Crane Co (CR) 2016 Q2 法說會逐字稿

Good day everyone and welcome to Crane's second-quarter 2016 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Jason Feldman. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to our second-quarter 2016 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'll start off our call with a few prepared remarks, after which we'll 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'll be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the 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, let me turn the call over to Max.

Thank you, Jason. As outlined in our press release last night, I'm pleased to report that Crane's second-quarter EPS, excluding special items, was a solid $1.21, up 14% compared to adjusted earnings in the second quarter of last year. Sales of $712 million were approximately flat, with 1% of core growth offset by unfavorable foreign exchange.

Operating margins, excluding special items, improved 120 basis points from last year to 15.1%, primarily as a result of Crane business system driven efficiencies, productivity, and restructuring and integration savings, along with modestly higher volumes. We did realize $0.06 of EPS benefit solely related to the closure of a tax audit. However, on an operational basis, the second quarter was better than we expected across each of our businesses.

While I'm proud of our results in the quarter and have confidence in the full-year outlook, we do expect to face some incremental headwinds in the second half. Overall, our end market views have not changed materially over the last few months. Our fluid handling end markets have stabilized but remain depressed, and we do expect continued uncertainty and potential volatility.

While we don't give quarterly guidance, to help set expectations, I would add that we expect the third quarter to be modestly softer than the second quarter, operationally, after adjusting for the low second-quarter tax rate. This should be followed a fourth quarter that operationally looks similar to our first quarter of this year. In the fourth quarter, please remember that engineered materials and merchandising are almost always seasonally weaker towards the end of the year.

Further, the timing of shipments in our process valve backlog was skewed to the second quarter. And the mix has been particularly favorable at payment and merchandising in the first half. While year-over-year comparisons are easier for growth in the second half, we expect margins to moderate somewhat. Lastly, we do now expect corporate cost to be modestly higher than our original guidance.

Balancing these factors, we are narrowing and raising mid point of our guidance range. We now expect EPS, excluding special items, of $4 to $4.20, compared to our prior range of $3.85 to $4.15. This updated view reflects earnings approximately flat compared to last year, with free cash flow up slightly to approximately -- to up approximately 16% compared to 2015.

Turning to our businesses. At fluid handling the story is unchanged. To refresh, activity dropped off towards the end of 2015, and our guidance set for 2016 was consistent with our fourth-quarter run rate. Market conditions continued to appear relatively stable at depressed levels and order rates have stabilized. We actually saw a modest improvement in our orders compared to the first quarter, after adjusting for foreign exchange.

We continue to believe that 2016 is the trough for fluid handling end markets, consistent with our commentary earlier this year. We are seeing a few isolated bright spots such as slightly better chemical MRO activity in Europe and a pick up in early stage planning for additional US chemical projects expected to hit in 2018 and 2019. However, while our customers are still tightly controlling CapEx, we still believe that 2016 is the trough for our fluid handling end markets.

We're seeing project push outs across our vertical markets and geographies continue at the same pace to that seen in recent quarters. From a pricing perspective, we're actually seeing some competitors return to disciplined pricing practices after what appears to be poor prior decisions and working through some mispriced projects, while some other competitors have now become increasingly aggressive on pricing for certain projects. However, our pricing strategy remains disciplined, demonstrated in part by our solid margin performance in the quarter.

We believe strongly in our value proposition, and while sensitive to market conditions are selectively walking away from projects we're pricing as utterly ridiculous. Overall while soft conditions persist, we believe we are on track to achieve our full-year guidance for this segment, and the margin performance this quarter is a testament to the fluid handling leadership, which is executed extremely well through a very tough period.

At payment and merchandising technologies, we had another strong quarter with 4% core growth despite tough year-over-year comparisons. Operating margins increased 290 basis points compared to adjusted margins last year. We remain on track to realize $33 million of MEI related synergy savings by the end of this year, and we remain optimistic about the prospects for growth of both sales and margins in this segment this year and well into the future. However, while we may modestly exceed our margin guidance for the full year, please remember this business has uneven project timing and the product mix can vary from quarter to quarter.

Our investment in this business continues. As we have discussed in past investor days, this business is as research and engineering intensive as aerospace, and we spend in excess of 7% of sales on R&D. Our product development pipeline is robust and we remain the industry leader in the payment and merchandising markets.

At aerospace electronics we had a strong organic growth of 13%, driven largely by the Space Fence program. Margins rose 100 basis points compared to adjusted margins last year, with strong productivity and volumes offsetting unfavorable product mix and higher engineering expense.

Performance was solid across aerospace and electronics. Additionally the microwave and power teams deserve a lot of credit for their work in execution on the Space Fence program. This is the largest project in the microwave business's history, and it's on schedule and on budget.

