Crane Co (CR) 2016 Q3 法說會逐字稿

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

Thank you operator and good morning, everyone. Welcome to our third-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 will start off our call with a few prepared remarks after which we will respond to questions.

Just a reminder, that 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 the accompanying slide presentation, both of which are available on our website at www.craneco.com, in the investor relations section.

Also a quick update on scheduling for early next year. We expect to report fourth-quarter earnings the evening of Monday, January 30 followed by our conference call on January 31. Our annual investor day event in New York City will be held on Thursday, March 2. Now let me turn the call over to Max.

Thank you Jason. As outlined in our press release last night, I am pleased to report that Crane's third-quarter EPS was a solid $1.07, up 4% compared to adjusted earnings in the third-quarter of last year. Sales of $694 million increased 4% with 5.5% core growth, partially offset by a 2% unfavorable foreign exchange impact.

Operating margins, excluding special items, improved 50 basis points from last year to 15%, primarily as a result of solid execution, productivity, restructuring, and integration savings, despite unfavorable mix. The quarter was modestly better than expected operationally across our businesses, with market conditions mostly as anticipated. The fourth quarter will soften, based on normal seasonality at engineered materials and merchandising systems, and less favorable mix at Fluid Handling.

As we told you last quarter, we expect the third-quarter to look similar to the second-quarter, after adjusting for the tax rate, followed by a fourth-quarter that should look operationally similar to the first-quarter.

We are tracking slightly ahead of expectations but that general guidance still holds. Balancing these factors, we are narrowing and raising the midpoint of our guidance range and we now expect EPS, excluding special items, of $4.12 to $4.20 compared to our prior range of $4.00 to $4.20. This updated view reflects earnings up slightly compared to last year's $4.13, with free cash flow up modestly to up approximately 18% compared to 2015.

Turning to our businesses, for Fluid Handling end-markets, there really isn't much new to report. Market conditions and order rates remain relatively stable at depressed levels. Project push outs across our vertical markets and geographies continue, similar to recent quarters and the pricing environment is similar to last quarter.

Overall, while soft conditions persist, we continued to execute well with another strong quarter of margins. In the fourth quarter, we do expect margins to moderate somewhat driven by less favorable mix. However, we expect volumes at similar levels to the third-quarter.

We continue to believe that end-markets are at or near trough levels; the question is recovery. The markets certainly look set for a lower-for-longer type of scenario and we are not anticipating a recovery in 2017. We believe that we have taken the appropriate measures for this type of environment and our cost base is properly positioned.

As we look ahead to 2017, we do expect to enter the year with the lower backlog than at the beginning of 2016 given our solid execution on shipments and the timing of orders. However, even in this environment, we continue to invest for growth. Coming out of our strategy review process over the summer, we reviewed a more comprehensive set of growth initiatives than I've ever seen from this business.

The team is not waiting for help from the markets. Rather we are creating our own growth opportunities. Our newly introduced line of triple offset valves is exceeding our expectations. We've been successful getting our products added to our customers approved manufacturer lists and we are receiving orders in a product category where we have not historically competed at this breadth.

Other new products including soft seated ball valves and a new line of gate, globe, and check valves have also been gaining traction. Beyond product commercialization, we continue to refine and improve our channel management. We have a rigorous process to ensure that we have the best set of distributors and integrators for each region and end market and we continue to make improvements and changes in our set of key partners.

We've also made substantial progress improving our customer facing processes, adding custom configuration software in a number of locations to improve quote lead times and our responsiveness to customer requests. We also continue to expand our scope of products available for the nuclear buildout in China. While that market has progressed slower than originally expected, we are seeing further development and we continue to pursue opportunities to expand our content per reactor.

We are also working to make sure we are positioned as activity starts to pick up in India, a market that still has uncertainty, but also some early signs of promise and momentum. We expect these initiatives, along with dozens of others that the team is working on, will deliver Fluid Handling growth above market rates.

At Payment and Merchandising Technologies, we had another strong quarter with 12% core growth. Operating margins increased 250 basis points compared to adjusted margins last year.

We continue to invest in this business and our research and engineering focus in spending is as high as it is in our Aerospace business. The combination of our technology advantage with our customers continued focus on productivity solutions, is creating a number of interesting opportunities for us that we are pursuing in both the emerging and developed markets. While parts of this business are project based, and we can see a fair amount of volatility and demand from quarter to quarter, we are very pleased with current end-market trends, as well as our own execution of productivity and growth initiatives.

