Crane Co (CR) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to Crane's First Quarter 2017 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 First Quarter 2017 Earnings Release Conference Call.

I'm Jason Feldman, Director of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Chief Financial Officer. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just a reminder. The comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward-looking statements.

Also during the call, we will be using some non-GAAP numbers which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com, in the investor relations section.

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 first quarter EPS was a strong $1.05, up 13% compared to earnings in the first quarter of last year. Sales of $673 million increased 2%, with 4% core growth partially offset by a 2% unfavorable foreign exchange impact. Operating margins improved 130 basis points from last year to 14.3% primarily as a result of solid execution, strong productivity and good leverage on the higher volumes.

Overall, I have added confidence on how the year is progressing. Most indicators we follow are improving gradually. End market activity appears to be picking up slowly, and sentiment among our customers and suppliers seems to be stable to slightly better. While we are incrementally positive even compared to Investor Day 7 to 8 weeks ago, we don't want to get ahead of ourselves. Substantial portions of our business are short cycle and can change quickly. We're only 1/3 of the way through the year, and there is still a fair amount of general economic uncertainty and geopolitical risk. Balancing these factors, we are raising the low end of our guidance range, and we now expect EPS in the range of $4.35 to $4.55 compared to our prior range of $4.30 to $4.55.

Turning to our businesses.

Fluid Handling is off to a good start. And Rich will discuss our end market conditions in more detail, but I want to provide some highlights where we are gaining traction in the markets we serve. We've talked a lot about growth initiatives over the last few years. And I'm pleased with our results in the quarter, with FX-neutral orders up 10% year-over-year. While we feel that the end markets are beginning to recover, our best estimate is that roughly half of this orders growth is related to share gain.

In the Americas, we are securing wins with our new products from our triple offset valves to lined butterfly valves. We're also seeing benefits from our value analysis, value engineering initiatives that substantially reduce our products' costs, helping us increase share by pricing more competitively while also improving our margin profile. Our channel initiatives are also showing positive results. In Asia Pacific and China, we are seeing share gains on projects, particularly with our Resistoflex brand. Some local customers have had competing products fail in specific situations. And we are one of the very few high-quality alternatives for PTFE line pipe, where the science behind our extrusion technology matters for the life and performance of the product which is used in some of the most demanding and dangerous applications. And in Europe, we are gaining share with our Saunders brand, where new products we've launched are providing targeted pharmaceutical customers with improved installation, commissioning and maintenance benefits that they previously could not acquire. Our dedicated project management support is also a key differentiating reason why we are winning with Saunders. Overall, order activity in Fluid Handling can be lumpy. A few large projects can swing the numbers one way or the other, but we are -- we not only feel more comfortable with the condition of our end markets. We are executing well in the marketplace and winning.

At Payment & Merchandising Technologies we had a really great quarter with 20% operating margins and 18% core growth, which reflects not just market strengths but outstanding execution by our team. New product and application investment continues. And remember our research and engineering focus in spending is as high as it is in our Aerospace & Electronics business. 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.

There's a lot of good news here. In the quarter, adjusting for foreign exchange, we saw growth across every single one of our payment verticals, with the strongest activity in developed countries' retail market applications, followed by transportation, financial services, gaming and vending end markets. This strength reflects both execution against our new product development strategy as well as the strong underlying market conditions, with customers increasingly willing to invest in productivity initiatives where we have a compelling value proposition. To give a few examples: In the retail end market, we're seeing accelerating rollouts for self-checkout programs in both North America and Europe. Consumers are increasingly comfortable with self-checkout, and in many cases, they prefer it. Consequently, retailers are rolling out additional lanes of unattended payment solutions to save money and improve the customer experience. We have also been successful gaining share with a number of the largest retail OEMs globally. In transportation, China continues to expand their transit systems, and unattended ticket machines are used across these installations. We're also winning fare collection projects in Europe and parking applications across North America and China. In financial services, we're seeing solid growth in developed market banking applications, in addition to traditional applications, such as bank branch automation. We are participating in some interesting new applications such as ATMs for digital currency, yet another example of where cash transactions are being automated and bridging the gap between cash and cash as parts of the system. In this specific application, ATMs are being deployed mostly in North America, where customers can deposit cash and have that cash converted into electronic currencies.

