimate here that suggests about another $4 million to $5 million of pressure associated with the challenges that we see in retaining the benefits of a lower raw material input costs.

And then finally, on that [$0.15], there is unfavorable mix, as Max mentioned in his prepared remarks, relative to the Space Fence program. That's going to drive about another $5 million headwind. So, that's that [$0.15].

And the last component is about -- call it $4 million to $5 million of incremental headwinds in engineering expense in our aerospace business. And this is -- we talked about these welcome investments. These are all in support of our narrowbody platforms that are going to launch in 2017. So we are excited about them. And they are investments we need to make to make sure we get the right products to our customers to ensure successful launches of those programs. So, hopefully that paints the picture for you in terms of moving down to that $4.00 midpoint.

So, Brian, we would normally save this for February Investor Day, but thank you for asking that question, because we want to make sure everyone is comfortable with the guidance that we have given. And I appreciate Rich going through that answer.

Yes, that was very thorough. Thanks, Rich.

You're welcome.

And if I could just follow with another hopefully quick one, just on Fluid Handling. So you're guiding down mid-single-digits. You ended with backlog down, I think, 8% to 9% on a constant currency basis. I presume -- you said orders weaken by the end of Q4 -- I presume, with the oil taking another leg-down post-quarter, that couldn't have gotten much better. So, why would mid-single-digits actually be a reasonable target?

Yes. So, we -- Brian, it's Max. We looked at the run rate at the fourth quarter. We looked at some of the trends that, where we finished up the year-end, and then I think it's further substantiated as we opened the year also. We're not assuming any improvement in 2016. I mean, our guidance right now is saying it's going to stay at this level through 2016.

We're not anticipating any second-half recovery. We believe this is going to be extended and prolonged into 2017. We feel that we've been appropriate and prudent in making this assumption. But that's really it in a nutshell, in terms of how we closed the year and the assumptions we made.

Got it. Thank you very much.

You're welcome.

Matt McConnell, RBC Capital.

Just to follow-up on your comment about the first quarter being a lower percent of earnings than last year, I think last year was actually below the normal seasonal average for 1Q. So any other insight into why that would be lower and then ramp up through the year? I know, Max, you just said you are not expecting fluid markets to improve through the year. Is it restructuring savings or something else?

You got it, Rich?

Yes. So, hey, Matt, I'll take that. So there's two primary factors that contribute to our year-over-year comparisons being a bit weaker. And it's -- it really relates to our Payment business as well as our Nuclear Services business.

So we tend to have this seasonality -- I'll start with the latter -- with our Nuclear Services business, where we have outages happening in the spring, which really contributes to that second-quarter ramp and -- as well as the fall. And then in CPI, it's lumpiness of certain projects.

I'd point to, again, that we had mid-single -- strong mid-single-digit growth in 2015. And we are expecting that to actually be consistent, as you've heard from the prepared remarks, next year. So, it just has to do with lumpiness, frankly, in the CPI business and the Nuclear Services business. A couple of other moving parts, but those would be the two big ones.

Okay, great, thanks. And just switching gears a little bit, you made a comment about M&A. And is there a pipeline? I was unclear what the message was. I know you are willing to be opportunistic and emphatic about not going to overpay. But is there a pipeline of deals that you are tracking right now? Or is that not a big priority?

Oh, it's definitely a priority and there is a pipeline. There's nothing that's close or imminent. We are chasing a lot of opportunities, having a lot of discussions.

Okay. Okay, great. Is that specific to fluid?

Yes, I would say -- just to add to that a little bit, Matt, I mean, I specifically wanted to address that upfront. M&A being a number one priority for us outside of our internal investments is important. We see that as being -- that opportunity to deploy capital to make sure that we are growing and contributing to earnings.

Okay, great, thanks. And just -- I wonder if you could give a quick update on asbestos. Your payments were down quite a bit this year versus last year and versus the five-year average. So, is there anything meaningful you are seeing there in trends for new claims or settlements? Or anything else of note that you'd like to share on asbestos?