At this point, we believe the momentum we have seen over the last few quarters will last well into next year and beyond. That momentum is coming from a number of different areas. In the Payment space, the secular trends are driving a continued need for productivity solutions; the emerging markets, this is a combination of rising wage rates, substantial infrastructure spending, and a growing middle-class, that still has limited access to the banking system.

In the developed world, the reality of a higher minimum wage is creating a renewed focused on productivity for retail and banking applications. We are also seeing further penetration of unattended solutions in retail and an upgrade cycle as customers move to our higher-end recycling products. There is one particularly large payment opportunity we are pursuing that we hope to discuss in more detail early next year.

We are also seeing very good growth in Merchandising, probably better than we have seen since the 1990's. This growth is really a validation of our vision for the industry that we've been working to develop for many years, fully connected digitally enabled machines. Crane Payment and Merchandising is the clear leader in this space, with more connected machines than any of our competitors, a thorough understanding of our customers' needs and the only player in the space with a mature, reliable, trusted, and credit-worthy organization behind it, something that is increasingly important to the customers in this industry. We are also the only provider with a complete end-to-end solution.

At Aerospace and Electronics, we had a strong organic growth of 15%, driven largely by Space Fence program shipments. Margins declined 180 basis points, compared to adjusted margins last year, with negative mix more than offsetting productivity than the higher volumes.

We are on track to complete the Space Fence program by the end of this year. While that is consistent with our original expectations, to deliver a project of this size on time and on budget is a testament to the microwave and power teams leadership, execution and effective deployment of the Crane Business System. This is an exciting program for us; however, the sizable revenue contribution from Space Fence will not repeat next year.

We are confident we can replace the operating profit that will not recur next year but fully replacing the revenue in the intermediate term will be extremely challenging. That said we are pursuing two more very large microwave programs. These programs wouldn't begin in 2017, but we believe the Space Fence solution will create opportunities for us that the program clearly demonstrates the packaging, weight, size, and durability benefits of our proprietary multi-mix technology compared to alternative microwave solutions.

We also incurred incremental engineering expense in the quarter, above and beyond what we planned for, related to the pursuit of a large commercial aviation opportunity. Chasing this opportunity is a bold bet for us but consistent with our intent to aggressively pursue a wide range of organic growth opportunities. Although content on most major new programs has been awarded, we continue to see opportunities to provide value added upgrades for the existing fleet and in a number of cases the potential for technology insertion on in-production aircraft models.

We also continued to invest in basic technology across this business, from advances in brake control algorithms that utilize new sources of runway condition data, to a new higher performance pumps, to working with a key customer on digital connectedness strategy across additional parts of the plane. Some of these efforts have longer time frames than others but we expect attractive returns on all of these investments.

Overall, it was a strong quarter across our portfolio. Based on what we know today and barring any new economic surprises, we are confident in our revised guidance.

We will provide more details about our 2017 outlook in January, on our next earnings call. We do face some elements of higher drag on the business next year, reversion to a normal tax rate, a lower back log from Fluid Handling as we enter the year, challenging sales comparisons at Aerospace and Electronics with Space Fence, and an uncertain outlook for our raising prices in RV demand in engineered materials.

We are also cognizant of continued general economic uncertainty on a global basis including, Brexit risks, continued volatility in commodity and foreign exchange markets, and the upcoming election in the United States. I will be visiting each of our businesses during the month of November for our annual operating plan review process but to fine tune our expectations; however, from what we're seeing so far I am confident that despite these issues and uncertainties, we will deliver earnings growth in 2017.

The last comment is on the M&A environment before turn the call over to Rich. The M&A environment remains challenging given valuation expectations and recent transactions in some of our end markets at elevated prices. However, we continue to pursue opportunities in our three core platforms; Payment, Commercial Aerospace, and Fluid Handling.

At any given period, the most attractive opportunities may be in any one of those platforms. Our pipeline remains full, our process will remain rigorous and disciplined, but overall I'm more optimistic about our medium term M&A prospects then I've been -- that I've seen over the last couple of years. We do see a number of small to midsized transactions as increasingly likely over the next 12 to 18 months.

