Crane Co (CR) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to Crane's Second 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 Second 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'll 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'll 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 second quarter EPS, excluding special items, was $1.17, down slightly compared to last year as our tax rate reverted to a more normal level. Sales of $703 million decreased 1%, with approximately flat core growth and a modest net acquisition benefit, more than offset by 2% of unfavorable foreign exchange.

I'm also very pleased to report adjusted operating margins up 80 basis points from last year to 15.9%, a record high for Crane, driven by continued solid execution and strong productivity. Notably, we reached this new record margin despite revenue still near trough levels at Fluid Handling, our largest segment by revenue.

As a reminder, as Fluid Handling recovers from current trough levels, we believe that this business can return to prior peak margins in the mid-teens at much lower levels of revenue than we saw in 2013 and 2014.

The fact that we were able to achieve new record total company operating margins with Fluid Handling end markets this depressed is a testament to how far we've progressed as a company. Across our portfolio, we continue to focus on differentiating our proprietary technology and leveraging our best-in-class engineering expertise, and our margins reflect the value we continue to deliver to our customers.

We also deployed $58 million of cash on 2 acquisitions, which I'll talk about more in a few minutes.

Overall, I feel good about how the year is progressing. If you recall, last quarter, we raised the low end of our guidance range by $0.05. While we believed it was too early in the year with substantial market uncertainty to get more bullish, several of you characterized the guidance revision as conservative. We continue to believe that we made the right decision, and we are reaffirming our adjusted EPS guidance of $4.35 to $4.55.

While sentiment among our customers and suppliers remain stable, looking ahead, there's still a fair amount of market uncertainty. Fluid Handling is performing modestly ahead of our expectations on sales and orders, with margins approximately in line with our original guidance. However, we're seeing some lumpy demand and spikiness from our large customers in Payment & Merchandising and the shorter cycle portions of Aerospace & Electronics. Further, while currency headwinds have moderated, the benefit is being offset by higher commodity and input costs. Balancing these various factors, we remain comfortable with the midpoint of our guidance range at $4.45. However, to hit the high end of our guidance range, market conditions would have to improve modestly from what we're seeing today.

Rich will provide further details, but we also do expect third quarter EPS to be lower than the fourth quarter, given shipment timing and anticipated mix, primarily at Payment & Merchandising and at Aerospace & Electronics.

Turning briefly to our businesses. Fluid Handling is performing modestly better than expected. As we have discussed previously, we believe end markets bottomed in 2016, and we saw solid sequential improvement through the first quarter, which we attributed half to market and half to share gains. Orders in the second quarter, while up meaningfully year-over-year, were generally consistent with Q1 and also reflected an improving share position. We believe underlying demand will remain generally stable, slightly above trough at current levels as we move through the balance of the year. And while we don't see anything that indicates worsening conditions, we don't yet have visibility to a further meaningful inflection upwards.

More specifically, last quarter, we reported year-over-year core order growth of 10%. And this quarter, we're in the same range at 7%. Compared to 2016, process valve orders growth is being driven primarily by the U.S. and Asia Pac chemical markets and by refinery activity in the U.S. and China. We believe that our orders are above market rates with, again, approximately half of our order growth attributable to market share gains.

We've received a lot of investor questions on the market impact of the recent softness in oil prices. While we don't see this as a risk to our guidance, however, it certainly increases the likelihood that a stronger recovery takes longer to materialize or that it is not as robust as otherwise might have been.

Rich will provide some more specific market color, but we are seeing a few consistent themes across our process valve business. MRO activity remains fairly stable with the year-over-year growth coming from new projects. To generally -- to generalize and characterize these projects, we're seeing a number of capacity upgrades at existing facilities, along with projects focused on plant efficiencies in an effort to reduce costs. We're also seeing certain facilities undergoing product conversions where the facility is modifying its process to produce a new product or to change the plant's primary output. Lastly, we're also seeing some projects driven by environmental considerations. Overall, the general consistent theme is that our customers want to do more with less, and they're trying to maximize their profitability without building new greenfield facilities.

Given current market conditions, we firmly believe that we have the right cost structure for the current environment. And as we have discussed many times, we continue to invest for growth. We are executing well on the marketplace and winning, and the Fluid Handling team deserves a lot of credit for consistent solid performance during a few extremely difficult years for their markets.

At Payment & Merchandising Technologies, we had another great quarter, with record adjusted operating margins of 21.8% and 7% core growth. Our team is executing on growth initiatives as well as productivity. However, as we have discussed previously, this business can be spiky and project timing can be difficult to predict exactly. The large retail project that we are working on is progressing nicely. Consistent with our commentary last quarter and based on what we know today, we still expect to ship the same total number of units as originally planned although those shipments are now likely to be spread more evenly between this year and 2018 than we expected when we originally gave guidance for this year. While I know many of you are focused on the timing of this project, I do want to comment about the broader trends we're seeing in the retail portion of our payment business.