I'll touch on this again on the February Investor Day too. I think it's just messaging is the same, Matt. We are pleased with our continued fight here. We made a safe product. This is about the last solvent bystander and we get pegged with claims. There was a recent article in a publication called Mealeys that highlighted the Garlock data that showed, after a typical case where swearing the only exposure was to Crane product, after resolving in some way that 80% of cases today on average go to 18 trusts, and then claim to those trusts that they had exposure elsewhere.

This is borderline -- well, at a minimum, it's robbing the future claimants from the trust assets, which is why the Fact Act is so important for legislators to realize and appreciate. We continue to educate, we continue to highlight, and we continue to fight.

Our total cost, net of insurance and tax, is down 20%. And I'm very pleased with that. It's not a prediction of future progress. There is still risk and unknown, but we continue to fight. And we will outgrow asbestos, which is a strategy that we've had over the last decade. And I think we clearly have credibility and success in driving free cash flow that will outgrow this while we continue to fight the abuse of system today.

Okay, great. Thank you very much.

Thanks, Matt.

Chase Jacobson, William Blair.

I think you answered most of the questions in Brian's question, but some details here. Within oil and gas -- or, I'm sorry, actually within the Fluid Handling segment in general, can you give some color on what you are seeing on the aftermarket side of that business, just in terms of demand and pricing?

I would say, from a pricing point of view, we're not seeing really a lot of incremental pressure at all. I would comment that from a -- just pricing overall, it's similar. Even on project work, there is this -- it's sort of the similar trend that we saw coming out of the second-half of the year.

So nothing overly incremental in that regard. And we don't expect any -- we're not planning for any incremental headwinds beyond what we saw, again, coming out of 2015 into 2016.

Okay. And on the demand side, is there anything that stands out as better or worse than the aftermarket business?

No, I wouldn't say so. I would say it's status quo in terms of what we've been seeing. I don't think it's any better or any worse at this point relative to the total sales within the space.

Okay. And in the Aerospace & Electronics business, last quarter, and I think maybe even before that, you were talking about the higher engineering expense that was going to be flowing through in 2016. But you talked about maybe maintaining -- you should be able to maintain the margin there.

The comments in the press release today, I don't know if it was more cautious on that. Do you think you could still sustain that low 20s margin in the Aerospace business? Or are we going to see some incremental pressure there with some of the aftermarket headwinds that you are seeing?

I mean, at this point, we see -- I think in the prepared remarks anyway -- sustained margin levels next year. And certainly, we'd love to see that go up and it definitely will in the not-too-distant future. But it's being hampered in the current year for 2016 with respect to the investments that you mentioned. And I think they are not -- these are real important for us in order to execute for those 2017 platforms.

But the other element within the space that holds our margins down a bit is a bit of an unfavorable mix that we see with executing on the larger Space Fence program. So, we typically enjoy leverage at much greater rates. And the read-through on that is going to be less. It's a great program and an endorsement of our technology, but it does have a little bit of a negative impact from a mix point of view next year on our results. So that's really what's driving our margin profile, to be generally consistent with 2015.

Perfect. Thank you very much.

You're welcome.

Ken Herbert, Canaccord.

Rich, I just wanted to follow-up on that. Is the step-up in CapEx in the 2016 guidance largely related to the incremental investments in Aerospace & Electronics? Or is there maybe something else in another segment?

No, you hit it right on the head. That's exactly what it is. It's in support of investments we're making that tie directly to much of the wins that we've had in the Fluids space within Aerospace. Right? Meaning the pumps business that we have for the hotter fuel requirements.

We want significant content on the fuel flow transmitters that require, for the first time in for quite a long time, a greenfield expansion in our Lynwood, Seattle facility, and required for the volume ramp-up as well as new testing requirements. So it's driven by program wins and nice return on that investment.

Yes. No, that's encouraging. I know you had some great wins there. If I look then at the free cash flow guidance in general, I'm guessing, is there anything you could particularly point to in working capital where maybe you see some opportunities? Or I know it looked like it was flat on a dollar basis with -- from 2014 to 2015, with obviously some of the pressure on the sales side. But anything you'd particularly point to where you expect improvement in working capital?