I was at the Farnborough Airshow earlier this month. While we continue to hear questions about the length and strength of this cycle, we continue to believe that the enormous industry back logs are supportive of continued industry growth, even if select cancellations were to take place. I remain excited about the ramp-up of a number of new platforms where we have substantial content. We continue to invest heavily across all of our aerospace solutions. We are still bidding on new opportunities and believe that we are well-positioned for years of strong growth with a highly attractive margin profile.

Engineered materials sales fell by a modest 2% in the quarter, as lower RV and transportation sales were partially offset by strength in building products. Margins expanded to 21%, up 250 basis points driven by our efficiency efforts, lower material costs, and solid execution. Overall it was a strong quarter across our portfolio.

Based on what we know today, we are confident in our revised guidance. That confidence is tempered only by continued volatility in commodity and foreign currency markets, along with up uncertainty related to the future of the European Union's direction and other geopolitical issues, all of which we feel we are positioned to address and react to as required.

Rich, let me turn it over to you for some additional financial commentary.

Thank you, Max. I'll turn now to segment comments which compare the second quarter of 2016 to 2015, excluding special items, as outlined in our press release, slide presentation and the accompanying non-GAAP tables.

In the second quarter, fluid handling sales of $266 million declined 9%, reflecting a core sales decline of 7% and a 2% impact from unfavorable foreign exchange. This is in line with our expectations and consistent with our guidance. Fluid handling operating profit declined 6% to $35 million. Operating margins were 13.3%, up 40 basis points compared to last year, reflecting productivity and restructuring savings, partially offset by competitive pricing and lower volumes. We expect margins in the second half similar to the full first-half margin rate.

Fluid handling backlog was $246 million at the end of June compared to $267 million at the end of 2015 and $287 million at the end of June of last year. After adjusting for foreign exchange, the backlog declined 11% compared to the prior year and declined 5% sequentially. Adjusting for foreign exchange, however, orders improved 4% sequentially.

Moving now to payment and merchandising technologies. Sales of $193 million increased 3% compared to last year. Core sales improved 4% with a 1% impact from unfavorable foreign exchange. We saw core growth across both our payment and merchandising businesses, with payment in line with our expectations and merchandising stronger than we expected.

Segment operating profit of $34 million increased 23% from last year, with operating margins up 290 basis points to 17.9%. The margin improvement was driven by higher volumes, along with MEI integration synergies, productivity benefits and favorable mix, at both the payment and merchandising businesses.

Aerospace and electronic sales increased 13% to $189 million. Segment operating margins improved to 20.4%, up 100 basis points from last year. The margin improvement reflects higher volumes in productivity, partially offset by higher engineering spending and unfavorable product mix.

Total aftermarket sales increased 9%, with solid results across both the commercial and military aftermarket. OE sales increased approximately 15%, led by strong military sales, although commercial OE sales also increased in the mid single-digit range. The OE to aftermarket mix was 75% to 25%, compared to 76% to 24% last quarter and 74% to 26% in the second quarter of last year.

Aerospace and electronics backlog was $436 million at the end of June, compared to $436 million at the end of 2015 and $448 million at the end of June 2015. The lower backlog year over year reflects deliveries on the Space Fence program. And after these deliveries, we are pleased with the $17 million sequential growth in the backlog, which is in line with our expectations. Engineered material sales declined 2% to $64 million. Operating margins increased 250 basis points to 21%. Both productivity and lower material costs more than offset competitive pricing pressure.

Turning now to more detail on our total company results and guidance. Our second-quarter tax rate was 27% compared to 31.5% in the second quarter of 2015. Primarily as a result of favorable adjustments following the resolution of a routine audit. The lower tax rate was partially offset by corporate expense that rose by $3 million compared to last year, primarily as a result of higher legal expense, higher benefit costs and compensation related expenses.

On a full-year basis we now expect corporate expense to be approximately $54 million, up from our original forecast of $50 million. At expected levels our corporate expense run rate remains near best-in-class at below 2% of sales. The full year tax rate is now expected to be 30%, down from original guidance of 31.6%.

Regarding foreign exchange, the negative translation impact in the quarter was somewhat smaller than we expected at approximately $6 million or just under a 1% headwind to sales. Compared to assumptions in our guidance, we saw greater than anticipated headwinds from the depreciation of the British pound, more than offset by smaller than expected impacts from the Canadian dollar, the Euro and the Japanese yen.

We have received questions recently about our UK footprint in light of the recent Brexit vote and related foreign exchange movements. The UK is a relatively important manufacturing location for us, with approximately half of UK manufactured product consumed locally and the rest exported. Of the UK exports, a modest portion ends up in the EU.