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 third quarter of 2016 to 2015, excluding special items as outlined in our press release, slide presentation, and the accompanying non-GAAP tables.

In the third quarter, Fluid Handling sales of $245 million declined approximately 7%, reflecting a core sales decline of 5% and a 3% impact from unfavorable foreign exchange. This was in line with our expectations and consistent with our guidance. Fluid Handling operating profit declined 1% to $31 million.

Operating margins were 12.5%, up 70 basis points compared to last year, reflecting strong operational execution and restructuring savings along with modestly favorable mix, partially offset by competitive pricing and the lower volumes. We expect margins in the fourth quarter, somewhat lower as the mix turns less positive.

Fluid Handling backlog was $242 million at the end of September, compared to $267 million at the end of 2015 and $279 million at the end of September 2015. After adjusting for foreign exchange, the backlog declined 11% compared to the prior year and declined 2% sequentially and orders declined 3% sequentially following a 4% improvement last quarter.

Moving on to Payment and Merchandising Technologies, sales of $187 million increased 9% compared to the prior year. Core sales improved 12% with a 3% impact from unfavorable foreign exchange. We saw a core growth across both our Payment and Merchandising businesses. And reaffirming again we will realize $33 million of MEI related synergy savings by the end of this year.

Segment operating profit of $35 million increased 27% from last year, with operating margins up 250 basis points to 18.6%. The margin improvement was driven by higher volumes, along with MEI integration synergies, and productivity benefits at both the Payment and Merchandising businesses. Aerospace and Electronic sales increased 15% to $198 million.

Segment operating margins declined to 19.6% down 180 basis points from last year, but generally consistent with what we expected. The margin change primarily reflects negative mix associated with the Space Fence program, along with higher engineering expense supporting pursuit of new content. Total after-market sales declined 1%, following very strong growth last quarter. The change from last quarter was largely related to timing.

OE sales increased 22%, with commercial OE up in the low to mid single-digit range, and the rest of the growth driven by military OE, largely related to the Space Fence program. The OE to after-market mix was 77% to 23%, compared to 75% to 25% last quarter, and 73% to 27% in the third-quarter of last year. Aerospace and Electronics backlog was $377 million at the end of September, compared to $436 million at the end of 2015, and $460 million at the end of September 2015.

The lower backlog year over year reflects deliveries on the Space Fence program, along with normal timing of orders from large customers. Engineered material sales increased 2% to $64 million, operating margins declined 220 basis points to 17.7%, as competitive pricing actions and unfavorable mix offset the benefit of higher volumes in productivity.

Turning now to more detail on our total Company results and guidance. Our third-quarter tax rate was 33% compared to 31.6% in the third quarter of 2015. We expect a slightly higher tax rate in the fourth quarter. In the quarter, free cash flow was $105 million, up from $62 million in the same quarter last year and we ended the quarter with $169 million lower net debt than at the end of September 2015.

As Max mentioned, we are narrowing and raising our 2016 EPS guidance of $4.12 to $4.20, excluding special items compared to prior guidance of $4 to $4.20. Our guidance continues to assume total 2016 sales of approximately $2.7 billion. This sales outlook includes an approximate 2% negative impact from foreign exchange, with core growth now expected to be flat to up 2%, compared to our prior range of down 1.5% to up 1.5%. We are also raising our free cash flow guidance by $5 million to a range of $200 million to $225 million.

Operator we are now ready to take questions.

(Operator Instructions)

Our first question comes from Chase Jacobson of William Blair.

Hi, good morning. Nice quarter.

Max, the first question on Fluid Handling: I appreciate your market commentary, and think it's a realistic expectation for the lower-for-longer scenario. But as we look at your business, though orders have been relatively stable now for four quarters and you're making good progress with some of the internal growth initiatives, so when you talk about not anticipating a recovery in 2017, are you talking about the market or are you talking about your business specifically? Because it seems like, given the fact you have had core sales down now, 2016 will be the third year, that maybe you could squeak out a little bit of growth in 2017.

Let me firm up a little bit, Chase, and Rich can chime in as well.