We are very pleased with how the payment business has performed. However, please remember that the year-over-year comparisons get much more challenging as the year progresses. Last quarter and at Investor Day, we spoke to you about a very large retail project in North America and our excitement about this sizable and important win. And we also discussed the timing risk associated with this project. To date, project shipments have gone extremely well. A project of this size requires ramping up our entire supply chain quickly, flexing our manufacturing capacity and coordinating all related logistics. And our execution has exceeded my expectations. We are in nearly constant communication with the OEM for this project. At this point, it does look like 30% to 50% of the expected shipments for 2017 may move into 2018. However, we are not changing our guidance for this segment at this time. Given the strength of the underlying core payment end markets and our continuous focus on productivity, we expect to fully offset the impact of this timing shift, and we remain confident in our full year outlook. Importantly, the end retail customer remains committed at this time. The move is just timing related, and we do expect the project to eventually be completed as originally envisioned. If it is as successful as we expect, we think it's likely that other retailers will move forward with similar rollouts over time.

While the payment portion of the business drove the growth in this quarter, I do also want to mention some of the recent successes in merchandising and Crane Connectivity Solutions. The team attended the NAMA OneShow last week, the biggest trade show for the vending market, and they previewed the new Media2 product, which offers full motion video, a larger screen and an intuitive user interface designed to influence consumer behavior and increase same-store sales. At the show, we also previewed our Navigator Touch retrofit screen, creating an upgrade path for vending operators to add an improved user interface and the option for digital advertising to their existing installed base. In Europe, we've been gaining traction with our new Voce Icon coffee machine, with a simplified user interface and high-quality brewer. And Crane Connectivity continues to make progress. Our installed base of connected machines capable of running digital advertisements from the Crane Media Network increased more than 10% in the first quarter alone. And we continue to add advertisers as well. In North America, we are adding cashless payment systems, thousands of machines each month, rapidly growing our installed base of more than 400,000 connected machines. And while the connectivity business has historically focused on North America, we have an early but strong and quickly growing presence in Europe. The European market is behind the U.S. in adoption of cashless and connected machines, but with our experience practically creating this market in the U.S., we believe we are extremely well positioned to succeed in Europe as well.

At Aerospace & Electronics, the year started as we expected with some incremental good news. We've talked previously about 2 large microwave projects that we were pursuing following our very successful participation on the Space Fence program. I'm pleased to report that we won the first of these. We will be providing radiating element tiles utilizing our proprietary multi-mix, multilayer fusion bonding technology for a large ground-based radar project. This program is not quite as large as Space Fence. It's about half the size. And given the project's timing, we expect the financial impact to be primarily in 2018. The second project we have talked about, which will be a second planned installation of Space Fence, has not yet received funding. We believe we are well positioned if a positive decision is made about funding, but at this time, we don't expect a decision for at least 12 months or longer. Throughout the business, we continue to invest. And we are continuing to support our customer's ramp-up of the newly re-engined narrowbody aircraft now entering service, including the 737 MAX and the A320neo, while also supporting the ongoing development programs for the C919 and the E2. We are well positioned on the next-generation narrowbody aircraft, and we continue to see incremental opportunities for technology insertion into existing platforms. We're gearing up for the Paris Air Show in June, where we will again receive a supplier of the year award from one of our largest customers. And we hope to see many of you there.

At Engineered Materials, resin prices have increased some given some Styrene shortages. While this hurt margins modestly in the quarter, the good news is that these shortages appear to be related to unplanned supplier outages related to maintenance activities that had been deferred for too long. We do expect these shortages to abate in the coming weeks. As a side note, we think these unplanned outages are a general positive industry indicator for our MRO business in Fluid Handling. We're also winning back some share in RV as planned. We've been extremely disciplined on pricing over the last 2 years, while our competitors have in some cases been much more aggressive. However, sticking firmly to our value proposition of having the best quality and service levels in the industry, we are regaining some share as a result and providing better total value to our customers.

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.

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 first quarter of 2017 to 2016, as outlined in our press release and slide presentation.

In the first quarter, Fluid Handling sales of $240 million declined approximately 3%, reflecting a core sales decline of 1% and a 2% impact from unfavorable foreign exchange. Fluid Handling operating profit increased 6% to $27 million, with operating margins of 11.3% that increased 100 basis points compared to last year, reflecting strong operational execution and productivity, partially offset by the lower volumes. Fluid Handling backlog was $250 million at the end of March compared to $228 million at the end of 2016 and $263 million at the end of March of last year. After adjusting for foreign exchange, the backlog declined 1% compared to the first quarter of last year and improved 9% sequentially. Adjusting for foreign exchange, orders improved 10% compared to last year and 11% sequentially.