There's been no direct impact on our business following the UK vote to leave the EU, aside from the obvious exchange rate movements. Our biggest concern is the impact of the recent decision on the UK economy and the decision making process of local businesses. At this time we don't expect any material impact in 2016, but we are monitoring the situation closely.

In the quarter, free cash flow was $54 million up from $48 million in the same quarter last year. We ended the quarter with $109 million of lower net debt than at the end of the June of last year.

As Max mentioned, we are narrowing and raising our 2016 EPS guidance to $4 to $4.20, excluding special items, compared to prior guidance of $3.85 to $4.15. Our guidance continues to assume total 2016 sales of approximately $2.7 billion, down 2% compared to 2015. This sales outlook includes an approximate 2% negative impact from foreign exchange and core growth down 1.5% to up 1.5%. We are also raising the low end of our free cash flow guidance by $5 million to a range of $195 million to $220 million.

Operator, we are now ready to take questions.

(Operator Instructions)

And our first question comes from the line of Chase Jacobson with William Blair, your line is now open.

Hi, good morning. Nice quarter.

Good morning, Chase.

Max, I appreciate all the color you gave. You guys always give a lot of transparency into your results. I was hoping you could maybe just expand on the pricing commentary in fluid handling. It sounds like it's pretty mixed, but can you kind of maybe --

Yes, sure.

Can you break that down by some of your -- some of your product areas?

I think it's a comment of -- it's the same. But rather than just say the same, we're -- we add a little bit of color to say, hey, in some cases we see some competitors that were doing what we would consider some aggressive pricing improve and then we see some other that are taking some -- what appear to be crazy actions. So net-net, we're staying disciplined. We feel good about the backlog, we feel good about our pricing discipline. Net-net, it feels the same. It's not worsening. It's not improving. But there's a mix regionally, geographically by competitors, that we see and we just thought it was worth noting.

Just the same, I would say just add the same. We go with how we have characterized projects versus MRO from a pricing point of view as well. More pressure from a product point of view in terms of Max's commentary, but on MRO we continue to see stable pricing actions and disciplines.

Okay. Similar question in commercial aerospace as it relates to the OEs stretching payment terms. Are you seeing that? What are you doing on Crane's side to mitigate the working capital impact of the OE stretching out payment terms? Any color on what drove the awards in aerospace? Because those were really strong this quarter.

I guess I'll start with the latter, Chase. From an overall perspective, order lumpiness does happen within the aerospace business and electronics business. What I would say is, I made the comment that I was pleased with respect to the sequential order improvement from Q1 to Q2, but from a year to date -- on a year-to-date basis, we feel pretty much comfortable with where we stand and in line with what our initial guidance was. A little bit stronger, but nothing -- nothing overly significant.

As it relates to payment practices and OEMs pushing, in that regard, it's really no change in terms of our approach to ongoing dialog with all of our customers. We don't see anything at this point that would be impactful to the year, but it's an ongoing dialog and discussion. At this point from a working capital perspective we feel comfortable with our targets and our free cash flow guidance.

All right. I'll hop back in queue. Thank you.

Thanks, Chase.

Thank you. Our next question come from Matt Summerville with Olympic Global Advisors. Your line is now open.

Thanks. Morning.

Hey, Matt, welcome back.

Hey, thank you very much. With respect to aerospace and electronics, I want to get comfortable. You talked about having this longer term sustainable organic growth trajectory there. And while I know you don't disclose content per platform, necessarily per se. But if you were to go through an exercise where you index, if you will, previous generation aircraft at 100, and you say, okay, now we're looking at these next-gen aircraft going forward. Does that looks like 105, 110? Do you know what I'm saying? I'm trying to get an understanding where your relative content is next-gen versus legacy aircraft, if you will.

Yes, we haven't disclosed that quite that way in the past. I know it's always been asked in the past. I think we have disclosed, in past, that certainly with some of the major programs that we're working on right now, the 737 MAX, the E2, Comac C19, all progressing very, very well. The content that we've won from a fluid [lube and scabbord] standpoint. Fuel flow transmitter, all things that we've talked about in terms of the opportunities that we've won.

From a content standpoint we've commented that the 919 has the highest content for any single aisle program. So just on a relative basis we've indicated that -- not on a scale of 100 versus a range, but just in terms of our single aisle content, the Comac 919 has more content than any current program. All indicating, just directionally, how we feel about -- of the programs that we've won and the demand profile as we move forward.