In our core process valves business, with the year-over-year order rates that we see, which are pretty much as we see them, pretty much flatlined, we are chipping away at the backlog with some excellent execution and clearing some past-dues as well; lead times coming down, getting well-positioned for the future. We're going to take an assumption that 2017 is going to stay at that level. So from a revenue standpoint, we might see within the core process valve business, a slight year-over-year declines in revenue. I think clearly it will be an improvement on a year-over-year basis from a revenue standpoint, without a doubt, for full Fluid Handling.

The rest of Fluid Handling, with the work we have to do in November, we'll really fine tune our expectations on what will overall Fluid Handling growth be. So a little early to tell, but we wanted to communicate this understanding within the core process valve business even though we are at trough. If you extend that through the whole year and believe that there is no recovery whatsoever through all of 2017, which is how we are going to be thinking about it and be planning for, we would see some slight revenue decline year over year for that piece of the business. Still work to do to understand what the net number is for Fluid Handling.

Rich do you have anything?

I think that covers it a fairly well. I think we were stating a little bit of the obvious with respect to the fact that we had a higher backlog coming into the year. We are going to exit with a lower backlog. You couple that with the consistent order rates that we have seen over the past several quarters extending into 2017 and I think that aligns well with Max's comments; and again, trying to outgrow the market, best we can with the initiatives that Max outlined.

Okay, that is very helpful. And then in both in Payment and in Aerospace you mentioned some big opportunities. Can you provide any more color on that? Specifically in Aerospace, you called it a bold bet. What makes this different than other bets that you have made in the past? And if you could just give any color on that?

We are chasing a lot of opportunities. We continue to chase a lot of opportunities. There is a couple that we highlighted that we feel pretty good about, that we want to share more as we move to January and February. But there is not a whole lot I want to add on this, Chase, other than the emphasis that we've got a lot of activity. A lot of focus on core organic growth and a couple of significant programs that we hope to share in a little more detail in January and our February Investor Day.

So in payment though it is organic?

Yes, exactly. What we called out is all organic, these large opportunities.

All right, thanks.

Our next question comes from the line of Shannon O'Callaghan of UBS.

Good morning.

In terms of Fluid Handling and the order trends, I understand it seems like it's stabilized, but it has been bouncing up and down a little bit, right? Orders up, now back down a little bit. Is there any concern that it may be taking a little more step towards the negative from last quarter? Or do you really feel like this has reached a visibly stable level?

We see some of that bouncing as also some of the impacts of valves services that has two cyclical seasons of service recovery in nuclear. As I continue to talk about the process valve business, we are flatlined. You see still a tight band of orders on a month-to-month and quarter-to-quarter basis, so we're not really that worried. We have looked at trends. We don't see it significantly worsening. We don't see signs of significant improvement.

Okay. In terms of some of the new products you talked about launching in that business, what is it like launching those products in this kind of a market? Is it easier or harder to gain share when the end-demand outlook is still pretty difficult as you are bringing these to market?

We differentiate with the technology. In this case, with particularly the TOV valve has improved sealing tape capability for fugitive emissions as well as torque values that we think are pretty important and resonating with our customer base. So it starts with the technology, the spec, and where we are positioned. We are getting on the AMLs and we are seeing some orders. So we are pleased with it. Certainly we would love to see additional help from the market as well, but we are well-positioned.

I would just add to that, when developing new products it is about that differentiation but it's also about developing a product that has a compelling cost proposition for us internally as well.

Is there a reason there is more of a flurry of new product activity out of you now? Is this a result of a couple of years of activity? Or is it reason you think now is the time to strike? Maybe little more color on why there is more new product activity now?

I would call it a continued maturation. If we go back, I have been with Crane now for 12 years and going back to even previous leadership and the transformation obtained into an integrated operating company, driving the Crane business system, the level of maturity where we have moved over the years to continued execution, better execution on new product development. We continue to raise the bar on ourselves, we continue to execute and I think it's a general culmination of maturation as I see it.

Okay great, thanks.

Our next question comes from the line of Brett Linzey, Vertical Research Partners.

I just want to come back on Fluid. You did note some elements of mix aiding margins in the quarter. I understand it does moderate. Could you put a finer point on that dynamic? Was it aftermarket? Was it specific customer projects? Any color as we look into Q4 and really into 2017 on the different complexion of expectations between OE and aftermarket?