Over the last several quarters, we have seen a broad-based improvement in demand for retail self-checkout solutions. These solutions have a proven value proposition for retailers and have become accepted as the norm by their end customers. As retailers face a number of challenges from e-commerce to store saturation, they're increasingly focused on productivity and improving the efficiency of their existing operations, and retail self-checkout is one of beneficiaries.

We've also seen a number of applications beyond traditional retail self-checkout. For example, we have seen substantial growth in our retail pay tower business, typically used in smaller retail stores, particularly in Europe. These are attended payment solutions where a store employee still serves the customer who then pays at the kiosk tower. Given the strength we're seeing across retail vertical, the team has actually backfilled 1/3 of the large project demand that has shifted into 2018 with wins from other OEMs and retail customers. Overall, we are very -- we're extremely pleased with the demand in our payment business across almost all of our payment verticals and geographies. However, we have seen some softening in our vending markets compared to when we gave guidance and spoke to you last quarter.

At Aerospace & Electronics, we are very well positioned. The team is also executing well. While most parts of this business are performing as expected, business jet demand has been weaker than anticipated and the softening demand for wide-body aircraft has been more pronounced than we expected, which also spills over to our cabin solutions business. As the airlines cut back investment in wide-body aircraft, there are fewer new premium seats where our cabin solution seat actuation has the most content. We are still largely on track to hit our commitments for this year, but exiting the second quarter, we see it a bit more challenging than we expected.

Throughout the business, we continue to invest, and we are continuing to support our customer's ramp-up of the newly re-engined narrow body aircraft now entering service, including the 737 MAX, the A320neo, while also supporting the ongoing development programs for the C919 and the E2. We are well positioned on the next generation narrow-body aircraft, and we continue to see incremental opportunities for technology insertion into existing platforms.

While sales this year are tracking modestly below our planning assumptions, we have seen improved recent quoting and bidding activity in a few different categories. First, we have seen an uptick in quoting activity for military programs from next-generation military aircraft and new engine technology projects to radar projects and cutting-edge solutions in areas like directed energy. Some of these opportunities are quite large, and although most of these are longer-term projects, we do see opportunities for near-term early-stage funded R&D.

Second, we are seeing continued opportunities for technology insertion on both the military and commercial side. In some cases, these projects are to add new technology or functionality to an existing aircraft. And in other cases, OEMs are looking for a replacement for a troublesome supplier.

There are no large programs I would highlight as imminent, but overall, we are pleased with how we are positioned today and the number of potential opportunities we see ahead of us.

In Engineered Materials, resin prices have moderated somewhat since last quarter, but not to the degree that we expected. However, demand, particularly in our RV market, has been better than we expected. We have been very disciplined in pricing over the last 2 years, while our competitors have, in some cases, been 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.

On the M&A front, we completed 2 acquisitions in the quarter. The first, Westlock, became available because of antitrust reviews of the Emerson/Pentair valves and controls transaction. As is typical in these situations, the ability to provide certainty of closing the transaction was a critical consideration for the seller. The purchase price was $40 million, and the business had 2016 sales of approximately $32 million. Westlock, based in Saddle Brook, New Jersey, is a great business, with the industry-leading brand and an excellent product portfolio with particular strength in North America, Europe and Southeast Asia. It's a global leader in valve actuation switch boxes and position transmitter, basically solutions that monitor and control process valves. The product portfolio includes integrated solutions that combine multiple components such as switches, sensors, wiring terminals, enclosures and the visual indicator into a single unit. Products are available for a wide variety of industrial environments, including those requiring explosion-proof or intrinsically safe classifications as well as weatherproof solutions, sanitary solutions and other general purpose applications. This is a close adjacency to what we do in Fluid Handling, but a new product space for us and one where we hope to expand further in the years ahead. It also fits perfectly with our long-standing acquisition criteria. This business manufactures highly engineered solutions that are typically specified by the end user, and these solutions are used in a wide variety of niche applications where reliability is critical.

In addition to the business itself, we acquired an outstanding team that is ready and eager to be unleashed in the [space] and the integration has been progressing very smoothly. I look forward to the team growing this business in the Crane family.

The second acquisition, Microtronic, provides electronic payment systems, primarily for vending markets in Europe. Based in Switzerland, Microtronic was acquired for a gross purchase price of $18 million. Microtronic provides closed cashless payment solutions that utilize RFID technology. Typically, money is loaded onto a card, a key fob or a smartphone app, and used in a specific set of vending machines. These systems are prevalent in Europe, particularly for office location coffee vending machines where the average product price is too low to justify a credit card based cashless solution.

This acquisition adds to our portfolio of cashless solutions, and we believe our global footprint can help accelerate growth beyond Microtronic's traditional European market.