In the Americas chemical market, we are seeing some improvement in the release of project spend for projects that have been in our funnel but delayed for a long time. It is a diverse set of projects from fertilizers to refrigerants. On the MRO side, we are seeing some emergency spot buys for unplanned outages. While it's early and conditions could change quickly, the broader environment feels stable to slightly better. What we have described as the new normal of constant project release slippage may be improving. And the pickup in activity does not appear to be driven by restocking. For U.S. refineries, it is still too early for us to have a great read on the fall turnaround season, but activity does look like it is improving. And North American general industrial activity is showing some positive signs from pharmaceuticals to heavy industries like pulp and paper and steel. In the Americas, the only area that has been a little slower than expected is power. We are seeing good MRO activity but fewer opportunities related to projects.

Overall, Europe remains relatively depressed, and we expect it to be fairly stable on an underlying basis but lumpy. We are seeing expansion projects, not greenfield but projects increasing capacity and efficiency of existing plants.

In Asia Pacific, we had a good quarter with MRO strength across Japan, Taiwan, Australia, Malaysia and Singapore. Quoting is up, and we are beginning to see a shift in quoting from MRO to projects. China is also improving with solid activity in the petrochemical and power markets; and within chemical, good demand overall and some methanol-related projects more specifically. The Middle East has steady MRO and a handful of petrochemical projects, but this is still one of our softest markets at this time with weak project activity.

A quick note on Westinghouse. Most of our current exposure to the nuclear industry is related to routine maintenance during outages for U.S.-based plants. And we do not expect any material impact to our results this year as a result of their bankruptcy.

In commercial markets, U.S. municipal and U.K. nonresidential construction demand has been fairly good, although Canada continues to be a challenging market.

Overall, we are feeling better about the Fluid Handling business based on what we have seen to date this year. However, until we see this level of activity sustained for another few quarters, we will remain somewhat guarded in our outlook.

Moving now to Payment & Merchandising Technologies. Sales of $196 million increased 14% compared to the prior year. Core sales improved 18%, with a 3% impact from unfavorable foreign exchange and a 1% divestiture impact. Segment operating profit of $39 million increased 40% from last year, with operating margins up 370 basis points to 20%. The margin improvement was driven primarily by the impact of the higher volumes.

As Max mentioned, there are tougher comparisons ahead and some timing risk, but we are very pleased with how this business has performed and with this -- and with the outlook for the remainder of this year.

Aerospace & Electronics sales declined 5% to $163 million. Segment operating margins improved to 19.6%, up 30 basis points from last year and consistent with our expectations. Total aftermarket sales increased 5%, driven by modernization and upgrade programs and replenishment spares. OE sales declined 8% given challenging and -- challenging comparisons from last year's Space Fence program and weaker business jet demand. The OE aftermarket mix was 74% to 26% compared to 76% to 24% last year. Aerospace & Electronics backlog was $352 million at the end of March compared to $353 million at the end of 2016 and $419 million at the end of March of 2016. The lower backlog year-over-year primarily reflects deliveries on the Space Fence program.

Engineered Materials sales increased 10% to $75 million. Operating margins declined 140 basis points to 18.7% primarily as a result of higher material costs. As Max mentioned, we expect material costs to moderate as the year progresses.

Turning now to more detail on our total company results and guidance.

Our first quarter tax rate was 28.1%, up slightly compared to 28% in the first quarter of 2016. The tax rate in the quarter was lower than expected primarily due to the adoption of new tax accounting standards which requires companies to recognize the excess tax benefits of stock-based awards as a reduction to income tax expense rather than the previous methodology which recorded the benefit on the balance sheet. We are not changing our full year tax rate guidance at this time given that the impact of this change in any given quarter could move in either direction.

In the quarter, free cash flow was negative $6 million compared to a negative $29 million in the first quarter of last year.

As Max mentioned, we are raising our 2017 EPS guidance to a range of $4.35 to $4.55 per share compared to our prior guidance of $4.30 per share to $4.55 per share.

Overall, we are pleased with how the quarter unfolded but remain cautious given we still have 3 more quarters to report. And external factors, including geopolitical events, are still driving a fair amount of uncertainty in our end markets. We continue to focus on what's in our control, remain focused on our growth initiatives, continue to drive productivity and execute with discipline.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from the line of Kristine Liwag from Bank of America.