I think the comments we made were relative to mix in the fourth quarter and some of our businesses in that segment. We tend to see some unfavorable mix. For example, in our building services and utilities business in the UK, tends to be a business that we are challenged a little bit from the mix perspective as volumes change. The other element I would point to is some of the components that are included within our process valve business and the types of orders that are in backlog and executing and so on and so forth. I don't want to overplay the amount of detrimental margin that we should expect to see in the fourth quarter. It is marginal. It's nothing overly significant, but we wanted to make sure that we were transparent that margins would come back just a bit here in the fourth quarter.

Okay, great. And then on Payments and Merchandising, as you went in the quarter and you did your bottoms-up planning by customer product application, did you see some projects get pulled into the quarter and then maybe there is some give back in Q4? Anything on that complexion? You also made the comment about Q2, Q3 levels as a good way to think about the go-forward. Are you suggesting we extrapolate double-digit growth into next year based on visibility and the pipeline there?

We are excited about the segment overall. In terms of the third quarter versus the fourth quarter, there is nothing unusual that happened with respect to having something at the sacrifice of Q4 happening here in Q3. (multiple speakers) Nothing of that nature whatsoever. The business tends to be a little bit lumpy in the payments space, so we just benefited from a good overall solid quarter from an execution standpoint.

Much of the growth that came within the segment was also from our merchandising business where we continue to execute on our strategy, as Max outlined in his prepared remarks, around the connected machine and we are seeing traction with our [bottler] customers in that regard. That is also a bit of a tailwind to us from a margin point of view.

In terms of the mix by customer by region across the globe, as we do see more opportunities in recycling, in the emerging market sector, is there a profitability shift that we should be thinking about between some of the activity we have seen over the recent years and as that takes place?

Yes, to the extent that we have increasing higher-end bill validation technology going to certain customer-end applications, we should expect, for example, in that particular case, to see margin accretion. Overall, the margins across most of our product portfolio in the payment space, in particular, is pretty strong. The opportunities that we are looking at right now, we are very encouraged with. The momentum Max pointed out, Q2 to Q3, and as we think about 2017, remains encouraging. And as that comes to fruition we would expect the margin profile to be consistent to where we are today.

Okay great, thanks.

Our next question comes from the line of Nathan Jones of Stifel.

Good morning, everyone.

I wonder if you could talk a little bit about the Fluid Handling businesses outside of process valves. You talked about process valves being, orders being stable at the bottom-end and a little bit of backlog as you're going through the year. Can you talk about the rest of the businesses in that segment from the same kind of angle?

Sure, when you look at the core growth or the core decline in the quarter at minus 5% or roughly thereabouts; when you look at it cascading across those different elements of Fluid Handling, our process valve portion of the business was actually a little bit of a lower core decline relative to that 4.5% to 5%. Part of what happens here, as you might be familiar with, in the third quarter we tend to have some seasonality associated with our valve services business. So we saw a notable decline there but expected. And we should expect to see that have a little bit of a bounce back in the fourth quarter.

Across the others, very solid strength that we saw in our building services and utilities business out in the UK, serving the UK nonresidential construction market and the Middle Eastern market. So, pleased with what we saw there and that is why we might see some of that retract a bit here in the fourth quarter.

I would say across the other elements of the business, our pumps business, we feel very good about municipal and what those end markets are affording us hopefully in the future in terms of traction and growth opportunities. Crane supply, similarly up in Canada, nonresidential construction is still a very big challenge in those end markets as I think you know. I think we're doing the best to hold our own in those end markets and our team executes really well on a very consistent basis.

Overall, outside of that process valve end market, I would say things progressing as expected. A little bit of upside I would say here in the quarter on our building services business, but really it's on the fringes but positive organic growth. And maybe expecting to see that to come back a little bit in the fourth quarter.

Okay. In payment and merchandising, obviously you had a very good year there from an end-market demand perspective. Can you give us a little more color in terms of the verticals that you play in? Where you have seen strength, where you have seen weakness, and what the outlooks are by vertical as you go forward?

Sure, where we have seen continued strength and opportunity, if I think about go forward, it's continues to resonate quite a bit in terms of the value proposition on customers' increasing efficiency and productivity requirements particularly in the retail space. That has been an important vertical for us. It's where the value proposition in particular resonates. And then when you think about going forward, the transportation end markets is one we are excited about.