Just, Matt, just to add to that. I think it came through in Max's comments, but it's important from a content perspective. In relation to programs rolling off and new programs, we feel good that a significant component of the growth rate that we're projecting actually incorporates incremental content versus what we perhaps might have had on other programs. So it's not just market driven, I think is the point.

Got it. Just as a follow-up with respect to fluid handling backlog, are you getting the sense that that's bottoming now for Crane? Do you think the second quarter's the bottom? You saw sequential uptick in orders per your prepared remarks, or have we yet to see that bottom out? What's your view there?

So, Matt, with respect to the backlog in the second quarter, so we saw some meaningful -- we saw some nice strong execution in the business as Max mentioned. We did execute quite a bit, a little bit more than we expected in terms of shipments that did take that backlog down in the second quarter.

I think what's important is that we did see the sequential improvement in orders from Q1 to Q2 and again off that run rate in Q4. All really happening according to plan, and to the guidance that we provided. So as I look at where backlog is today, into the third quarter, I would say it's largely as expected and consistent with the guidance that we provided at the beginning of the year. There's going to be movements a little bit from quarter to quarter depending on how we execute on that backlog, but consistent overall with what our expectations are.

Great. Thank you, guys.

You're welcome.

Thank you. Our next question comes from the line of Nathan Jones with Stifel, your line is now open.

Morning, Max, Rich, Jason.

Good morning.

Just I want to follow up a little bit on Chase's question on pricing on valves. You said that short-cycle stuff is -- is maybe a little better, projects is maybe a little worse. Is there anything end market specific that's going on there in pricing, or is it really a matter of the bigger the order, the more aggressive people are getting on pricing?

Some of it's related to end market in the solution. What do I mean, by that? Depending on the competitor, you might have a specific competitor that is stronger in power that all of a sudden begins to be very, very aggressive on some power projects versus another competitor that is strengthening in chemicals, for example. So it tends to fluctuate a little bit, which is normal. But I wouldn't say that there's any dramatic trend in one market versus another.

Okay. Then is the pricing that you're putting into backlog now in fluid handling any better or any worse than the pricing that's currently in backlog?

No. We kind of view it the same.

Okay. Then on payment and merchandising, you did 17.9% margin there. I think you said -- I think maybe Rich said, payment was inline with your expectations, merchandising was better than expected, which would be negative for mix. Then I think Rich also said it was -- that you had a negative mix in both pieces of those businesses. If I heard it correctly. So you've got --

No. I think I'm going to correct you on that a little bit. Let's take it one at a time.

Go ahead and finish your question Nathan.

I was going to say that, it sounds like you've got a negative mix in that business. Even if merchandising was inline and payment was better than expected, that's negative for mix, overall. And you did 17.9%; the guidance for the full-year I think is 17%. Can you just talk a little bit about why you're not getting a little bit more bullish than that and if something's changed here structurally that might change your longer term outlook for the margin structure of that business?

Yes. No it's a good question. I was -- just to clarify some of the statements. Overall -- just to start, our overall margin target for the year, for payment overall, payment and merchandising and technologies was 16.6%, so I appreciate you rounding up to 17%. But with respect to some other comments, my commentary relative to performance in the quarter for payment and merchandising was that we actually saw favorable mix overall.

Now you're pointing to business mix and that if vending was stronger from a revenue perspective versus the CPI business, yes, that from a business unit mix has a bit of an unfavorable impact. However within those specific businesses in both -- in both our merchandising business as well as in our payment business, we saw some favorable mix of product sales. So just by way of example, we saw some heavier sales in our retail channel, which commands some higher margins. So without getting into too much detail, those mix benefits outweighed the business unit mix within the segment. So we did see, overall, a favorable mix come out of that group, itself. So that did benefit us in the quarter and helped us with respect to seeing that -- I think 17.8% overall -- 17.9% overall margin target.

Structurally as we look at it going forward, to the second part of your question. I think as I look at the integration having gone so well, and as I think about the opportunities that we all believe remain within this larger organization and deploying the practices that we do across all of our businesses with respect to continuous improvement, we do see further opportunities. So I guess the cat is out of the bag a little bit with respect to where margins are on our forecast or guidance on 16.6%, and that we anticipate it being a little stronger here as we close out the year.

All right. Thanks very much.

You're welcome.

Thank you. And your next question comes from the line of Matt McConnell with RBC Capital Markets, your line is now open.

Good morning.

Thank you. Good morning, guys. Just first some very high level questions. After about a $0.20 beat raise by $0.10, would you say there's more buffer here or are there specific kind of concerns for the back half?

No, Matt, I'll take that question. Internally, we didn't perceive a -- we don't see a $0.20 beat as we look at our internal forecast and how we saw the guidance playing out for the balance of the year. Understanding where consensus was as we look at the business, I'll provide my commentary here.