Max, can you provide more color on the possible shipment deferral you mentioned in payment? Like what is that entirely?

So of the large project that we referred to, the large retail OEM project that we had explained at Investor Day, the end customer is just slowing up their deployment a little bit. And it's, the current forecast shows that 30% to 50% of the expected forecast in '17 which we had originally communicated in terms of the full scope of the project is going to be deferred and slip into 2018. Then as I just mentioned, with the strength that we're seeing across all segments, including retail outside of that particular order, and with productivity initiatives that we're driving, we feel confident in our ability to offset that slippage and hold our guidance and our confidence.

Can you just remind me of the size of that order?

I can't recall did we actually say, Rich...

It's half the growth.

Yes, we attributed roughly about half the growth in the business to this particular initiative. So if you recall, I think it was about 11% overall core growth that we guided to in 2017.

But we gave a rough range, Kristine. We didn't give the exact number.

I think -- just to add a little bit here in terms of we actually see this as a positive not only because of our ability to replace given the strength in the remaining portions of the business but as we even think about 2018 and what that means to potential incremental upside in 2018 as projects potentially move to the right...

So does this mean that -- is this 2018 look like you could achieve your peak cycle margins of 22% in payment in 2018 if this contract moves over to 2018?

Yes, I would hold off on providing guidance on our margin profile in '18. Obviously, we're pleased with where we are in the quarter and our full year margin target in the segment being 20.5% on a full year basis. And we think we're tracking pretty well to that, but as we continue to see growth and strength in the segment, we leverage very well here and we would expect to see incremental margin improvement as we move forward.

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

I'm going to stick with payment and merchandising here. I did -- I mean I did some rough math, and it looks like about $15 million to $20 million slips out into 2018. Is that about the right number?

You're referring to revenues, yes?

Yes, yes.

Order of magnitude.

So -- and then I'd actually be interested in talking a little bit more about what you guys think the opportunity here might be over the longer term if we take some of the timing issues out of it and think maybe over the next 5 or 10 years. I think, Max, in your prepared comments you talked about thinking that other large retailers might follow suit with installing these unattended payment systems. If that goes the way you're thinking it's going to go, what kind of revenue opportunity are we talking about just from this one channel over a 5- or 10-year period?

That's a excellent question. I don't have that as crisp as an answer I'd like to today, Nathan. I think we'll be working through our strat plan review in the summer, and it's a question that we'll be continuing to review with the team. We are seeing some increased share gain with other OEMs and also seeing increased deployments on a global basis with the retail self-checkout. So it's not just a North America story. It's not just with one customer. So we are seeing continued traction as well as the growth that we're seeing across all of our end market segments, but let us go back. I can frame that up and think about how we communicate that more intelligently going forward.

Is there any kind of -- I'm going to push a little bit here. Any kind of order of magnitude that you could think? Would it be another 2x what this one is, 10x what's -- what it is, 50x what it is?

I think, again, it's a little bit tough to be able to provide that level of guidance, I think, at this point, right? I mean these are programs that are designated to specific retailers and what their behaviors are on buildout of new stores versus simply doing what they need to do to become more productive and more profitable in the near term. So I think we're -- overall, we're encouraged with what we're seeing in terms of the number of lanes that are being added across the retail space. There are other OEMs that are starting to pick up, as Max mentioned, seeing the benefits in this regard. Overall, we've presented an overall outlook for our core guidance for this particular segment in the mid-single-digit range. Does that tick up a point or so? Because of this kind of strength, it's possible certainly in the near term, but over 10 years is really hard for us to make a comment about that.

I think Rich has a good point. This business is lumpy with projects. We've always seen that. We've explained that in the past. We always described it as a mid-single-digit growth business. Consistently, we guided to stronger than that this year. It's important to recognize the some of the project-based business that can impact some of the other segments as well and that can average out in total of the segment. So a little bit of caution not to overweight too much just on the retail opportunity alone.

Okay, no problem. I'm just going to slip one in on Fluid Handling. You're talking, I guess, more constructively about a lot of the different end markets here. Built backlog, order rates were up, yet you haven't really put that into your guidance yet. Is that just conservatism on your part? Or is there something other than just being conservative that's at the heart of that?