These were relatively small transactions. We continue to pursue numerous acquisition opportunities of all sizes from those similar to Westlock and Microtronic to some that are much larger. As a reminder, we look at acquisitions for our 3 primary growth platforms: Fluid Handling, Payment Solutions and Aerospace & Electronics. Acquisitions should either strengthen our core business or give us access to new product categories, customers or markets that are closely aligned with our existing served market and where we can differentiate our offerings based on proprietary or differentiated technology.

Financial criteria include positive NPV at the target specific discount rate, return on invested capital of 10% by year 3 and, ideally, EPS accretive in the first year, with an accretive margin and cash flow profile. Both of the acquisitions discussed today meet all of these financial criteria. Valuations are still challenging, and we will remain disciplined. There's still a large number of opportunities we are pursuing across a variety of size ranges and for all 3 of our primary growth platforms.

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

Thank you, Max. I'll turn now to segment comments, which compare the second quarter of 2017 to 2016, excluding special items as outlined in our press release, slide presentation and the accompanying non-GAAP tables.

In the second quarter, Fluid Handling sales of $264 million declined 1%, reflecting flat core sales and a 2% benefit from the Westlock acquisition, offset by a 3% impact from unfavorable foreign exchange.

Fluid Handling operating profit declined 5% to $34 million, with operating margins of 12.8%. And while down 50 basis points compared to last year, these were consistent with our expectations.

Fluid Handling backlog was $259 million at the end of June compared to $228 million at the end of 2016 and $246 million at the end of June of last year. After adjusting for foreign exchange, the backlog increased 5% compared to the second quarter of last year and it improved 1% sequentially. Adjusting for foreign exchange, orders improved 7% compared to last year and were up slightly sequentially. Again, about half of our order growth was attributable to share gains and a lot of activity in our core process valve markets, where we focus on applications for some of the harshest and most hazardous erosive and corrosive conditions.

Starting with our core process end markets. In the Americas, we saw double-digit order growth driven by projects with MRO approximately flat. Growth was strongest in the chemical markets where we won a variety of projects across product lines and end applications. Refinery activity was somewhat mixed, but overall, the fall refining season looks like it will be modestly stronger than last year.

North American general industrial activity is still showing some positive signs, particularly for us in pharmaceutical projects, but conventional power remains weak with fewer gas combined cycle power plant projects.

Europe performed as expected, with orders down modestly on tough comparisons for our MRO business. The underlying markets are basically flat, and we expect relative stability for the rest of this year.

In Asia Pacific, we had another good quarter with strength across Japan, Taiwan, Australia, Malaysia, Indonesia and Singapore. Activity was broad-based with a pickup in both project and MRO. Strength was evident across all of our verticals in this region including chemical, power, refining and general industrial.

China was strong overall, particularly for projects, but the strength came from refining activity, power and general industrial. In refining, we are seeing capacity expansion projects and the activity appears to be driven by increasing domestic demand. Chemical was somewhat weaker with multinationals holding off on incremental investment in the region.

The Middle East is the only region that has been weaker-than-expected so far this year. The main drivers appear to be current political dynamics and sustained low oil prices. MRO quoting activity has recently improved, but project activity does remain weak.

And in commercial markets, we saw a modest improvement in both our Canadian and U.K. markets. U.S. municipal markets also continue to perform as expected.

Overall, while we have performed modestly better than our expectations for Fluid Handling year-to-date, we remain somewhat guarded in our outlook until we see this level of activity sustained for another few quarters.

For the second half, we expect total sales and operating margins slightly below second quarter levels given normal seasonality.

Moving now to Payment & Merchandising Technologies. Sales of $198 million increased 3% compared to the prior year. Core sales improved 7% with a 3% impact from unfavorable foreign exchange and a 1% net divestiture impact.

Segment operating profit of $43 million increased 25% from last year, with operating margins up 390 basis points to a segment record 21.8%. The margin improvement was driven primarily by the impact of the higher volumes and strong productivity gains.

We are very pleased with how this business is performing. We saw continued strength in our payment business this quarter, particularly in the retail and gaming markets. Max discussed our views on the retail market, but some of our accomplishments in the gaming space merit mentioning as well. So far this year, we have seen good results in the European gaming market. This is being driven in part by customer adoption of our newer SCR build recycler, which has enabled us to win with our customers.

In North America, we are clearly gaining share in the casino market by encouraging product upgrades to newer versions of our high-end build recyclers and by driving adoption of our EASITRAX solution. EASITRAX is a software and RFID-based asset management system that links the slot floor to the casino cash count room, giving casinos access to performance and transaction data that is used to make faster and more strategic decisions and drive productivity in the casino.

Because of project timing, transportation was a little softer in the quarter, although the medium and long-term outlook remains quite solid, especially as countries like China and India continue to focus on their infrastructure buildout. In the nearer term, we remain excited about China where we continue to capture projects associated with the transit system buildout.