As I think about it, it's going to be largely -- I might've mentioned this even in the last call -- it's continued emphasis around making sure that we are driving inventory reductions. And if you look at our DPOs and DSOs, we feel real good about them. Some challenges with respect to certain customer contracts in that regard, but we are working our way through it.

We feel pretty confident about the guidance that we have here as we look into 2016 -- the absence of some of these repositioning payments that we otherwise would have had; a slightly lower pension contribution requirement also helping; and a variety of other little things. But it's -- we feel good about the working capital that we have in the plan. There is an improvement that's baked into our plan to drive that incremental free cash flow. And we feel pretty confident that the plans are in place to make sure that we achieve it.

Okay, thank you. And then just if I could, on Fluid Handling, just if you think sort of step-back big picture, I mean, if you look back over the last several years, it's unusual to see the backlog in this business down for more than sort of three or four quarters sequentially. And I know you've got very, very limited visibility and there's a lot of unique aspects to this cycle now.

But are you at all closer, you think, to calling maybe a bottom in the business? Or do you feel like -- because I know this has been an issue for several quarters -- or do you feel like the visibility is uncertain today as it's been through much of 2015? I guess I'm just trying to get a sense -- I know obviously you've been through this business or several cycles in this business. Is anything maybe changing incrementally for the positive on your visibility here or still as uncertain as it's been?

You know, too early to call a bottom. Uncertainty -- look, I've looked at every report I can get my hands on. I'm seeing the same information you are seeing. I could get estimates that range from recovery in second-half to oil that should be an average of $40 versus -- today versus the major oil producers' estimates at $50 and will it drop to $40? There is just significant uncertainty.

I don't think anybody is going to quite call this right. And I think we've been prudent in looking at the run rates at how we exited the year and planned accordingly, and we're going to manage the business to that. We don't anticipate recovery in 2016. You know, we are flying and it's a turbulent volatile time. We have limited visibility. But you've got a solid vehicle that we are driving. You've got a great crew, and I think the message is we're going to get our shareholders safely to the destination.

No, I appreciate that. And you've clearly been managing this just very well. At the risk of getting too far ahead of ourselves, do you get a sense that, from your customers, that the deferred spend might be getting a little excessive, in terms of when things do start to turn, you could see maybe a little more acceleration on the growth than maybe you might otherwise expect? Or is it even too premature to have that discussion?

I think like all cyclical upturns, I think it's going to be unexpected and unpredicted, and it's going to be stronger than anticipated when it does come. That's my own personal feeling. I don't know when that's going to be. But I think there will be over -- there's going to be a continued adjustment in supply that probably will overreact and we will be positioned to benefit.

Great. Thanks a lot, Max.

Okay, Ken.

Joe Radigan, KeyBanc.

Max, you mentioned the historical trajectory of the Fluid Handling segment margins. Where do you expect margin to bottom this cycle? I mean, could it get back to single digits? Or is -- incremental repositioning?

No.

-- the incremental repositioning? Okay.

2016 will be the bottom.

Okay. And then, in terms of -- you are continuing to see the project delays -- in terms of the run rate business, the maintenance activity, what are you hearing about turnaround schedules for 2016? How did that -- did you continue to see those get pushed out in the fourth quarter? And then what are you hearing about for this year?

We are hearing continued mix, some signals. I think everyone is running as efficiently as possible, pushing everything they can. So turnarounds are happening on a more selective basis. There is maintenance that needs to occur that's happening unexpectedly that we see, but I think it's still being managed very tightly.

And I think as we open the year with the market reactions with oil price that we are all watching, I think it's just -- again, it's another indicator where everybody is going to tighten CapEx and be very, very cautious on spend across the industry.

Okay. And then on Aerospace -- Aerospace and Defense, aside from the Space Fence program, what are you seeing in terms of global defense spending? There seems to be improving sentiment in that space at least, following the budget deal in the US and just the funding environment elsewhere.

Yes, I think, overall, just on the military side, we -- I think, just to point to some of the positions we have on certain programs, we have good positions on the F-35 as well as the A400M; numerous upgrade opportunities with content on the legacy aircraft. Part of the reason for the increase in the aftermarket in this particular quarter was the B-52. So, content on the B-52, the F-15, F-16, the F-18.