I think it's there's still -- I think we -- the way we think of this is there's still a fair amount of uncertainty in the end markets. We're very encouraged certainly about what we saw in the quarter, but it's 1 quarter, and 1 quarter doesn't make a trend necessarily. It's playing out the way we expected; the way we started to communicate this, frankly, in the middle of last year, even through the fourth quarter and Investor Day. So we are encouraged, but 1 quarter doesn't give us that kind of confidence to say we should really be thinking about a higher number here for the balance of '17.

Did you see order rates improve through the quarter? And did that continue into April?

Through the quarter, yes.

We did see it through the quarter. We can't comment on April.

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

Just wanted to come back to payments growth. We've seen it clearly strong in the quarter. I understand the full year guide was kind of half based, half some of the -- to some of retail wins. Was that the complexion in the quarter? Could you give any color?

Yes. I think, in the quarter, the way to think about overall in the segment, if we were to exclude this project in the quarter, we were at about a mid-single-digit growth rate, so very consistent with our guide for the full year. So again showing some really positive signs, mainly in the payment portion of the business. We did see some unfavorable comparisons in the merchandising portion of our business, where we were down a bit, but expected given last year the -- we were up 15% quarter-over-quarter. So we had a very good year last year, in the first quarter, specific to the merchandising portion of the segment, but overall, even including that, if we were to take out the benefits of this one particular retail project, we were at a mid-single-digit growth rate.

Okay. And you guys talked a lot about the product initiatives and some of the consumer segmentation push. It does suggest, if that business does get pushed out, that mid-single-digit rate does step up through the balance of the year, to hit the guide, as it's unchanged. Is there -- is it simply tone that gives you that confidence? Are there bids outstanding that you're close to finalizing contracts on hand? Anything that helps you with that, the balance of the year visibility.

Yes, I think the first thing I would say is we didn't proactively go out there and change the segment-level guidance of 11%, but I would say that, given the pushout, that will be a little bit lower on a full year basis. The comments that we made specific to making up the impact of this moving to the right was geared towards the profitability of the remaining portions of the business. So we think that we can make up the impact of the pushout to the right as it relates to EPS and OP, but from an overall revenue perspective, we would see this coming down, call it, 150 basis points on the top line or something like that.

Okay, all right, that helps. And then just shifting to aero, if I could. Obviously, the margin profile is very strong in an absolute sense. I would have thought that, given the Space Fence positive mix variance, plus a little help in aftermarket which looks like it's starting to pick up here a little bit on the provisioning side, you would have saw a little bit better margin improvement year-over-year. Is there anything programmatic or investments that we should be aware of that maybe impacted the quarter?

I think, just stepping back, the way to think about this is, first of all, the margin performance that we had in the quarter was right where I expected it to be when we started the year. So the print of 19.6% -- was it -- 19.6% was right where I expected it to be. As you think about the balance of the year, our revenue profile here in the first quarter was $163 million. And I expect that and we expect that to be up at the $180 million range on average as we close the year out, so the incremental leverage on that is going to bring us the incremental margin profile that we expect to finish the year at our overall guide in that segment of roughly 22%.

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

A couple questions. First, Max, can you maybe talk about the M&A pipeline and the degree of actionability you're actually seeing therein? Any update on multiples? And kind of compare what you're seeing now in your pipeline versus maybe a year ago.

Funnel, we continue to work. Funnel's full, activity across most of our segments, including Fluid Handling, payment, merchandising, aerospace. Multiples, in discussions on some opportunities, starting to come in-line a little bit for us in terms of our disciplined approach. I would say that there's some increased activity even over the transom for us versus some of the more strategic, so I feel really good about our activity. I feel really good about our continued process, our focus, our discipline. I would say that we expect in the short term to positively announce 2 smaller opportunities that are very close. So that should be coming shortly. And we're working on some larger opportunities that are less certain and longer term in terms of any timing, but -- so hopefully, that frames it up a little bit in terms of activity as well as actionability.

Yes, that's helpful. And then any comments you would like to make in terms of just the Fluid Handling business, what you're seeing pricing-wise versus input cost there and what the outlook is for the balance of the year?

We -- I think it shows in our results that we've remained disciplined in pricing. We continue to, if anything, now -- commodity impact hasn't read through to a significant degree for us year-to-date. We're starting to see some hints reading through. We have got long-term agreements in place. We've got other offsets that we've been pursuing. Some of the commodity numbers that you would see overall aren't reading through quite that same level, what is going to read through, we are putting price increases through. We have put some selective price increasing through. It's holding. So I think we're pretty good in this regard. And we're -- we feel good about what we've planned, what we're executing to, what -- and how we're reacting to commodity pricing today. I'm not seeing any more -- just in terms of the pricing competitiveness in the marketplace, I think there it's the same. I mean we -- it's been challenging. It continues to be. It's project by project in terms of the opportunities. So I don't see any dramatic change one way or the other.