While our payment business has been strong, the domestic vending market has been more challenging over the last few months as large customers adjust capital spending and their timing and prioritization. Please remember that the revenue comparisons get much more challenging in the second half of this year for Payment & Merchandising. And given the project pushout Max discussed, our large retail project made a much bigger contribution in the first half than it will in the second half of this year.

Although we do expect core sales growth for the year to be very strong, in the mid- to high single-digit range for the year after growing 6% and 8.5% in the last 2 years, core sales growth will come in below our original guidance. The shortfall will be driven by the 150 basis points of project delay that I spoke about last quarter as well as incremental weakness in vending that has become more pronounced over the last few months. On an operating profit basis, however, we still expect this segment to make nearly the same contribution to full year EPS as we did when we provided guidance in January.

Second quarter revenue and margins were at the highest level for this year. Given project mix and timing elements, we expect third and fourth quarter revenues to be similar to each other, but fourth quarter margins are likely to be much higher than the third quarter, possibly as much as 150 basis points.

Aerospace & Electronics sales declined 10% to $171 million. Segment operating margins improved to 22.2%, up 180 basis points from last year, consistent with our expectations and driven primarily by productivity and lower engineering expense.

OE sales declined 9% compared to last year. Defense OE sales declined in the mid-teens given challenging comparisons from last year's Space Fence program, partially offset by higher shipments for the F-35. Commercial OE sales declined in the mid-single-digit range, driven primarily by weaker demand for business jets and for our cabin solutions.

Total aftermarket sales declined 11% driven primarily by weaker modernization and upgrade program sales, particularly related to B-52 brake upgrade program and the 737 titanium sensor and carbon brake upgrade programs. Remember that compared to many other aerospace businesses, a greater portion of our aftermarket business is related to modernization and upgrade projects. Consequently, there is some spikiness and some cyclicality inherent in this business. While comparisons are challenging right now, we have seen a recent pickup in bidding and quoting activity for M&U programs across both commercial and military programs and across multiple solutions, including our landing solution, sensing and fluid solutions. The OE aftermarket mix was 75% to 25%, comparable to last year.

Aerospace & Electronics backlog was $328 million at the end of June compared to $353 million at the end of 2016 and $436 million at the end of June of 2016. The lower backlog year-over-year primarily reflects deliveries on the Space Fence program along with the timing of certain orders including multiyear military aircraft orders.

Looking ahead, we expect a slight sequential increase in sales next quarter, with a more substantial increase in sales in the fourth quarter. Given the expected mix, we expect a modest sequential decline in margins in Q3 with a much stronger fourth quarter. On a full year basis, we expect to be close to our original guidance issued in January.

Engineered Materials sales increased 8% to $69 million. Operating margins declined 190 basis points to 19.1%, primarily as a result of higher material costs. Compared to our expectations for this business at the beginning of the year, sales growth has been better-than-expected, although this benefit has been approximately offset by material cost at higher levels than we anticipated.

Turning now to more detail on our total company results and guidance. Our second quarter GAAP tax rate was 30.5%, up 350 basis points compared to last year. You may recall that in the second quarter of 2016, we benefited from the favorable resolution of a tax audit. On a non-GAAP basis, the tax rate of 30.4% increased 300 basis points.

In the quarter, free cash flow was $56 million compared to $54 million in the second quarter last year. We are on track to hit our free cash guidance for the year. As we discussed at our Investor Day earlier this year, our free cash flow conversion has shown a step function improvement over the last few years, and we remain focused on delivering our goal of 100% free cash conversion on a consistent basis.

For the year -- for the full year, we are reaffirming our EPS guidance, excluding special items, at $4.35 to $4.55. On a GAAP basis, the range is now $0.04 lower, reflecting onetime items related to our recent M&A activity.

Overall, we remain comfortable with the midpoint of this range, consistent with the numerous puts and takes that Max and I have discussed this morning.

While we have provided annual guidance for many years, we deliberately do not give quarterly guidance. While Crane has a number of short-cycle businesses that can periodically have spiky demand, we have a consistent focus on managing the business for long-term growth and value creation. We will not deviate from our long-term focus, but we do want to be as transparent as possible. Consequently, we will, on occasion, provide additional commentary on certain timing elements as we have today.

From that perspective, while we are reaffirming our full year EPS guidance, please note that we believe second half EPS will be much higher in the fourth quarter than in the third quarter, primarily because of anticipated shipment timing at Aerospace & Electronics and expected mix at Payment & Merchandising. At the midpoint of guidance, the difference between third and fourth quarter EPS is likely to be in the range of $0.05.

Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from the line of Matt Summerville with Alembic Global Advisors.