Our second-quarter performance was notably stronger operationally and we did perform modestly better than I would say we expected. Notwithstanding the $0.06 tax benefit in the quarter, which followed a $0.03 benefit that we saw in the first quarter, again, roughly a $0.10 benefit overall in the first half. And what I'd like to point out is if you recall back in Q1 I indicated that margins in fluid handling would improve in the second quarter based on the business mix that we would see in that segment. And that, in fact, occurred. I'm not sure if everyone saw that or believed it, but that did in fact occur.

As I pointed out a little bit earlier, we did execute better than expected from a backlog perspective in fluid handling in the quarter, so we did get a little bit more sales out than we expected. As I just had mentioned with Nathan, performance at payment was strong. Engineered materials also modestly stronger than we expected, solid mix, benefiting payment. Then we saw some strong performance execution-wise, productivity-wise in engineering materials along with continued lower costs in the engineered materials business. So we did have a relatively strong performance, a little bit better, I would say better than we anticipated.

Looking to the second half and trying to, I think, couch your question with respect to our revised guidance. The tax rate's going to be higher, so we have a natural -- you consider the tailwind in the first quarter and the headwind in the second quarter, that's meaningful. Q3 margins will abate a little bit. I want to make sure I emphasize, just a little bit in fluid handling, again seasonality related. Our valve service business coupled with some of that modest impact that that execution on the backlog caused and drove for us in terms of leverage rates.

And as you know, Matt, the fourth quarter, we do experience normal seasonality in our business, the merchandising business in particular, and of course, in our engineered materials business. So a lot there to digest, but overall very pleased with our results year to date. I think we executed really well, and we are cautiously optimistic about the balance of year.

With that said, as Max pointed out, and it's important, our guidance is balanced and considers the ongoing risk and uncertainty that remains in the fluid handling end markets.

Okay. Great. Thank you. Just switching gears to the asbestos case in New York, have you -- maybe it's hard to kind of gauge what the financial implications will be longer term. But what's your view on how that could impact Crane's asbestos liability? And might there be a change to the reserve as a result of that case?

Matt, I'd like, I'd like to start off with that question on asbestos -- we put out a press release on June 28, and I would like to read that to kind of frame up. It's early in terms of understanding the full impact. We've made significant gains, but we made the following statement regarding the ruling handed down by the New York State Court of Appeals with respect to the Dummitt and Suttner asbestos cases, which upheld two state court judgments against the Company totaling approximately $6.7 million.

We said that we are disappointed by the court's ruling, which is in conflict with those made by courts in other states as well as on the Federal level addressing duty to warn standards for equipment manufacturers who did not make asbestos products. In its decision, the court adopted a new test that considers economic necessity in determining a manufacturer's duty to warn about the potential hazards of third-party products used in combination with its own product. This new test will now have to be interpreted and applied by the lower courts in New York.

Crane Co never manufactured asbestos containing products and it believes that all of its products were safe when used as intended. Consequently, Crane Co will continue to vigorously defend itself against asbestos cases, consistent with its past practices. I think that's as much we really want to really comment on today, and I think it's too early to talk about how this continues to play out. Rich, I don't know --

Yes. Matt, just to follow-on a little bit here. We've got a lot of great disclosure that we've put in the Form 8-K that you're all familiar with, and what we put in the Form 10-Qs. We've made a meaningful progress over the years from a liability perspective. At the same time though, from a context point of view, our total company cash flow has grown substantially in recent years, as you know.

And just to give some highlights on that. In 2011, our free cash flow was in the $115 million range and that included net asbestos payments of roughly $50 million. In comparison, last year our total free cash flow was $190 million. And our net asbestos payments were down to $35 million, and this year you know what our free cash flow target is here between $195 million and $220 million and our revised guidance here of net asbestos payments in the $35 million to $40 million range. So while disappointed with the New York decision, which is specific to New York. I think our approach and progress here is clearly working.

As it relates to your question on the reserve, this is something that we continually look at on a quarterly basis. This process as you know, it takes into account a wide variety of factors, recent court decisions being one of them. But our overall process is unchanged and we'll continue to monitor the impact of the cases here in New York. And at this time we don't expect today -- obviously as of this quarter to update the reserve. So just some added color Matt, to couch a little bit more on the question.

Okay. All right. Great. Thank you very much. That's helpful.

Thanks, Matt

Thank you and our next question comes from the line of Robert Barry from Susquehanna. Your line is now open.

Hey, guys. Good morning.

Hi Rob.