Got it. And then just one follow-up on aerospace: Has there been any change, now that you're through basic 4 months of the year, to your outlook? Just focusing on the commercial side of the -- A&E segment. Is there any change in your outlook with either OE or aftermarket? Or is it still the same as it was when you set it at Analyst Day?

I would say, no change at this point, Brett (sic) [ Matt ], same as what we communicated at Analyst Day. We obviously are monitoring the end space pretty closely, but no change.

Our next question comes from the line of Jim Giannakouros from Oppenheimer.

And sticking on payment. And I'm sorry if I missed it, but is there -- in your core, is there a vertical or 2, I suspect retail, that's carrying the day with respect to your raised expectations specifically to core? Or is it your innovation, share gains from initiatives et cetera that drives that step up in your 2017 expectations?

Yes, just to reiterate, I mean, from a core perspective, we actually would anticipate our initial guidance of roughly 11% to actually abate a bit. So I'd call it 150 basis points from what we initially communicated because of some of the pushout that we would experience with this one particular project into 2018, but the good news that I'm hoping that everybody is hearing is that we're seeing strength across the rest of the vertical markets that we participate in specific to the payments -- to the Crane Payment Innovations business.

Right, but following that, I mean, what I meant is within that core -- take that one retail deployment aside. Is it broad based, or is there a vertical or 2 that's contributing more than...

Yes, no, it's broad based. It runs across the verticals. It was a great quarter for us across the business. No one other had any big, significant item that we would call out.

Okay. And in -- you said, the new win, half of Space Fence, as far as revenues. And again, I apologize if I missed it, but given its size or your experience there, any reason to think that you can do better margins on this deployment versus what you did with Space Fence? Or it will be a similar margin experience.

Yes, so the impact that we have here that -- for 2017 is that it's going to be a minimal impact for the 2017 year. As we move forward, we're going to continue to look at ways to be more efficient to improve the profile of the margins in that particular group or that particular opportunity. But similar to Space Fence, it is defense related. We -- but given what we've learned and our ability to become more efficient in terms of what we learn, we would expect to do, hopefully, a little bit better.

Okay. And one last one, if I may: You said in Engineered Materials, input cost increases that you're seeing, you expect that to moderate as the year progresses. So if I got that right, should margins also improve as the year progresses? Or volumes moderating, that would potentially offset.

So we're seeing solid demand continue in that space. So frankly, the -- from a volume perspective, we tend to leverage very well in that business. We would expect, to the points raised in the prepared remarks, for the costs to come down a little bit as it related to what we specifically experienced in the quarter, which was some supply capacity issues on behalf of the industry, the vendor base. So from that particular perspective, we would expect things to actually get a little bit better. That said, to the extent we see oil and gas prices continue to move in that northern direction, there could be some headwinds. And that's what we guided to in terms of our overall margin target for that segment in the year. So short term, we'd -- we would expect it to abate a little bit but overall reverting back to our overall margin target.

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

I just wanted to first start off, Max. You highlighted the opportunity within Aerospace & Electronics to potentially take some share across a number of platforms. Can you provide any more detail on either timing or within your -- within the product lines where specifically you're seeing opportunity and what the potential magnitude could be?

Magnitude, I'd -- just some of the opportunities. If you look at our solutions from sensing and the numerous sensing applications that we are able to provide solutions on, in some cases, there's competitors that may not be performing as well and there are certain problems that we can solve. That's a great example. Looking at our fluid business and some of the solutions we have there in terms of our lubrication solutions for the engines and some of the opportunities that we're providing and looking at -- or, is another great example. Those are some things that come to mind most immediately.

Okay, okay, that's helpful. So it doesn't sound like, near term, anything necessarily -- at least, when I say near term, 2017. It could be incremental up side but, over time, just continues to build the base of the business. Is that the right way to think about it?

Correct. Correct. It's a steady healthy diet of opportunities that we are engaged with our customers, looking at solutions beyond just the programs.

Okay. And then on your -- the aftermarket growth within Aerospace & Electronics up 5%, is that consistent? Or can you parse out the military versus commercial?