I just want to talk about the payment business for a few moments. Perhaps, can you talk about what is sort of the rationale behind the slippage on the retail self-checkout project? And I guess, what is your level of confidence that -- I think you said last quarter, you thought 30% to 50% of it could move into '18. Based on your comments, if I heard you right, it now sounds like that's closer to 50%. I guess, what is sort of the confidence interval that, that does end up revenue-ing next year? And I would assume, perhaps that's more first half weighted. And then can you also sort of fold that into this whole timing thing from a mix standpoint in payments, i.e., should we expect another big chunk of self-checkout to hit in Q4? Is that really the differentiating factor?

Well, let me try. I'll start, and I'll let Rich join in too, Matt. But in terms of the drivers, this is a pretty significant upgrade for the end customer. And a capacity and installation is what we gather to be one of the constraints governing the ability to fully implement and kind of pace this versus the original expectations. So there's nothing more than that really in terms of what's occurring. We're using the best forecasting that we can. It's -- it doesn't have the exact specific visibility. It's clearly coming through, so I'm not that worried about it. I'm trying to remember all of your questions here. So in terms of the drivers and why the slippage, nothing more than just ability, capacity to execute on the installations and the upgrades. As we think about next year, yes, more than likely still in that 30% to 50% range. We're still trying to get the full forecast for the balance of the year. There's definitely going to be slippage in that still -- that 30% to 50% range. We're planning for the 50%, but we would expect that to be delivered in the second half of next year. The reason we added the color commentary in the script as well was to talk about the fact that we're seeing some broader strength across other OEMs in the retail space for payment and more broadly than just North America and Europe as well, and as I mentioned, have replaced about 1/3 of that slippage. I would expect us, as we move into next year as well, to continue to see that momentum move forward also.

Yes. I would just signal, I think we are feeling very good about the program overall. It's more about the pace. I think the customer feels the same way certainly, and that's the feedback we're getting. As it relates to the mix question, Matt, in terms of the fourth quarter, it's just -- across all of our different verticals within the Payment & Merchandising business, we have a variety of different profit levels. And the way projects are rolling in between Q3 and Q4 as well as some of the seasonality that we tend to see in our vending business in particular, we tend to see that impact as well. So it's really -- it's a mix of projects between Q3 and 4, to answer your question. And it can vary from period to period.

And just a follow-up question on aerospace, if you sort of look at kind of the recent historical peak in backlog, $460 million. Now you're down rounding at $330 million. I get a big chunk of that walk down is going to be Space Fence, but perhaps some more granularity there. And I guess, are you seeing backlog bottom? I mean, when you just think about in percentage terms, even in dollar terms, the magnitude of decline there is very substantial. And I guess, I just want to get comfortable that there's not something more systemic going on here that we need to be concerned about.

Yes, I can appreciate -- I appreciate the optics on what you see when you look at the numbers in the press release. I'm not worried, we're not worried at all about the backlog and its relation to sales and OP in the future period, is the way I would start off. When you look at the big components that are driving that disparity from period to period, the biggest driver, clearly, is Space Fence. I think at this point last year, we weren't even close to halfway through the project deliveries. So it's a substantial component of the reason. The other piece that we tend to see from time to time and in this particular period when compared to June of last year, and a little bit even in -- even sequentially is multiyear military programs that we would book from time to time. So we had a rather large one for a large military program that we had booked. So another element is that. And then really the last driver of this is just strictly timing related to large orders for certain platforms and mainly platforms that we are the sole provider on. So again, reinforcing the fact that we're not worried here at all as it pertains in particular to that -- to those OEM demand levels. So I think, yes, in summary, the timing can vary substantially. You got some one-offs from time to time, and I think when our content per aircraft is fairly fixed, we feel pretty good.

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

This is Adam Farley on for Nathan. We've heard reports that the long-awaited chemical plant is being built around the Gulf Coast downstream of the completed ethylene crackers are out for bid and likely to be ordered in the first half of 2018. I don't know if you have any color on these projects, details on timing and maybe what the opportunity is for that.

Yes. So Adam, the plants -- you might be talking about the -- some of the methanol plants in the Gulf, and I think ethylene, glycol. But we're -- in relation to the ethylene buildout and then as we talked about in the past, the derivative plants that we would see content on, where Crane has its strength is really further down in the erosive, corrosive downstream of even though the plants that I just mentioned, vinyl chloride monomers, urea, propylene, propylene oxide, ammonium nitrate, ethylene oxide, and we're tracking a number of projects and opportunities in the Gulf Coast. In our early-stage project tracking, we still, from where we play the strongest, we still see the derivative plants on the -- in the feed stage early and pushing to the right, looking at '18, '19. So this whole shift has continued to take place. So while I think you're right about the plants that are out for bid and should see some activity, I think it's an encouraging sign in general for everyone in the flow space. Where we have our strength is going to be a little further in other derivatives and further to the right. Does that help?

Yes. That's helpful. Then follow-up question, shifting gears to Engineered Materials. The business continues to post solid growth and healthy margins with some signs out there of an incrementally positive RV market. I know in the past, you've taken the conservative outlook on the business, RV sales are close to peak, margins are likely compressed on oil prices. I don't know, is there anything new out that you're seeing, any positive signs in the business?