So we've got nice content in that area. But overall, I would say that we see the military end markets basically being stable to slightly up.

Okay, great. Thank you, guys.

You're welcome.

Ryan Cassil, Seaport Global Securities.

Just going back to the question about backlog down 9% and the expectation that you'll be down mid-single-digits, I was taking it that maybe the short cycle MRO type work was going to be expected to pick up and sort of bridge the gap. But am I off-base there? Could you still help me kind of bridge that?

So, we expect no real difference in MRO versus project mix. You know, in terms of perhaps adding a little bit more color with respect to where we are seeing as we are ending the quarter, and you look at our process valve business -- which is really the subject of, I think, all the discussion here -- and you look at our order rates on a year-over-year basis, as we look through the full year of 2015, they deteriorated at a lesser rate as we went through the year, including in the fourth quarter.

So, while I think too early to call bottom, as we pointed out, we feel like we are close, I would say. Now, the nature of the range that we have is to accommodate missing on that assumption at our midpoint. So I think when we look at order rates and we look at what's in our current backlog, we feel good -- again, getting back to the run rate -- that the sales profile that we put forth here for Fluid Handling is the right one.

Okay. Okay, thanks. And maybe just given the kind of global macro environment here, could you give some color on maybe the differences in trends in the emerging markets versus North America in that fluid side as well? Thanks.

Sure. So just -- I'll just start with the overall Fluid Handling end markets. And really not a whole heck of a lot I would say to start off that's changed. We did talk about some deterioration of the fourth quarter with December a bit weaker than expected. We do still see customers continue to defer capital spending, delay projects, lower commodity costs perhaps having an impact. Also, customers delaying shipments and acceptance of orders.

So we are still seeing that kind of a -- an element with respect to the demand in the business. Isolated project cancellations largely confined to the power sector in China, I would say. But the greatest deterioration that we saw here was in the chemical markets and specifically in the United States. This is -- and I'm speaking really specifically to the trend that we saw in the fourth quarter.

But the rates of decline in most other regions have been more stable. Chemical markets in China okay, although off a very depressed base. I think we've been talking about China being a very difficult end market all year. So, stable off of a very depressed base. And I would say it's too early to call bottom with respect to China as well.

Power markets in Europe, weak. Power in China, weak. Good activity in the United States relative to power with coal to gas conversion projects. And while also still early, we are seeing some progress in China with respect to nuclear opportunities, although not a very significant aspect of what we do but meaningful. And then from a refining perspective, I would say just soft across all geographies and order rates being stable in that area.

In terms of -- right, in terms of the broader global and across the risk business too, I mean, there are opportunities. So it's mixed. And in the emerging markets, we do see pockets of strength for our financial -- our Payment Innovations business; Merchandising, Aerospace clearly as well. So it's -- it continues to be difficult in the Fluid Handling end markets, but generally okay in the rest of the world across our other markets.

Okay, great color. Thanks, guys.

Thank you.

Ron Epstein, Bank of America Merrill Lynch.

So, Max, big -- just a big, big, big picture question for you. And when you think about the business, granted, there is the cyclical stuff and it's real hard to forecast when we'd see a turn in that, but are there other ways to drive growth into the business? Right? Maybe when you guys sit back and you sit around the table and think what you can do with the Company, what else can you do besides just waiting for the cycle to turn?

You always like to ask the big picture question, Ron.

Yes. Well, I've got you on the call. I'd rather ask you that than what the interest rate is going to be for the quarter. It's kind of a waste of your time.

And I remember you asked me this not too long ago and I think the answer is similar, is -- look, we continue to explore all options. We put a hat on that says within the businesses that we have, the portfolio we have, the capital constraints that we have, the opportunities that we have, what can we do? We're chasing quite a bit I can't talk about.

But we continue. We have been -- I think our Board is absolutely aligned with exploring all options to continue to drive shareholder value. And we are doing that. Rich mentioned clearly, from an acquisition and M&A standpoint, that continues to be top-of-mind and a top priority.