Let's see, between military and commercial. And so the upside of the 4.5% was -- a good chunk of that was replenishment spares in commercial. We didn't see as much initial provisioning, so it was replenishment spares, as well as some modernization and upgrade benefits that we saw in the quarter. I would say -- if you're trying to gauge between defense and commercial, I would say there was nothing meaningful from a trend perspective to take from the balance of that 5% number.

Okay, okay, that's helpful. And yes, and...

(inaudible) it probably leaned to more strength in commercial than military, though, on the MNU side.

Okay. And that's how it sounds from your comments. And then just bigger picture, Max. As you look at -- I mean really nice first quarter. Obviously, you've made it clear that clearly you don't want to get in front of your skis. There's clearly geopolitical risk. There's some timing on -- within payment and merchandising. How close were you -- or how did you think about raising the full year top line guidance as you did obviously on the EPS line? Was that something at all that you were thinking about? Or maybe just a little bit on how you thought about that. Because it looks like across each of the segments, I mean, I can appreciate the risk, but you're -- it sounds like you're communicating sort of incremental strengths in -- across the board. Can you just help with some of your thought process there; or maybe help with, just from an expectation standpoint, how to think about that?

Yes, I'm not sure if you asked me or Max, but I'll chime in here, Ken. So overall the 4% that we saw in the quarter is -- it was actually just a tad lighter than I would have expected or we would have expected in the quarter itself from a core growth perspective. And then the real strength from an orders point of view came in the Fluid Handling space beyond what I would say we would have expected. It was a little bit stronger. I think you heard that read-through in the call, but again, we feel like it's too early to say this is going to translate into a continuation of that experience in Q2 and 3 such that it would give us enough confidence at this point in the year to be able to raise the revenue target. So of course, we did talk about it. And we did contemplate, but it just didn't feel like it was the right time at this point.

Our next question comes from the line of Rob Barry from Susquehanna.

It's [ Mike Tulloliwan ] for Rob. A couple questions on fluid end markets. To what extent are you seeing projects that have been delayed or pushed right for a while starting to move forward? Or is it better activity, or more deferred maintenance? And can you also give a little more color on refiner MRO activity?

A little bit of both on the projects. Again, it's a little too early to say that it's an ongoing trend of pulling in projects that have been deferred a significant amount of time, but we did see some projects that we historically have seen maybe continue to slip to the right a little bit that were released. MRO generally is -- as we -- as Rich went through in detail by geography, is generally stable to increasing slightly. And what was the last one, [ Mike ]?

Just a little more color on refiner MRO activity in particular.

Refiner MRO...

No, I think there were some signs of it picking up, but we didn't see anything...

Nothing dramatic.

Dramatic in the quarter itself but just signals and signs that it's moving in the right direction.

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

So just following up on the -- in Aerospace & Electronics. This new project that you won that's half the size of Space Fence, is that also like a 12-month opportunity for you? And is that -- and then I guess the other question on the -- on that segment is you said that, starting in Q2, that you'll start a $180 million kind of run rate revenues. Does that include the new project as well?

So the project itself really won't begin to ship until much later.

But it'll take (inaudible). Once it starts shipping, it'll be about that 12 months.

Yes, right. It'll be 12, 12-plus months but not really beginning in earnest until 2018.

So okay, so...

And then the run rate is balance of this year.

Got it. So it doesn't impact this year, okay.

Right.

And then the $180 million run rate, is -- does that start in Q2 for you and then the margin should lift up with the higher value?

Correct.

Okay, very good. And then you just talked of like maybe 2 small opportunities that you're working on. [ Maybe if you could just give us some of the fact ] that you see you're going to possibly announcing very soon. Maybe just if you could give us a little more kind of detail on that.

Yes, I can't give a whole lot more detail than that, Jimmy, other than that's more detail than we've ever, ever given in the past, quite honestly. Normally we don't comment at all, but we're close on 2 smaller, tracking some others that are much larger, but longer term, I guess I could add that one of the smaller opportunities is in Fluid Handling. One of the smaller opportunities is in payment and merchandising.

Okay. Well, congratulation on those. Hopefully, it comes through.

Well, certainly, hold that, but thanks.

And then on this payment project that -- the retail, this sort of -- that's retail and that gets -- 50% of business gets -- 30% to 50% gets pushed out in 2018. So will we kind of see a margin pickup that's greater than, I guess, what you factored in your Investor Day because of the pushout on this new retail business?