Just -- I mean, well, I'm encouraged at this length of the cycle and the strength. I mean this has been pretty impressive. So we're about to begin our strategic planning period right now. We'll be traveling in the month of August to all of our facilities. And one of the questions we have for the team and looking at the data is what are our projections for next year. It's been a strong run. It's been stronger than expected this year. It's encouraging. But I think we're going to be cautious on how long this cycle can continue.

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

I just want to circle back to the earlier payment question, and I guess just more of a point of clarification. You mentioned the constraints on capacity. Were you speaking more to your internal manufacturing capacity? Is this more of a supply chain logistics readiness?

This is installation. This is actually putting the retail checkout facilities in the stores. I mean, this is a pretty significant install. And so it's just simply the reality of speed and pace of the installation across the U.S. Do you see what I'm saying?

Okay. Got it, got it. And...

Thanks for that clarification, if anyone else was confused. I wasn't clear enough.

And then just in terms of the outlook for the segment, clearly, lowering the growth guide, I understand that, but the profit contribution does unchanged here. I guess, what are the big drivers there? Is it just simply mix? Are there other cost actions or things you're doing to sort of make the original profit contribution guide for the year? Any color there would be helpful.

For the overall payment segment you're referring to?

Yes. For the overall payment segment.

Yes. No, I don't think there's anything terribly unique. It's not like there's some different project or something else that we're seeing in the space. We've been executing very well on productivity on a year-to-date basis in the business, being careful about cost, notwithstanding all the debt we're seeing in the business. So, no. As I look at our guidance on a full year basis for the segment, we'll come a little bit, just slightly under the EBIT target or OP target, but not really all that consequential. And again, with sales coming in, in that mid- to high single-digit range as opposed to the low double-digit range that we talked to before, so that's really all driven by cost and productivity in the business that we continue to execute on.

Okay, great. And then just back to Fluids, you mentioned on the Q1 call that productivity measures and some other things on design and value engineering were allowing you to be a little bit more competitive on price. I guess, what's the state of the market there on price, both in the project business and the aftermarket or the MRO side? And then any color you can provide on like-for-like price in the quarter would be helpful.

I think the story's still somewhat similar. So we haven't seen any new significant pricing pressures, and we haven't seen the ability to significantly see any robustness in pricing. So I think our pricing discipline remains firm, and it's more of the same, Brett, from what we see.

Our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch.

Maybe a bigger picture question to start. As you know, Boeing is making concerted effort in garnering more of the aftermarket, and it looks like they'll start breaking out the segments starting in 3Q. How do you expect this strategic shift to impact your aerospace businesses? And how do you see -- how defensible is your aerospace portfolio?

Well, the intellectual property is ours, and so we start there. And we continue to work with Boeing in every way as they -- as an incredibly important customer for us. We -- the Partnering for Success program, we are partnering for our mutual success. We continue to work on all fronts to drive cost reductions where we can, participate. So from a Crane standpoint, I would say, as with all of our major customers, we're continuing to be incredibly competitive, provide the full value, including not just price but the quality and service that the customer requires, is an important factor. I think these pressures are not going to go away. I think that we're going to continue to work with Boeing on all fronts to be the partner that they expect. At the end of the day, Kristine, quite honestly, I'm looking for our team to continue to be a partner that can provide solutions that others potentially can't or Boeing is struggling with and see it as a growth opportunity, if anything.

And maybe following up on that, I mean, so far, in some of the suppliers that we've seen report, it looks like there's some general repricing of some contracts. Presumably with Boeing Partnering for Success, and we've seen Boeing Partnering for Success 2.0, there'll be a 3.0 and possibly in the future, a 4.0. When you think about that, how does that change your expected total return on investment on that business? And is there a point where you could decide to allocate capital elsewhere to get higher incremental rates of return?

Well, on the capital allocation question, we continue to invest. And if anything, we continue to reinvigorate innovation and ideation across Crane, including Aerospace & Electronics and where we're going to continue to invest for growth. Whether it's 2.0, 3.0, 4.0, it's the same types of initiatives I would expect out of my own supply chain teams across Crane, which is continuing to get the most value with your supply chain partners. So I applaud Boeing on their efforts, quite honestly. And as I mentioned, we're going to -- I think we're well positioned to continue to work with them as an important customer and win new opportunities because of it. I don't know if you have anything to add?

Yes, the only thing I would add is that, it's not like we've changed our hurdle rates in terms of expectations in profit and returns either on any of the opportunities, including the ones we see with Boeing from time to time. So to answer your question on, do we change our metrics or does our return change over time, that's not the way we're looking at it. We're looking at holding our financial criteria on all the programs that we're evaluating with them.

And our next question comes from the line of Robert Barry with Susquehanna.