I just wanted to follow up on your answer to Matt's question, it sounds like tax is tracking $0.10 better in the first half. I think the tax guide given at 4Q was reiterated at 1Q. So versus your internal plan are you saying that the raise to the outlook is really net-net just on tax?

I would say it's a large component, there's a little bit of stronger performance in certain segments and part of our guidance revision incorporates risk associated with end markets that we see in fluid handing. Just general uncertainty there, uncertainty with respect to where foreign exchange rates go.

Got you.

Corporate would be the other element, right? So our corporate costs also being a bit higher for the balance of year -- or being higher in the first half of the year and overall at a $54 million level was considered in that guidance.

I see, so that's off-setting a little better operational?

Yes.

Got you. I wanted to clarify the comment about the margin in fluid in the back half. I'm not sure if I heard you correctly, but I thought you said it would track the average of the first half, which I think would be about 11.7%, 11.8%, which would put you a little bit below the target. Is that right or is the back half (multiple speakers)?

I think the way to interpret it, is we still feel like the 12% is in our -- is what we would expect to achieve. We were just trying to provide, overall, a flavor for what we would expect in the second half. Really not to expect 13.3% to continue in Q2 and Q3. Overall we feel good about an overall 12% margin target for this segment.

Right. Fair enough. Then a follow-up also on the question about pricing in the backlog being similar to what's hitting the P&L now, I think you said it was. But I know you also talk about gross margin, I mean, would that be the same answer for the gross margin in the backlog being similar to what's hitting the P&L now, in fluid?

Yes.

Okay. Then maybe just lastly on aero, also a clarification. So the target there for the year was 5%. Are you tracking ahead of that, or is the back half going to be lower now that the Space Fence is done?

Yes, on a year-to-date basis we're tracking at about -- a core growth rate at about 9%, 9.8% overall. The biggest component to that increase over what our full year rate would be is execution on the Space Fence program, so that is actually moving in a good direction. As Max pointed out in his prepared remarks, we're executing well in that program. We're not yet prepared to say that that growth rate should be increased. we'll see how things progress as we move through the balance of the year.

Okay. So what's the risk there? I mean, right now to get to your 5%, you'd have to have a low single-digit growth in the back half?

Correct.

Comps get tougher but maybe not --

We don't expect -- we'd expect to finish a little bit north of that 5%.

Got you. Okay. Thanks, guys.

Thanks.

Thank you. And our next question comes from the line of Jim Foung with Gabelli and Company. Your line is now open.

Hi, good morning. Good quarter.

Good morning.

Just hitchhiking on the aerospace business, could you just give me an idea [into just] the Space Fence revenues for the next -- for the second half? Is it going to be -- as that continues to wind down, is that going to be substantially lower than the first half revenues?

I would say, we should see -- we're going to largely complete the program as we move through the balance of the year.

Okay.

Yes.

So that you have it split up between the first half and second half, did you ship like 60% or -- and you have 40% left kind of a ratio?

It's roughly -- there's roughly 50% left.

50% left, okay. Very good. Thanks. And then on the fluid handling, what was the book-to-bill in the quarter, the orders to sales? Because you said the back -- you shipped a little bit out of backlog but the orders grew? Do you have that book-to-bill number for that?

Yes. I mean, yes, we do. We do track that. So again we had a very strong shipment month, in the month of June, that skews us a little bit. Just given -- we would tend to see those shipments spread a little bit more into the third quarter. But book-to-bill, in the segment overall, is just -- I would call it just under 1.

Okay. Then when -- you feel you're in the trough -- this year will be the trough year. I know 2017 is a little early for you, as you peak into 2017, do you expect growth in 2017? Or you think it's just going to be the same -- at the same level as what you might do in fourth quarter of 2016 with fluid handling?

Order rates are stable.

Right.

I'm not seeing significant -- any significant increase. Couple of bright spots we mentioned, but it's nothing that we would say that we're predicting growth yet. Right now it seems stable and we're saying it's the trough.

As we continue to look at longer term indicators, one of the things that we track pretty well -- of the projects and -- I think we mentioned this in the past. We have a staged system: stage one through four, in terms of when we first identify a project. And one the things that we saw occur in this quarter was a rather dramatic increase in the stage one projects in the funnel. That's in a 16-month plus kind of time frame.

Okay.

As we continue -- again anything can happen in terms of the uncertainty in the marketplace, so with any other dislocation. But taking all that aside, based on what we see today, based on what we are seeing in terms of the stability in order rates, the consistency. When I look out at our project based funnel and I see some significant increase -- again, this all has projects that continue to push to the right. But we're seeing a meaningful increase in terms of the stage one funnel.