Not materially, no. I wouldn't model anything that would suggest some kind of a margin pickup as a result from the specific program. But the fact that my -- I'm holding my -- I mean, I think, implied, the fact that I'm holding my margin target for the year and the revenues are going to be down slightly, yes, but that's not associated with the specific project having a lower or a higher profitability. It has to do with really just the math on us being able to deliver the margins on lower revenues.

Right, okay, got it. And just lastly, on the nuclear business. So with this Westinghouse bankruptcy, I mean, I -- it's not -- I guess, not very clear right now what Westinghouse is going to do when they emerge out of bankruptcy. They talked a little bit about just wanting to sell designs and maybe going through some services, but do you see any opportunities in this nuclear business with them filing for Chapter 11?

Sure. In -- as the AP1000 continues in China for sure, there'll be continuing opportunities, whatever happens out of the bankruptcy, with that design on a global basis, where we continue to participate in to that degree, Jimmy.

But do you see any kind of -- are you kind of -- did you get kind of any business opportunity that you can kind of profit from with them filing for a bankruptcy?

No, no, no. I -- nothing like that. Surely, though, I mean, let's -- we'll continue to analyze as we move forward. Understand it's early days.

(Operator Instructions) Our next question comes from the line of Ryan Cassil from Seaport Global.

If I could just touch on Fluid Handling. You mentioned some positive signs in -- with respect to the fall turnarounds. Is that just early customer conversations, or are there some more substance behind that comment?

Well, I'm trying to remember this specific comment on turnarounds. I don't think I -- we actually commented exactly that way, Ryan, in terms of the fall turnaround activity. I think we're saying we're seeing some general -- whether it's tied to a specific turnaround or not, we're seeing generally this -- a push to defer maintenance ends up in some certain surprises, and that even outside of turnarounds, just in terms of -- I think that's what we hinted even at the [ starting ] pricing issues. You're seeing some outages occur that were more unplanned than planned. And that's a normal occurrence when -- we've been hearing about this deferred maintenance for so long that sometimes it catches up with some of our customers and requires some shorter-term downtime and recovery. And we see some uplift from some MRO activity, slight. This isn't a huge, significant trend. It's again caution, but just in terms of the general overall increase, projects seem to be releasing a little sooner, MRO picking up a little bit. That's the general comment. Did that help?

Yes. So it sounds like fall turnaround may be a little bit stronger than spring turnaround, even more so than seasonally appropriate. Is that fair?

I don't have a good read, honestly, on this one. I'll have to get back to -- we have to -- we can come back to you on this, Ryan, and give you some more color.

Okay, no worries. And another comment I just wanted to clarify. You made that -- you said that MRO activity was leading into what sounded like more new project activity. Was that just in Asia Pacific, or was that a broader comment...

That was a specific comment to Asia Pac. We're seeing -- what has historically been in the weaker environment just MRO, we are seeing an inflection point there in project activity that's being quoted bid, moving through the funnel.

Okay. Is that energy, or more general industrial? Any color there would be great.

That was chemical. That...

Power.

That's some energy, some power. I'm thinking there's some refining, right?

Okay, great. And then last one for me: You mentioned the timing on the project in A&E and the margins on that project once it gets started, but is there any incremental spend in '17 as you ramp up for that project or look to be competitive on these projects you're still bidding on that we should be thinking about?

No, no incremental, notable investments for this year. We're going to be -- we're benefiting, frankly, from the investments we've made in the past with respect to other large programs, the one that we executed on last year. So we have the infrastructure and all that in place for us as we look to execute on this program as it starts towards the end of '17 and really into '18.

Thank you. I'm not showing any further questions at this time. I would like to turn the call back to Max Mitchell, President and CEO, for closing remarks.

Thank you, operator. And thank you all for your participation today.

We're pleased with our solid performance in the quarter. We're executing well. The markets are showing more potential than we've seen in quite a while. And just as important as our recent performance, however, is how we continue to position ourselves for the future. As I think about the opportunities that lie ahead, I'm reminded of the late, great Al Jarreau, who once said, "I am a distance runner, a marathoner, literally and figuratively." That captures how we think about running our business. 162 years behind us, and we are focused on setting ourselves up for decades of further success. That requires consistent strategic execution, which we have demonstrated time and again, as well as continued investment for growth across the cycle in good times and in bad. We are seeing the benefits of our investments, and the best is still ahead.

Thank you for your interest in Crane. Have a great day.

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