This is Mike DeLalio on for Rob. And I have a couple questions on the aero business. First, you mentioned, softer spend on cabin solutions. How big a business is that? And what's the outlook for it? And then second, how much of the year-over-year margin expansion in aero was on Space Fence related mix? And what's happening with margins outside of mix impacts?

Yes. So the -- our mix impacts relative to what we expected in the quarter is right where we thought it would be. We had some outside on mix benefits from Space Fence. And conversely, we had some going the other way on certain programs. So -- but really, exactly what we expected in the quarter, plus or minus a small amount, but fairly well aligned with what we expected. So with the margins that we delivered in the quarter in Aerospace & Electronics, at 22.2%, we felt pretty good and it's setting us up nicely for the balance of the year. The cabin business is the smallest of the solution set businesses that we have. I think it's roughly, call it, $40 million or $50 million, I think, in total revenue or something like that. But any impact to any of our solutions that we feel like it's important to call out, we go ahead and do that. I would say on an overall basis, notwithstanding the pressures that we're seeing in biz jet and cabin, that we do expect to come close to our full year EBIT guidance that we provided.

And then one more question, if you don't mind, on working capital. Do you expect working capital to be a source of use this year? And are you building working capital on Fluids? Or is the recovery still too uncertain at this point?

We're working on working capital down. If I look at my full year guidance externally, we feel like that's an opportunity. I talked about that at Investor Day. We're managing it tightly, in particular in the area of inventory and Fluid Handling and some of our -- in particular in our process valve part of the business. And so I don't see that as being a headwind in 2017. We did see a little bit in the way of payables, I think, as a potential headwind when we came in and we talked about that as well at Investor Day. If you recall at Investor Day, I think we delivered $267 million in free cash flow in '16, and we came down a little bit just because of timing elements. And some of those are in working capital. But from a sustained improvement perspective, we feel like we're making progress on all fronts, in particular in Fluid Handling.

Our next question comes from the line of Joshua Pokrzywinski with Wolfe Research.

Yes, just a couple of follow-ups on some of the questions that have already been asked already. I guess, first, on Fluid Handling, if I'm reading it right, kind of a mixed message on the turnaround environment, characterization of the order growth being maybe half market, half out growth. Still seeing some projects pushed to the right, although I get less refining and more on the chemicals side. And I guess, could you maybe square that away with some of what the actual service providers are saying. I mean, you see guys like TEAM report EBITDA of half of what they would have expected. How would you square that up with what you guys are seeing in the refinery MRO right now?

If you're going to look at pure refining MRO, I mean, you got to look at our product and the mix and the niche applications that we're in as well. In refineries, we have a particular strength in HF alkylation, and some of the turnarounds that we're seeing there is a bit of an uptick. So that's a particular bit of strength for us. Just to give you a sense of some of the other project wins we had in the quarter, Josh, because it's -- the activity that we're seeing is fairly diverse and hard to pin down in any one given market. It tends to be around these higher value-added, higher pressure, temperature, erosive, corrosive. One example, in the Gulf Coast, a refrigerant manufacturer changing refrigerants and significant capacity increase in the facility, and we won some significant content there. Another win in the quarter for us, fairly sizable, in Asia Pac, on the chemical side, chemical related is a methionine process that goes into supporting chicken feed, for example. So these are some of the end market dynamics that are playing out where we're winning when we referenced refining strength, it tends to be around that HF alkylation in particular and some related areas. Hopefully, that helps a little bit.

Got you. So I guess to summarize that, it sounds like it's more niche-y than a call on a broader uptick and is kind of defacted.

Exactly, exactly.

And then just a couple of more little follow-ups. I guess on the Payment & Merchandising side, you guys have been able to backfill a good amount of this slippage. How does that make you feel about how 2018 sets up? I mean, I guess I don't know how sustainable some of this other backfill strengthen is versus how these push-outs layer in as a tough comp with the larger project. I mean, it is a lot going on there between slippage and newfound business. Would you say, you're still kind of running hot overall? Or the 18-month pipeline here is still looking good?

Anything, I think, this moving or shifting has not necessarily -- as we think it has been a bad thing, it's going to help smoothen out and the year-over-year comps will be -- we feel we've got some real momentum and continue to show growth into next year. That's how we're feeling about it right now.

Yes, just to add, I think -- and it's not just this one project. I know we've called it out because of its significance and its size and its impact year-over-year and whatnot, but we're seeing good, strong fundamentals in the retail space as a whole, whether that be other self-checkout, traditional self-checkout opportunities that we're continuing to make really good progress with and seeing momentum. I think that's -- maybe to answer to your question, as we think about 2018, are we seeing momentum in sort of underlying fundamental self-checkout. And I would say that we are. We're also seeing some -- and we mentioned this in the prepared remarks, different applications where there is -- we call them a pay tower applications, where a consumer actually operates that by himself or herself and again, pulling through some of our technologies into more niche applications in the retail space. So we are seeing good, I would say, fundamental momentum that underlines -- underlies the business as we think about 2018.