I don't have a whole lot more to add other than that, Ron. We love our businesses. We like the diversity in the portfolio that we have. We continue to explore into adjacencies as well, not just those that strengthen our core business, and look to accelerate profitable growth.

Well, so maybe -- how can I ask this that you don't -- not that you would, but I'm going to try to ask something that you could actually answer. Is there any way you could put sort of a maybe a broad framework around adjacencies when we think about that?

You know what? We're going to do a little bit of that at the February Investor Conference, if you'll hold that. I look forward to giving you a little more insight. Yes.

All right. Because that would be helpful just to kind of -- when we think about how you guys are thinking about it, if we'd just get a framework about what is an adjacency for Crane. Because you guys have such a broad set of businesses anyway, right?

Yes. No, we are planning on doing some of that in February at the Investor Conference. It'd be great.

Okay, cool. Thanks.

Thanks, Ron.

Jim Foung, Gabelli & Co.

Maybe I could ask a smaller picture question here. Maybe could you just talk a little bit about the M&A and what areas you are looking for -- where do you want to grow? And I know this -- with the values being down there, probably plenty of opportunities for you. Could you just talk a little bit about your areas of interest?

Yes, Fluid Handling first, Jim. Our businesses within our core and then we'll talk more about some of the adjacencies we are looking at on the February Investor Day. There's still a bit of a disconnect, even in the market dislocation, some disconnect between sellers and expectations and what we think is a fair deal. I think that's going to continue to shake out here in the months and quarters ahead, and provide some great opportunities.

Payment Innovations had some opportunities as well that we are looking at, and clearly, in Aerospace. And those valuations are difficult, but we clearly have a number of opportunities that we are chasing. Those are the key priorities, areas of focus.

Okay. And then maybe you could just kind of -- maybe you could just talk a little bit about the aftermarket demand in the commercial aerospace? Could you just kind of dig a little deeper in terms of what the new norm is and when your airlines are being more careful in the aftermarket marketing industry?

Sure, Jimmy. So, us and many of our peers, frankly, we've been seeing softer commercial aftermarket over the last few quarters than I think all of us expected and what we would have really expected, given the level of flight activity, frankly. Right? You would have expected that with flight activity and et cetera being at real high levels, that aftermarket would pick up.

So I think there's a lot of factors that involved. And -- but I think the takeaway would be that airlines are clearly focused on improving their supply chain and their supply chain efficiency. And they are managing spares more effectively than they have historically. So we see it really settling into a bit of a new norm. And as we think about 2016, I would say we will provide more color again Investor Day, but I wouldn't -- we don't expect any real significant changes one way or the other as we've exited here 2015.

And what do you think the growth rate is in the after -- commercial aftermarket when you are looking 2016, 2017? I mean it used to be 4% to 5%. Do you think it now is a notch down?

It's probably safer to say that, but we would like to honestly provide a little bit more color at Investor Day as we pull all that together. I mean, we do believe it's settled into a new norm that, given the efficiency in the supply chain, it will be a challenge to see, I think, mid-single-digit/high-single-digit type growth that some folks talk about.

Okay. And then just lastly on the space contract, with -- so this contract is with Lockheed. And is it just a one-year contract? I mean, when you say you started shipping a little bit in the fourth quarter. Do you expect to complete this in 2016? And what's the revenue size we could look at in terms of this contract?

Yes. So we started to ship it a little bit here in the fourth quarter, not really in a big significant way. So a little of what we expected to ship started here in the fourth quarter. Unfortunately, Jimmy, we can't provide the total revenue number. It's something that's a bit proprietary with our customers so we can provide too much color in that regard.

I tried to at least provide for you the mix impact that we do expect to see in terms of how it hinders the otherwise expected OP read-through that we would see in the business. And I positioned that as about a $5 million number next year. So, I think that's what we are prepared to share with you. And we'll share as much as we can and provide as much more color as we can at Investor Day.

Okay, great. Thanks so much.

You're welcome.

Igor Maryasis, Avondale Partners.