Is it going to read through in 2017, to what level? That's still an open question. As we continue to move through the year, we'll have more clarity on it as we get closer. So I hope that gives a little bit of color. I can't say with certainty that 2017's going to be a growth year or what kind of growth, but it certainly feels like, we're at that trough.

Right. No, it's great color. It's just -- it's a lot to get excited about as these -- as the stage one projects play out to completion.

Well, as we've said, the work we've done to position ourselves to when the recovery does occur, I mean, we are well positioned to leverage that from a cost point of view.

That's great. Just one last question, on the UK exposure, regard -- what's your sales for the UK? I know you said you're more worried about Europe spilling over to European community, but could you just give us an idea of what your sales are to the UK, how big is it?

Overall sales -- I think what your question is more of, how much sales are we shipping out of the UK? And off the top of my head, I don't have that figure. I would tell you, though, as we think about the foreign exchange exposures that we would be concerned about or anybody would be concerned about is, what's your net exposure after expenses?

So when we think about our UK businesses, we have a large component of manufacturing and costs that exists in our UK businesses. That's relative to sales, so we sell a significant amount from the UK in different currencies. So when we -- when I look at that, with the high cost base of UK to -- British pound denominated expenses, when my rate goes down, I get a bit of a benefit there. And I have less of an exposure given I have a lot of export sales. So I don't have the figures on the top of my head, Jimmy, but I would say that overall I'm not overly concerned with the foreign exchange movements that have happened from a transactional basis.

Okay. Great. Thanks so much then. Good quarter.

You're welcome.

Thank you. And our next question comes from the line of Ken Herbert with Canaccord Genuity. Your line is now open.

Hey, Max, Rich, Jason. Good morning, this is actually John on for Ken.

Hi, John, how are you?

Good. Quick housekeeping item, so for commercial aftermarket within aerospace, what was the growth in that in the quarter?

It was mid-single -- mid single-digit.

Got it. Okay. And then just two quick questions, staying within aerospace. How is the Comac 919 ramping? I know you mentioned it briefly. Any meaningful contribution in the quarter?

I'm sorry a meaningful contribution in the quarter relative to what? I apologize.

No. Just as far as shipments goes, for the Comac 919, just how is that ramping?

Nothing yet. The C919 is still in development. You would expect that to be in development for some time here yet. You know we're spending quite a bit of time, from an execution point of view, on engineering and development.

Got it. Then as far as defense goes, any -- besides Space Fence, any short cycle, any uptick in short-cycle defense?

No, I wouldn't say anything meaningful. Nothing meaningful.

Okay.

It tends to be program specific, and what programs we're on and what technologies we have to offer. I wouldn't say there's any meaningful impact, at this point, with respect to defense.

All right. That's all I have. Thank you, guys.

John, you're welcome.

Thank you. And our next question comes from the line of Brett Lindsay with Vertical Research Partners. Your line is now open.

Hi. Good morning, guys.

Good morning.

Hey, just wanted to come back on fluid handling. Obviously, very strong margins given the top-line pressures there. Could you just put a finer point on the scale of magnitude between the mix contributions, productivity, repositioning on margins in the quarter?

Yes -- geez. I would say that it was -- there's no one that was meaningfully greater than another. I mean, we does execute on repositioning activities that clearly have trickled through -- through the quarter. Productivity continues. There's not one item. It's not like the 13.3% was flattered really by any one particular item.

Mix, I would say -- if I was to point to the number one item, it would be the mix of businesses in the quarter for the segment. So where we have greater sales of valve services for example, greater sales of our pumps business, our building services and utilities business. As I mentioned on the first quarter call, those would be the ones that helped flatter the results a little bit here in the second quarter. But again, it's on the margin, but that would be the number one component.

Okay. No, that helps. If 2016 is the trough and we do begin to see recovery. As we think about 2017 and sort of this inflexion in growth potential, how should we think about the incremental margins when you consider mix, you consider some of the variable cost structure that might have to come back? Just as we calibrate next year for any type of inflexion, how does that look on the way up?

Yes, our typical leverage rate in that business tends to be in the 25% range. Might be just a little bit north of that, considering the cost actions that we took over the last couple of years. But again, we're at a point here where our orders rates have stabilized and we feel good about the trend in orders. We feel like we're at that bottom. It's when does that flexion point happen such that I can see that growth in sales period over period to see that leverage, which we're not comfortable with talking about just yet on 2017.

Yes. Okay.

Okay.

Switching gears just to payments and merchandising. So MEI-related synergy is on-track for the full year. Can you quantify what you realized in the quarter for benefits and how that layers through the balance of year as we look at some of those projects that are underway?