Okay, perfect. Then just one last more housekeeping one than anything else. The -- if I back into something, I guess, tantamount to book-to-bill in Aerospace & Electronics, clearly a lower number than what you guys have had in a while. It sounds like timing, but is -- I mean, that removes a lot of the year-over-year noise. And you're running in, call it, the mid-8s, 0.85-ish. Is that something that you would expect to start picking up as we get into the back half?

Yes. We would start to see that picking up. Well, we are going increase on sales. The one thing I think to think about this book-to-bill that you're referring to is the lap off of this project in Space Fence in the backlog. So when looking at the backlog and looking at our sales profile, it's not necessarily a perfect indicator. So we do expect sales to improve slightly, I would say, in the second half of the year. We gave guidance in the aerospace segment of down 5%, I believe. As we look at where we are on a year-to-date basis in that business, we're down, I think, just over -- just about 7% on a year-to-date basis. So we feel like we'll improve slightly from that, but still potentially be a little bit off on our top line guidance on a full year basis.

(Operator Instructions) Our next question comes from the line of Ken Herbert with Canaccord.

Max, I just wanted to follow up on your comments in the prepared remarks regarding Fluid Handling and -- or maybe it was Rich, but it sounds like you identified the -- or called out the Middle East as one area where you've seen sort of incremental downside relative to the initial guidance for the segment. Would you attribute that to or think of that as temporary? I guess, there's clearly been a lot of volatility in that region, not just from oil prices and everything else. But how do we think about that part of the world for you moving forward and timing or maybe getting back to a more normal environment in terms of your outlook or catch-up relative to the guidance?

Our best estimate or best understanding is there's been a shift of capital deployment in terms of military spending, in terms of investment in the region outside of chemical and other buildouts that we've historically seen. So it's been a redeployment of capital that is constrained because of low oil prices. So I think we're seeing this even in today's paper about OPEC trying to do what they can to get some discipline depending on shale U.S. and the impact. I mean, these are some of the global dynamics. You've got to forecast where oil is going to go to understand what the Middle East is going to be capable of doing, plus couple that with the tensions between Qatar and what's occurring there. I think all these things are just putting a slowdown on a freeze. I don't think -- we're not forecasting significant change to the balance of the year. Is it timing? I think if these conditions change, then it's clear they're going to improve. But I don't think you're going to see much change to the balance of this year.

Okay. And to that point, if we are in a situation where tar sands and other areas incrementally add capacity, and we're in a relative world of stability in terms of crude pricing, how does that impact what you view as timing of recovery in the segment or potentially sort of the margin ramp? I know you've done a phenomenal job of taking cost out, but how do we think about that post '17?

We have -- as I mentioned, it's going to be lower, longer. We feel like we're properly positioned. We're getting overall peak margins as a company. We've got to look at this as the year continues to progress and understand the implications for '18. We do not -- I do not see it worsening. I think it's an inflection point that could have accelerated a little faster than what we're seeing, that we're seeing it, as I mentioned, sustain at a new level and feel pretty good about that. I think there's going to be growth clearly into next year. We've got some work to do to dial in what our assumptions are in terms of just how much.

Okay. That's fair. I appreciate that. And then if I could, just bigger picture on Payment & Merchandising and the one retail project, obviously, you've called it out. It's not the only one. But when you think about the secular trend for self-checkout and what it might be able to do to your business, do think of that as we're in the early innings? Was this a sort of one-off project? Or maybe anything you could comment on sort of how you view penetration rates there and just maybe where we are in that sort of secular cycle or trend, if you could call it that?

Everything that we're learning and understanding, it's early innings. There's a real opportunity here to continue.

Okay, okay.

So in terms of adoption, in terms of acceptance, in terms of the drivers of acceptance...

Other applications.

Other applications. So we think it's early innings and has some momentum for a while.

And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Mitchell for closing comments.

Thank you, operator. We are pleased with our performance so far this year to-date. Fluid Handling, modestly outperforming our expectations, and while Payment & Merchandising and Aerospace & Electronics are facing a few more challenges than we expected, both are performing very well on an absolute basis. We remain comfortable with our guidance range, and we will continue to focus heavily on driving productivity and on our organic growth initiatives.

The late, great Roger Moore once commented that "I am a mixture of an idealist and a realist." That's our approach here at Crane as well. We are never satisfied with the status quo, pushing for continuous improvement and constantly working to get better at everything we do. But that drive has to be tempered with realism, acknowledging some of the challenges that we face, while continuing to focus on those factors that are within our control. I believe that our guidance and execution strikes this balance successfully, and I look forward to giving you all additional updates in the quarters ahead. Thank you very much 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 all disconnect. Everyone, have a wonderful day.