(technical difficulty) -- in other words, does the current market weakness present opportunities for you guys in that regard?

Yes. It's a mix of all of the above. Since discipline, in terms of service lead-time, continue to drive improvement where our customer still values and appreciates that opportunity, we've increased our channel focus as well. So, there's a number of areas and opportunities, even in this difficult market, that we think we are -- continue to position us well for the future.

So this is both on the OE side and on the aftermarket side? Is that correct?

Correct.

Okay. Thank you.

Robert Barry, Susquehanna.

Nice to see such a robust Q&A session on the call. Thank you for fitting me in. Just a couple things. Rich, I think you mentioned $5 million impact from price in Fluid?

Yes.

I mean I know everyone talks about price a little different and it's a little nebulous, right? I think internal, you speak about gross margin, but I think that implies like 50 basis points of headwind. And I know it's mostly concentrated in process valves. So even in there, it only implies like a point of headwind, which seems a lot more benign than multiple points of headwind, some of the other OEMs have been talking about, including some that are focused on valves. I mean, just any thoughts on what the difference might be in what you're seeing on pricing?

Oh, I think to start off the answer, I think you couched it well at the beginning in terms of how people really quantify what the price impact is. You know, because of where pricing is, just for example, we'll walk away from certain contracts. So how do you really quantify that in the way of OP headwinds, right?

So it really depends. I think every business probably, when they present out on these calls, looks at it a little bit differently. But the $5 million, from our point of view, it really is a continuation of what we saw in the second-half. So we talked about 150 basis points of pressure. And really the incremental year-over-year impact is really just pulling forward what we did not see in the first-half of the year, if you follow that.

Is that incremental? So that would be like kind of since the start of the pricing pressure, it would be more like 2 point impact?

Correct.

Got you. Okay, that's helpful. And then just I wanted to clarify the commentary about chemical. It sounded like in the bucket of what's new in terms of end market pressure in Fluid, it sounded like chemical had started to become weaker. Can you elaborate on that?

Not much more than what we had mentioned because it developed late into the fourth quarter and we are still getting our arms around it, whether it was just a reaction to year-end cash flow and some constraints or how much is related to the deteriorating commodity prices. Chemical overall, whether it's chloralkali, titanium dioxide, whether it's ethylene, everything is just -- supply is slightly over demand, and you are seeing some pricing pressures and some constraints.

There are some big moves taking place, and major customers that are consolidating and splitting. And there is just a lot of factors here that we still are looking at -- on trying to understand here. So, hopefully, by the February Investor Day, Rob, we'll have some more insight and color.

Got you. Okay, great. Thanks very much.

Thank you.

(Operator Instructions) Brian Konigsberg, Vertical Research Partners.

Thanks for taking the follow-up question. Just on the M&A topic, can you just tell us where you stand from a fully adjusted leverage ratio, and maybe talk to -- talk a bit about what you think the capacity actually is? And I mean, would you possibly consider using equity for the right type of deal?

Sure. So in terms of our capacity today, we are probably right around $350 million to $400 million. So our total -- today, our overall ratio is around 2.9 to 3 EBITDA. It's closer probably to the 3, which is where you get close to the -- to where we can be, frankly, to maintain the investment grade rating.

But we have extra capacity through the available cash that we have, largely overseas. So in terms of M&A opportunities, we are prioritizing overseas investments or investment opportunities at this point. And, obviously over time, we generate a very strong free cash flow, as you know. And as the years progress here -- as the next couple of years, even towards the end of 2016, that capacity will increase.

Equity is not a consideration, though?

To the extent the opportunity presents itself and it makes sense from an accretion perspective, it would be, but it would be -- it would have to be quite strategic for us.

Got it. Thanks.

Thanks, Brian.

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back to Max Mitchell for any further remarks.

Outstanding. Thank you, operator. Well, end markets continue to be under pressure. And, in the words of the late great David Bowie, there is a terror in knowing what the world is about. Take solace that Crane, at 160 years old, is taking the right actions to adjust and is well-positioned for future. We look forward to sharing our update on Investor Day February 24th. Have a wonderful day and thanks for your interest in Crane.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.