We are excited about all of them first of all, but if I were to point to a couple, retail, transportation, with infrastructure build-out in China and India. We continue to win on new metro investments across those two countries or areas of the world and we are excited about what those countries will continue to bring in terms of opportunities for Crane. Financial services as well; it's been also an area that has been an opportunity for us as we think about 2017 and 2018 with bank automation, both in the developed and emerging parts of the world.

But if I was to point to a couple to get at the heart of your question, retail, transportation are our in particular ones that we are particularly excited about.

Vending as well. And as we look forward, I think I agree with Rich, it's across the board. As we think about some new product launches that we have coming we expect some things in gaming and financial services moving into 2017. The only vertical that we think of is specific to a little bit of a challenge would be in Japan, with some year-over-year trends there, but strength across all verticals. Particular strength: retail, transport, vending, with positive outlook here in gaming and financial services as we move forward.

So the message is, it's pretty broad strength.

Correct.

I'm going to ask one to try to follow up to Chase's question on your bold bet in aerospace. Understanding that you don't want to give away what it is, do you have a time frame on when we should expect to hear the results of that bet?

We will know by next quarter.

That's helpful, thank you.

Our next question comes from the line of Ken Herbert of Canaccord.

Good morning.

Max and Richard, I wanted to dig a little deeper into the payment and merchandising. A phenomenal year, I should say, but quarter as well from a margin standpoint. Is there much incremental synergy upside you expect to see as you head into 2017?

I would say we're getting away from there being NEI acquisition synergies. We completed that acquisition at the end of 2013 and at this point our organizations have come together really nicely and I think the incremental opportunities that we see are going to be more on the general productivity front. There might be a couple of million dollars of opportunities still yet to read through from a synergy perspective but it is really starting to blur against general productivity initiatives across the business. We still see opportunities across all of our businesses and that is going to be one that we pursue like all the rest across Crane.

Okay. That makes sense.

As I think about this business and I think about the incremental margins into 2017, specifically within this segment, any reason -- you have still got across the business some significant opportunities I'd imagine, but how should I think about incremental margins in particular? And is there any potential mix headwind from a margin standpoint into 2017 as you look at where you are seeing the opportunity within payment relative to merchandising?

I think from an overall leverage perspective on incremental sales, clearly with the $33 million now largely behind us, or effectively behind us, those incrementals are going to decline. But when you look at the margin profile, the products that we sell, and the space, they are higher than the average for Crane. As we talk about our 25% leverage on incremental sales it will be slightly north of that, probably closer to 30% in that space.

Okay, that's helpful.

Finally, on the Aerospace side, within the aftermarket, were both commercial and military down? You specifically highlighted the difficult comps on the B-52 program but were you seeing growth on the commercial aftermarket or was that down as well in the quarter?

Commercial was also down just slightly in the quarter year-over-year. So we continued to see a little bit of lower replenishment in the quarter. It is all on the margin, frankly, when you look at it. We were up considerably from Q1 to Q2, on, for example commercial spares. It retracted a little bit here in the third quarter and we would expect to see a little bit of momentum as we move into Q4.

And finally, (multiple speakers)

I was going to say in terms of the split between the two, military aftermarket improved a bit in the quarter relative from a spares perspective but that was offset by some lower modernization upgrades. So there's always a lot of moving pieces at the point, but pretty consistent with what we expected and we would expect to see a little bit more in the way of aftermarket in Q4.

That's helpful, but finally on that point, have you noticed any change in your discussions with airlines or distributors on the aftermarket within the commercial side in particular as we've seen a little bit of uptick in fuel prices and airlines clearly looking to be a little bit more disciplined to drive a little bit more improvement on yields? Has that flowed through? Or has that been a headwind or do you expect to be that an incremental headwind on the commercial aftermarket?

I don't think we see that as an incremental headwind. I think it's more of the same, frankly. No real big change in dynamic over the last, I would say, six months.

Great, thank you much. Really nice quarter.

Our next question comes from the line of Matt Summerville of Alembic Global Advisors.

Thanks, good morning.

A couple questions. To conclude handling talks, been a couple quarters now seeing pushouts, not a surprise necessarily, but have you seen some of the stuff that had been pushed earlier in the year? Has that actually revenued at this point? Or are those sort of the deferred in perpetuity (multiple speakers) in installations?