Yes, it was even. It's not like the quarter necessarily benefited for any up-take in synergy savings in the quarter, so it would be an even distribution of what we've seen from the first half of the -- first quarter this year.

Okay. And if I can just sneak one more on pension. You've seen rates kind of ticked out about 75 bps. As we think about -- obviously it's early, but as we think about if we were to snap the line and look at 2017, do we see a pension expense headwind? Then any potential contributions that will need to be made to pension, whether it's voluntary or mandatory, as we look at some of those funding levels?

Yes. I think from a -- to answer the question on expense and on funding levels, we wouldn't anticipate --based on what rates are doing at this -- based on what the discount rates are doing, there isn't much of a meaningful impact to expense. But from a payment point of view, the discount rates and the tools that are used to calculate those payments rates are a little bit than the simple 25 basis points or 75 basis point math. So we don't expect, at this point, on anything north of, say, a $5 million or a $6 million incremental headwind next year, from a payment point of view.

This is all notwithstanding any other changes that might be made with respect to asset returns and things of that nature. But I think the way to think about it for Crane is for that kind of a change in basis points, the bigger impact is, what's your unfunded liability position at the end of the year?

Okay. Great. I appreciate all the color.

Thank you, Brett.

Thank you. Our next question come from the line of Ryan Cassil from Seaport Global Securities. Your line is now open.

Thanks, guys. Most of my questions have been answered here. Going back to your comment on fluid handling. We're seeing some competitors are getting more aggressive on pricing. My question is, is that really more of the proliferation of these lower cost Eastern competitors being more prevalent in the bid process, or are you actually seeing more of the traditional Western manufacturers that are getting more competitive on pricing?

Mix, traditional.

Okay. Great. Then just moving on to the engineered materials side. You mentioned lower material costs and probably resin costs being the big driver there. How quickly can that flip and have you seen that already in the third quarter, or is that really more in the fourth quarter you expect margins to moderate?

Yes, at this point, as we look at it in the LTAs that we have in place, from a cost point of view, we feel pretty good. What I would like to point out, though, in terms of the benefit that we saw in the quarter between raw material costs and general productivity improvements in the plants, it's roughly about a 50/50 split. So to give credit to the team, they did an outstanding job in the second quarter following some good work in the first quarter. The overall margin profile being improved the way it has is, is not all resin costs.

In terms of how we see it flipping, part of what we need to do here is execute on price strategy that considers these raw material costs and how long that they'll sustain. But we do expect the margins to moderate, largely because of that, that rebalancing of pricing in relation to the costs that we're seeing on the input side.

Okay. Thanks for the color. Appreciate it.

Thanks, Ryan.

Thank you

(Operator Instructions)

And our next question is a follow-up from the line of Nathan Jones with Stifel. Your line is now open.

Hi, guys. I would actually like to follow up a little bit on the engineered materials business there. If you're talking half the improvement is productivity, half the improvement is price, the productivity is not going to go away. Have you improved that business structurally so that you think that long-term margin range that you've laid out has maybe structurally improved for that business?

Yes, I think in some respects it has. The long-term margin target is 12% to 16%. And we do think we're going to update from the 20%. But being toward the higher end of that range, I think is something that -- provided that we're at the -- reminder, we're at the top of the cycle for RV.

Yes.

So structurally, as we look at opportunities like first pass yield and where we really see a lot of the progress being made from a productivity perspective, if volumes move in the wrong direction given the cycle, we'd see that -- we'd see margins come back because of that as well. But there are structural improvements. Is the bottom no longer 12%, maybe it's 13% or 14%, we'll be looking at that over the course of the next six months or so.

So maybe the top is not 16%, it's 17% or 18%?

Possible.

It's possible, yes.

Then one other one, there was a comment you made about chemical OE in the US. You were talking about seeing improved activity there, at least in the front log [our refue] space. And then you said 2018, 2019 for those projects. I assume that's 2018, 2019 for revenue recognition, but orders would hit your book earlier than that?

Yes. It's hard to say with certainty, but generally I think that's a fair comment, Nathan.

Okay. Thanks very much.

Thanks, Nathan.

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Max Mitchell for any final remarks.

Thank you, operator. We delivered a strong quarter despite challenging end markets, and we are guarded but confident about the remainder of this year. While global, macro uncertainty persists we take to heart the words of the late-great Mohammad Ali, to float like a butterfly and sting like a bee. Accordingly, we'll remain nimble and quick, keeping our gloves up, staying off the ropes. While upcoming rounds have uncertainty, we feel great about the strength of our portfolio. We continue to invest for growth and are poised to go the distance as markets recover. Thank you all for your interest in Crane and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.