When we say projects push, we mean that when you expect to get the order it tends to push another few months or quarters so it translates into revenue. We are not seeing major cancellations. We haven't seen significant changes there. So when we continue to say things continue to push, there is just this careful CapEx spending projects. You think you are going to get PO released. They come, but they come a quarter later or six months later than you had originally anticipated. We are seeing the same types of trends. No better, no worse.

With respect to the aftermarket or MRO side of the Fluid Handling business, are you seeing price pressure there to any extent? And on the OE side, if you will, could you quantify the magnitude of price structure you are seeing in the marketplace?

Well, in MRO we are not seeing price pressure; it has been fairly consistent I think on the project side. It is consistent with what we have described in the past.

We had initially talked about, towards the beginning of the year, price pressure on the OE side relative to what we started to see in the second half of 2015, roughly about a $5 million headwind from a price perspective and our views there haven't changed.

Got it. One last one on the vending business: at this point how much of the install base has been refreshed; has become as you term it, connected, if you will, and remind us what the demographics look like for the install base here?

I don't have all those numbers right in front of me. (Technical difficulty) million in terms of the install base.

We would have to come back to you, Matt, to have those specifics handy. A lot of the traction that we are seeing is not just some of the opportunities retrofitting install base but on successful execution with bottlers on new machines. So it is a couple of different things playing into the growth that we are seeing here and I don't want to mislead you and suggest that the install base is where we are getting all the incremental revenue. That is not the case.

Yes. Maybe my question was more along the lines at this point, either upgrade or replace, are you still early innings in terms of the install base being recapitalized one way or the other?

Yes. Definitely.

Too early.

Definitely very early.

That was more of the genesis of my question, thank you.

Our next question comes from Robert Barry of Susquehanna.

Good morning, this is Filippo on the call for Rob.

I just want to go back to the guidance update on core sales, up about 100 basis points at the midpoint. I was wondering if you could comment how the businesses are tracking versus the previous expectation; looks like payment has had; but just comment through the segments.

Yes, I think the simple way of thinking of this is, looking at our year-to-date performance for the first nine months of the year and where we are now with a quarter to go, a little less uncertainty with respect to the end markets in Fluid Handling. So it is really a calibration in the tightening and our understanding of what can happen in the next several months or next three months. And we like what we see, in particular in the payment space. It is really year-to-date performance, less uncertainty in Fluid Handling and the expectations we have in payment.

Fair enough. In aero, do you expect growth in Q4? There is a tough competent after-market. What are your thoughts there on also the impact of Space Fence?

We typically don't give guidance on a quarterly basis, but I would say that we do expect to complete the Space Fence program in the fourth quarter. It's going to be at a much lower level of sales then what we have seen in Q3, but overall we would expect to see some growth year over year.

Okay. Just high level, as we think of 2017 in aero, you are going to have the tough comp on Space Fence revenue so if we think of high-level revenue margins, should we expect flattish to down sales but margins will benefit from the mix from Space Fence? Or how should we think high-level margins and revenue in 2017?

I think, as we stated in the prepared remarks, very difficult and tough comparisons from a revenue perspective next year, given the rolloff of the Space Fence program, notwithstanding the fact that we are chasing some large opportunities. We don't see those impacting in a materially in 2017, so we will have a headwind from a revenue perspective next year. But from a comp perspective on margins in OP, we would expect both those to expand in 2017.

Okay, thank you.

Next question comes from the line of Jim Foung of Gabelli & Company.

Good morning.

Max, I wonder if you could talk a little bit about the nuclear business. How big is it now? And what is the potential for growth there? Specially to China, India both building out their nuclear plants in the next five years?

It's a nice opportunity for us. We have a couple million of content per reactor today. We continue to develop some new solutions, so even though the original AP 1000 has been specified there are some opportunities that our teams chase on some other suppliers that are struggling with some solutions. So we continue to quote and try to win additional content within China. Some of the project releases have been delayed with normal actual schedules versus planned, but the market long-term continues to be solid. And then just a renewed focus within India with some real momentum on planned projects. We're working closely with Westinghouse on the AP 1000 on early discussions there. So just generally positive.

Did you sell to all the different designs or just the AP 1000?

We focused mostly on the AP 1000.

Okay, terrific.

Talk a little bit about the process valve business. What has to change for you to get more confident that this is could grow in 2017? Do oil prices have to go higher than this for you to change your feelings about it?

Clearly, you're going to see a tight correlation to price of oil as it relates to CapEx and CapEx environments. Having said that, we still have a very strong presence in chemical and additional end markets that will continue as the economy grows. So, major macroeconomic trends, GDP growth, all these things are important to all the end markets we play in.

Okay. Could you talk a little bit about M&A and something in the next 12 to 18 months. Do you think something could be done sooner then that?

(Laughter) We added that comment specifically for you, Jimmy. (multiple speakers) Not much more to comment other than what was in the prepared remarks.

Okay, but the pipeline is full and [years] can happen any time, basically.

Exactly.

(Operator Instructions)

Our next question comes from the line of Ryan Cassil of Seaport Global Securities.

I guess on the aerospace side, I can appreciate the headwind from Space Fence. But talking about off-profit being up next year, could you give a sense on how much of that is just lower R&D or more normalized R&D spending? And what are the expectations from the platforms in the commercial and defense side? I guess the question gets more to bigger picture about, in the commercial side you see some good trends there on the narrow body side and some content there, but a little bit of cautiousness or concerns on the wide body side. Any thoughts on those dynamics and how it affects you next year potentially?

Sure. I'm going to do the best I can to answer those questions.

The mix element certainly is going to be challenge for us. It was a considerable program that we have been executing on here in 2016 on Space Fence, so just the natural elimination of that will cause an accretion to margins. Engineering spend also another area that we have talked about in the past, in terms of that reducing as we are completing a lot of the development programs on the new platforms that we have won over the last couple of years. So that also is going to be a contributor to operating profit as we think about 2017.

In terms of timing and impact of wide body versus narrow body, I think what I would be prepared to say is that you know that we have an excellent position on all platforms, frankly, absent the A350 and that is probably pretty much it. But our participation on all the platforms is helpful for us. To the extent that the narrow body moves a little bit more slowly for one reason or another, and aged platforms fly longer, we're going to benefit from the aftermarket on that type of a mix. We will provide a lot more color and be very clear in terms of what build rates are going -- how they are going to roll out for us in 2017. To give you that color during our Investor Day, but broadly speaking I think we are well positioned and can benefit from either an aged platform that flies longer or certainly when narrow bodies enter service and you get that incremental initial provisioning as well.

I appreciate it, thanks.

Lastly, there was a decision as it relates to the asbestos liability in New York that perhaps was a surprise in terms of the precedent it might set. Any thought on the bigger picture or longer term impact of that? Or is it too early to assess at this point?

I would point you to the 8K, where we clearly summarized not only that decision but a win. We see wins, we see some decisions that are a disappointment. The long term trends remain positive. We continue to fight the abuse as we have never manufactured asbestos, so in the bigger picture we don't see much changing.

Great, thank you.

I'm showing no further questions in the queue at this time. I'd like to turn the call back to Max Mitchell for closing remarks.

Thank you, Operator. Markets remain challenging, but we are excited about the opportunities that we see ahead of us within our control. Fluid Handling is well prepared to capitalize on an eventual recovery in its end markets when that occurs. Payment and Merchandising is performing extremely well, better than we had hoped, and this momentum will carry into next year. Aerospace and Electronics is well positioned on the right platform and we still see opportunities for new content awards. Overall we are confident in our ability to grow earnings next year and we believe we are well positioned and prepared for the future. That positioning and the key to our success is based on our relentless focus on innovation, from hardware to software, to digital connectedness, our products and solutions are increasingly differentiated by the engineered technology that we develop.

As the late great Gene Wilder said in his role as Willy Wonka, invention, my dear friend, is 93% perspiration, 6% electricity, 4% of evaporation, and 2% butterscotch ripple. We wholeheartedly endorse the sentiment of this view regarding hard work and effort. Despite challenging market conditions, we continue to work diligently on execution, productivity, and just as importantly, innovation. We are pursuing substantial new opportunities in our Payment and Merchandising, Aerospace and Electronics, and Fluid Handling businesses to increase sales above and beyond market growth rates, by driving solutions that create value for our customers.

We look forward to early next year when we hope we can speak with you about these opportunities in more detail. Thank you for your interest in Crane and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect.