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Edited Transcript of CR earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 Crane Co Earnings Call

STAMFORD Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Crane Co earnings conference call or presentation Tuesday, July 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason D. Feldman

Crane Co. - Director of IR

* Max H. Mitchell

Crane Co. - President, CEO & Director

* Richard A. Maue

Crane Co. - Senior VP & CFO

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Conference Call Participants

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* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Damian Karas

UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Robert Douglas Barry

The Buckingham Research Group Incorporated - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Crane Co.'s Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jason Feldman, Director of Investor Relations. Thank you. You may begin.

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Jason D. Feldman, Crane Co. - Director of IR [2]

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Thank you, operator, and good day, everyone. Welcome to our second quarter 2019 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 Senior Vice President and 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 will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers and tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section.

Now let me turn the call over to Max.

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Max H. Mitchell, Crane Co. - President, CEO & Director [3]

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Thank you, Jason. As outlined in our press release last night, I'm pleased to report Crane's second quarter EPS, excluding special items, was $1.58, up 12% compared to earnings in the second quarter of last year. Sales of $842 million decreased 1%, with 1% core growth more than offset by unfavorable foreign exchange of 2% and the slight divestiture headwind.

Core growth was very strong across Fluid Handling and Aerospace & Electronics with expected headwinds of Payment & Merchandising due to extremely challenging comparisons. Operating profit, excluding special items, increased 9% from last year to $132 million. Adjusted operating margins improved to 140 basis points to 15.6%, in line with our expectations and led by very strong margin performance across our 3 primary growth platforms.

Before I provide more detail on our businesses, I would like to make some comments on our recent offer for CIRCOR. Certainly, our approach was atypical, but we have previously explained why we felt the need and the responsibility to go public. We are very thankful for the support we received from CIRCOR's shareholders throughout this process. At expiration of the tender, we had just over 2/3 of CIRCOR's shares supporting our offer, a remarkable result that was much stronger than typical for these types of situations, almost unheard of and a stunning rebuke to the CIRCOR Board and their submitted plans for value creation.

CIRCOR's issued statement yesterday that they remain open to any transaction in the best interest of shareholders strikes me at a minimum as extremely disingenuous. We have attempted to contact CIRCOR many times. I've e-mailed and called their CEO repeatedly, even over the weekend and yesterday. Our bankers have reached out to their financial advisers throughout the process to no avail. They won't even return our calls.

We have also made it clear throughout this process that we would -- we might consider paying more than our last offer $48 if they would engage and demonstrate that the company is worth more than that. Further last week, CIRCOR announced the sale of Pibiviesse for a nominal amount. This is a valve asset with a great brand and products that we have had an interest in for many years. Despite our position as one of the most logical acquirers, we were never contacted about the sale process. I hope if CIRCOR looks to divest further assets they will engage all potential buyers, including Crane, to maximize shareholder value. Regardless of our views, CIRCOR's shareholders have spoken loudly and affirmatively with 2/3 supporting engagement and a potential transaction. I remain perplexed at how a public company in this day and age of good governance can simply refuse to even speak with an interested party, particularly with that level of shareholder support or engagement.

We believe that CIRCOR would have been an excellent fit for Crane strategically and that the deal economics made sense and were consistent with our long-standing acquisition criteria. However, with the window for a potential transaction closing very rapidly, there are a few key messages I want to leave you with.

First, we will continue to pursue inorganic growth actively. Our M&A pipeline is full within our targeted range of $100 million to $1 billion, with many opportunities across all 3 of our primary growth platforms, including both public and private targets, and we're now actively working on those other potential acquisitions.

Second, while we will continue to actively pursue acquisitions as part of our balanced capital deployment, we will remain disciplined in valuation. We have had a strict set of financial criteria for many years. These are unchanged, and we will not compromise on them.

And third, we are committed to pursuing acquisitions more actively because we know that we can drive value for our shareholders by improving operating performance of acquired companies through the application of our differentiated business system as well as adding scale through consolidation. As we build scale across our 3 primary growth platforms, we are also creating more long-term portfolio optionality. And keep in mind, we have strong underlying businesses with significant organic opportunities as well.

Now I will make a few comments about each of our businesses, starting with Fluid Handling, which had a fantastic quarter. Adjusted margins improved 270 basis points compared to last year and more than 8% organic growth, roughly half of which was from share gains. The team continues to execute well both on growth initiatives as well as our previously announced facility consolidations.

While comparisons become more challenging over the next 2 quarters, based on what we know today, we remain confident in our ability to deliver on our previously issued guidance of 4% core sales growth and 13% segment margins.

At Payment & Merchandising Technologies, the quarter's results were in line with our expectations. We continue to see very strong trends supporting further cash automation at our payment business, particularly in the retail vertical. In addition to traditional self-checkout, we are seeing more and more retailers opt for customized solutions, driving productivity and helping with labor staffing challenges. As the industry leader in this space, we are extremely well positioned to continue to capitalize on this trend for the long term.

And in Currency, as you all know, we had an extremely challenging comparisons related to a single large customer last year. However, this business is making great progress on productivity initiatives and is benefiting from the move of our banknote Crane facility from Sweden to Malta.

In fact, I just came back from a meeting with the Central Bank Governor of a country that is specifically awarding us new business in large part due to the technical rating of our new Malta facility after their due diligence visits. We're also driving growth, new products and the pursuit of additional new customers. This business can be very lumpy and project-dependent, but I'm very pleased with how much progress this team has made in the 18 months since we acquired Crane Currency, and I'm excited about the opportunities we see ahead of us.

Aerospace & Electronics had an exceptional quarter. Continued strong demand with broad-based strength across the entire business. Our very strong performance in the quarter reflects benefits from business won over the last several years as well as consistent strong execution from the team. We just returned from the Paris Air Show where, once again, our incredible team of engineers is identifying new opportunities with our customers for technology insertion and growth even on existing platforms. For example, during the show, we announced that we were awarded a large military aircraft monetization upgrade program involving our SmartStem Wireless Tire Pressure System. We hope this also opens the door for similar application of this product across other military aircraft.

I'm also pleased to report that we were recently awarded the brake control system for the MQ-25 unmanned aerial refueling platform as well as the brake control system on Boeing's T-X training jet system. These are just more signs of how our continued investments in technology is driving long-term profitable returns for the business.

And Engineered Materials delivered results in line with our expectations coming out of last quarter. Sales remain under pressure from continued destocking by retail dealers, and the inventory correction is taking longer than expected to correct. At this point, it will likely not be fully rebalanced until the end of the year, but our team continues to execute well in a challenging environment.

We will continue to stay very close to what's occurring in the channel. While the North American economy appears to remain generally healthy, RV demand has historically been one early indicator of macro softening, and we will continue to watch trends in this space closely, along with other short-cycle businesses across Crane.

Overall, I'm very pleased with our results and how we're positioned for 2019 and beyond. Based on what we know today and barring any new economic surprises, we remain confident in our ability to deliver on our current guidance for EPS, excluding special items of $6.25 to $6.45 as well as free cash flow of $335 million to $365 million.

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

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Richard A. Maue, Crane Co. - Senior VP & CFO [4]

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Thank you, Max, and good morning, everyone.

As usual, I'll be providing segment comments that will compare the second quarter of 2019 to 2018, excluding special items, as outlined in our press release and slide presentation.

To start, I remain very pleased and impressed with our teams across Fluid Handling who have shown consistently how well they balance driving growth while executing successfully on repositioning.

In the second quarter, Fluid Handling sales of $291 million increased 5%, reflecting core sales growth of 8%, partially offset by 3% of unfavorable foreign exchange and a small divestiture impact. Fluid Handling operating profit increased 31% to $40 million, with operating margins of 13.7%, increasing 270 basis points compared to last year, reflecting higher volumes and productivity.

This was a very strong performance by the team in the quarter, again, driving very strong operating leverage by continuing to execute on repositioning actions as well as growth initiatives.

Fluid Handling order backlog was $275 million at the end of June compared to $280 million at the end of 2018 and $292 million at the end of June of last year.

In the quarter, we saw growth across all of our businesses both on the commercial as well as the process side. Market conditions remain similar to what we described at Investor Day, with our core markets positive and relatively steady.

While that characterization generally still holds, we have incrementally seen a few spotty signs of softening order activity. After adjusting for foreign exchange, the backlog declined 3% sequentially and 4% year-over-year. Orders, also adjusted for foreign exchange, improved 2% sequentially and declined 2% compared to last year.

Order activity in the quarter was approximately in line with our expectations and still consistent with the demand levels necessary for us to achieve our full year guidance.

At Payment & Merchandising Technologies, sales of $291 million declined 10% compared to the prior year driven by an 8% core decline, 2% of unfavorable foreign exchange and a small divestiture impact. Core growth at CPI and merchandising was more than offset by the challenging comparisons at Crane Currency from the nonrepeat of a single large customer from last year.

Segment operating profit of $49 million decreased 7% from last year, although margins of 16.9% rose 60 basis points from last year, with productivity repositioning benefits and acquisition-related cost savings more than offsetting the impact of lower volume and unfavorable mix, an exceptional performance by the team.

At our CPI business, retail is still an extremely strong growth driver. We are seeing a lot of opportunities in the North American self-checkout market both for traditional off-the-shelf solutions as well as for more customized solutions. Over time, we expect strong demand for retail automation to expand to other regions globally as well.

Our gaming business continues to execute extremely well on its new product development and growth initiatives. While we continue to gain share in gaming, market conditions are a little more challenging in the U.S. casino market as well as in Europe following some legislative changes in the U.K. and Germany. Vending transportation and financial services all performed well in the quarter.

At Crane Currency, we continue to pursue new customers, and we are also continuing to execute on new product development as well as productivity initiatives. The business has been performing well, and we are excited about the opportunities we have ahead of us. However, as you all saw last year, this business can be very lumpy with large customer orders whose timing can be unpredictable. And remember that the core sales comparison become more challenging as the year progresses, but I expect margins to continue to improve sequentially for the balance of the year.

Aerospace & Electronics end markets remain very robust and sales increased 9% to $205 million accompanied by solid operating leverage. Total aftermarket sales increased 10%, with similar growth on both the commercial and military sides of the business. Strength was driven by commercial and military spares.

Total OE sales increased 9% compared to last year, with commercial OE up in the mid-single-digit range and military OE up in the mid-teens range. Strength was broad-based across platforms.

The team is executing extremely well in a strong demand environment, but they are also focused on positioning this business for the future. Investment continues across our long-term technology road map specifically in electrification, advanced brake controls, wireless sensing, advanced microwave systems and in several other areas. We also continue to drive cost structure improvements through productivity and repositioning initiatives, another example of a team driving growth while also executing well on repositioning in other continuous improvement actions.

Aerospace & Electronics' backlog was $503 million at the end of June compared to $447 million at the end of 2018 and $441 million at the end of June of last year.

Engineered Materials sales decreased 11% to $56 million driven by a decline in sales to recreational vehicle customers. Operating margins declined to 13.5% primarily as a result of lower volumes, continued strong performance by the team during a challenging period.

We do expect the sales decline to stabilize over the next 2 quarters on easier comparisons, and we expect the RV channel inventory correction to be largely complete by the end of the year.

Turning now to more detail on our total company results and guidance. Our second quarter tax rate was 22.4% compared to 23.9% in the second quarter of last year. We continue to expect a full year tax rate of approximately 21%, consistent with our original guidance.

In the quarter, free cash flow was $137 million compared to $41 million in the second quarter of last year. This strong free cash flow quarter includes the reversal of the timing items we discussed last quarter.

We are comfortable with the strength of our balance sheet and we are actively working on our pipeline of opportunities given about $2 billion of M&A capacity over the next few years. Again, a solid first half of the year, and I'm confident in our prospects for the future.

However, while we do not provide quarterly guidance, I feel it is important to call out that from a cadence perspective, we do expect second half of the year earnings to be fourth quarter-weighted, with third quarter earnings' somewhat between this year's first and second quarter levels based on the timing of certain large projects. Barring any new macroeconomic surprises, we continue to expect that we will deliver earnings in line with our guidance.

Operator, we are now ready to take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Brett Linzey of Vertical Research Partners.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [2]

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Yes. Just want to start with the Fluid Handling, very solid on the top line in the quarter. But specific to orders, you had noted some of the moderation you saw in the quarter. Has that trend continued in July in that kind of down low-single-digit range? And then maybe any specific areas within your vertical mix that have slowed a little bit more?

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Richard A. Maue, Crane Co. - Senior VP & CFO [3]

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Yes. Sure. So Brett, I'd just start off by saying our full year order forecast in aggregate is largely consistent with what we expected coming into the year, so no major shifts and changes. Following the 6.5% core growth in the first quarter and 8% here, we're holding our 4% guidance for the full year. And so the cadence of what we've seen is, again, consistent and with that core growth declining on a rate basis with the second half comparisons being more difficult. So just to frame up, so while we did -- we are positioning here some softness overall supporting our full year guidance.

From a process point of view, I would say, just to give you some color, and I'll answer the question on trending, again, generally in line with our expectations as we talked about at the beginning of the year, some signs of softness in specific areas related to projects, some push-outs on projects mainly in chemical. And we did see our first large project cancellation, not something that we had booked and canceled, but a project become canceled.

On the MRO side, a little bit slower with the distributors reducing inventory levels, in particular in the Americas, so a little bit of color there on the process side. From a geographic point of view, also in process, I would say that Europe has pretty much same to slightly weakening from the last time we spoke, U.S. decelerating a little bit from a growth point of view, and I'm still seeing some nice opportunities both still in the U.S. and China as well.

And then from an end market perspective, power, as you might imagine, still weak, refining, okay. It was actually a little strong for us here in the quarter and decent, again, underlying chemical demand, but again, some project pushouts that impacted us in the quarter. From a commercial point of view...

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Max H. Mitchell, Crane Co. - President, CEO & Director [4]

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Does that answer -- does that help, Brett?

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [5]

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Yes, yes. That's good. I appreciate that. And then maybe just pivoting to M&A. I mean, it looks like you guys are shifting to sort of Plan B here. Maybe just a finer point on the actionable ideas that you currently have in the funnel? I guess, what's the concentration look like between smaller and medium-sized, something a little bit larger? And then maybe what's your preference within that size range?

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Max H. Mitchell, Crane Co. - President, CEO & Director [6]

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I think it's fairly -- right now, it is interesting. It's fairly balanced on size as well as across the segments. We -- I mean, we're looking to drive intelligent acquisitions no matter which of the focus segments, so there's no strong preference between Fluid Handling and Payment & Merchandising and Aerospace & Electronics. It's around availability and actionability. And right now we're tracking in each.

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Operator [7]

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Our next question is coming from Damian Karas of UBS.

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Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [8]

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Max, you made a comment about the share gains that's driving about half your growth in Fluid Handling. I was wondering if you could maybe elaborate on that a little bit? Any end markets or product lines where you guys think you're really capturing most of the share? Is it perhaps in the chemical side, even though you're seeing a little bit of weakness there now? Maybe just any color around the share gains you've been able to achieve in Fluid Handling.

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Max H. Mitchell, Crane Co. - President, CEO & Director [9]

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Yes. Some of the new product that we've launched around emissions -- fugitive emissions controls and higher value-added requirements by some customers both in chemical as well as some petrochemical where that's valued. We've clearly seen some share gain, some in the pharmaceutical space with some new product introductions that we've had there. So it's a combination of new product as well as geographic execution is how I would frame it up.

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Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [10]

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Okay. You think that you could continue to gain some share going forward?

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Max H. Mitchell, Crane Co. - President, CEO & Director [11]

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From a share gain standpoint, I think like we're all reading right now, and on a broader macro, are there signs of some deceleration? Markets are still solid. Things feel good. U.S. economy is solid more so than Europe. We're tracking everything that everyone else is reading around some of the decelerating signs whether it's U.S. PMI, orders index, trade volumes, so forth. So it's just a question of what we're seeing. Now Rich just took us through on the process side what are we seeing, a little bit of deceleration. We're seeing, as he's mentioned, for the -- a little bit more of projects pushing to the right. First time we saw cancellation. So these are just some indicators that things are not bad but slowing on the process side. Generally, general industrial is across all geographies. BASF came out with some weakness. So having said that, if I go across the rest of Fluid Handling also, what's interesting is the spottiness of the slowdown. For example, Canadian distribution is doing quite well. Construction's up. Activity is solid. A little bit of recovery it looks like on the West in the oil sands. Potentially mining, solid, particularly gold mining. U.K. conditions on the commercial side, probably better than we expected holding up, generally flattish. Middle East remains depressed, not dramatic change. I would say that in some of our Fluid Handling businesses that have exposure to the European machine tool sector, a little softening there. And then if you move over to the pump business with municipal vision -- visibility, good activity in municipal, probably flattish on construction activity on the pump side. And then this industrial, general industrial weakness showing up on the pump side as well. So it's mixed. We've got some bright spots as well as this early sign of generally solid end markets clearly -- as Rich said, clearly supporting our full year and slowly decelerating. Hope that helps, Damian.

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Damian Karas, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate of Electric Equipment & Multi-Industry [12]

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It does. That's helpful color. And a follow-up question on M&A. Max, you sounded quite optimistic about your opportunities across the 3 growth segments. Specifically, as it relates to currency, one of your competitors there is going through a little bit of a management shakeup and there's some portfolio changes in the works. Wondering if you have seen any changes in the market environment or your relationships with customers as a result of that. And would you potentially have an interest in those assets?

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Max H. Mitchell, Crane Co. - President, CEO & Director [13]

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No comment on the asset. I would say that regardless of any of the competitive moves that our team continues to execute to our plan, driving enhanced value through our technology differentiation, our service, our delivery, our quality and all those continue to play out.

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Operator [14]

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Our next question is coming from Matt Summerville of D. A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [15]

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A couple of questions. First, to your prepared remark, Rich commented kind of on the third and fourth quarter earnings cadence, can you talk about what's driving sort of the lopsidedness between the third quarter and fourth quarter? You mentioned timing. Can you just give a little more granularity maybe down to the segment level why you're seeing that sort of split, if you will?

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Richard A. Maue, Crane Co. - Senior VP & CFO [16]

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Yes. So what I would say, the added granularity would be around payment and the lumpiness of some of the opportunities that we have there that we've been pursuing in terms of when they'll actually realize and shift. So that's the primary move that we see here from Q3 to Q4. So the overall growth profile in Q3 relative to Q4 and what we have for balance of the year, it's all in Q3 from that point of view. So when you think about the full year guidance that we have out there, if you were to look at that midpoint that we're at, it's roughly a 45% to 55% aggregation if you look at Q3 to Q4 in total.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [17]

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Sure. Sure. Sticking with the payment side of the business, can you maybe parse out in a little bit more detail the underlying organic that you're seeing in the CPI business versus the merchandising business? And then on the currency side, if you back out the one single large customer, is that business growing this year organically? Do you believe it's going to be up ex that one large contract?

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Richard A. Maue, Crane Co. - Senior VP & CFO [18]

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Sure. So I mean just going through them, at CPI, solid year-to-date performance. The core growth there has been, I would say, exceptional in particular in the retail space. Saw strong signs as I mentioned in the prepared remarks not only there but in transportation and other areas, vending, et cetera. Gaming is one spot that's a little bit spotty in the business. And it's -- can be a sign of some softness in the overall economy, and it's one that we're watching closely, but still executing really well with our growth initiatives in that space. But from the market point of view, I would point to that being the only really weak spot or the most notable weak spot within the business. But overall, the CPI business, exceptional core growth when you look at first half performance. From a merchandising point of view, I would say just status quo, not a whole heck of a lot of growth there at this point. We're following the bottlers. And then on currency, excluding Venezuela, yes, we are seeing growth. We're seeing notable growth, in particular in the international market space year-over-year.

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Operator [19]

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Our next question is coming from Robert Barry of Buckingham Research Group.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [20]

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So I just wanted to maybe put a finer point on the comments about CIRCOR, just is the bottom line there as far as your concerned, it's just like a no-go at this point?

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Max H. Mitchell, Crane Co. - President, CEO & Director [21]

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Never say never. Right now we've done everything we feel possible to engage. I think CIRCOR's shareholders have clearly, from all that we have spoken to, have engaged with the Board of CIRCOR and have asked them to engage. There's no engagement. If something were to change in terms of engagement, we would certainly welcome that. The point being that we're at the close of our process what we can do. We've had the full support of CIRCOR's shareholders. And at the end of the day, if the Board of CIRCOR wishes to remain entrenched and stick with their defenses and say no, they can do that and continue to work to their plan. So it's more one of as days continue to progress, Rob, it becomes less and less likely.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [22]

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Yes. Yes. And the comments on the pipeline, it sounds like there's a fair amount of activity there. I mean, are there -- is it fair to assume that there are other actionable items kind of the next quarter or 2 or....

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Max H. Mitchell, Crane Co. - President, CEO & Director [23]

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We can never affirmatively say one way or another, but I would say our hopes would be yes.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [24]

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Got it. I guess shifting to the fundamentals and trying to make sense of the guides for Fluid and Aero. I think both are guided to grow 4% -- both are tracking up much stronger than that in the first half. It sounds like maybe 4-ish for Fluid still makes some sense given things are softening a little. But on the Aero side, I mean, your line of sight to the back half being -- would have to be really materially weaker than the first half. Is that the right way think about it or is there some...

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Richard A. Maue, Crane Co. - Senior VP & CFO [25]

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No. I think -- good question, Rob. On the Fluid Handling side, you're right, we're going to be roughly right into where our guidance was. Just remember that we have tougher comps as we enter the back half of the year. So that 4% is still, we feel, the appropriate guidance figure. And for Aerospace & Electronics, I would expect us to be higher than the implied growth rate if you kept our 4%. So I would expect this to be in the high single-digit range by the end of the year.

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Robert Douglas Barry, The Buckingham Research Group Incorporated - Research Analyst [26]

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Got it. Got it. Just lastly, on price cost, curious if you're seeing any signs of help from deflation, and on the price side, whether the kind of pricing environment or ability to get price is perhaps getting a little tougher and markets are slowing a little bit.

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Richard A. Maue, Crane Co. - Senior VP & CFO [27]

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Yes. So overall, we've been doing -- the teams have been doing a fantastic job on price cost, dealing with the tariff exposures that we have as well as the dynamic movements on material costs. So overall, price is holding. We're continuing to be targeted in that area and strategic in how we do it. And the overall relationship has been positive for us on a year-to-date basis. And we do see that result that we've seen in the first half continuing into the second half.

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Operator [28]

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Our next question is coming from Nathan Jones of Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [29]

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I'm going to beat the CIRCOR horse to death a little bit more. Really, it sounds to me like you have a pretty full pipeline on the M&A front. It sounds like there's some [executable] things in there. Rich mentioned again here today that you've got a couple of billion of M&A capacity over the next few years, which CIRCOR would have sucked up almost all of. Is it fair to say here that if you execute on any kind of deal of size, it basically takes CIRCOR off the table for you guys for an extended period of time?

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Max H. Mitchell, Crane Co. - President, CEO & Director [30]

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It's hard to say with any deal size. But conceptually, I think you're accurate.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [31]

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Would you have any intention of looking to force changes at the Board level when it comes to their election next year? Is that something that you'll now leave up to CIRCOR shareholders? Just how you might approach that, let's say, if you don't get any kind of deals done over the next 6 to 9 months.

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Max H. Mitchell, Crane Co. - President, CEO & Director [32]

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Look, I think, Nathan, that will continue to monitor CIRCOR and their performance, and depending on our own path forward, continue to explore. I think it's important for us to have certainty for our Crane shareholders and not have uncertainty continue to linger in what we may or may not do. And so right now we have absolutely no plans whatsoever to pursue this in April and fight a long entrenched battle if they remain completely unwilling to talk. But again, we certainly will monitor the situation, but we have no plans to do what you've just described.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [33]

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Okay, fair enough. I just want to move on to Engineered Materials here for a minute. You guys have talked about expecting the destock there to be done about midyear. Now it sounds like you're thinking it's going on to end year -- end of year. It certainly looks from your comps here that it's a little bit more than just destocking in the channel. It looks a little bit like the cycle might have rolled over here. As you said, it can be a leading indicator of softness economically, which I think we are seeing. Can you maybe talk a little bit more about what the possible outcomes here could be, what you're seeing it terms of sell-through in the end markets there?

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Richard A. Maue, Crane Co. - Senior VP & CFO [34]

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Yes. I would say that I don't think our position is materially changing from last quarter. We said the destocking would be largely complete around midway through the year. We do see that as taking a little bit longer. We're going to start to see core growth, we believe, in the fourth quarter. So we do think that we're getting through the inventory appropriately here in the channel.

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Max H. Mitchell, Crane Co. - President, CEO & Director [35]

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In terms of end markets, it's RV, is the soft spot. Building products and transportation in that segment are actually holding up fairly well surprisingly.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [36]

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Okay. I got one more on Fluid Handling margins. You're about 50 basis points in the first half ahead of the full year guide. I would assume that price costs should actually be a little bit more positive for you in the second half with input costs having fallen. You'd [have to do of about] 12.5% come down in the second half. It looks like the revenue numbers probably are still going to be basing around flattish. Should we be expecting you to outperform that full year margin guide given the execution that you've had here the first half?

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Richard A. Maue, Crane Co. - Senior VP & CFO [37]

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Yes. Yes, I would expect that. We'll be modestly higher than our guidance of 13% that we have provided at the beginning of the year, Nathan. We'll be a little bit -- we'll do better than that.

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Operator [38]

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Our next question is coming from Kristine Liwag of Bank of America Merrill Lynch.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [39]

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Max, as you evaluate your acquisition pipeline, can you discuss the hurdles that you look at and the main things that you evaluate during due diligence? And a follow-on to that is when you look at the big acquisitions you've done in the past few years, MEI and Crane Currency transformed your payment business. Are you interested in adding another leg to Crane through formative actions or maybe a complete new leg or do you want to do more deals like CIRCOR where there's an obvious strategic fit?

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Max H. Mitchell, Crane Co. - President, CEO & Director [40]

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Yes. So right now, Kristine, no new leg in our strategy. There's enough fragmentation and opportunities within Fluid Handling, Payment & Merchandising Technologies as well as Aerospace & Electronics that we believe that we're going to stay very, very focused on those 3 core segments right now. I'll ask Rich to just remind us again on the acquisition.

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Richard A. Maue, Crane Co. - Senior VP & CFO [41]

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In terms of what we look at from a return perspective, Kristine, obviously, a positive NPV at the right risk-adjusted rate is how we value and then an ROIC that's appropriate as well, and we have targets for 3 and 5 years. So we like to see 10% by year 3, and depending, we might stretch that a little bit to year 5. But that -- it's year 3 10% ROIC in a positive NPV again at the right risk-adjusted rate. There's other elements that we'll look at, but those are the 2 primary ones.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [42]

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And on Fluid margins, in the past, you guys have mentioned that you could expect the next $100 million of revenue in Fluid to get you at least 50% in incremental margins. When I look at the quarter, you're kind of tracking around 69% year-over-year on an adjusted basis. So first, where there any onetime items in Fluid margins that contributed to that? And then also, second, even with the slowdown in order activity that you're seeing, do you still think you can get that 50% run rate going forward?

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Richard A. Maue, Crane Co. - Senior VP & CFO [43]

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Yes. So in the quarter, nothing unusual. It's just us executing on the repositioning actions. You're going to see incrementals that are higher than that here and there as you're executing on things like repositioning and a variety of different productivity initiatives, so they'll layer into quarters maybe a little bit different. I would say that the 50% still holds, and we would expect to -- we're already at 13.7%. Now here I think we did 13.5% last quarter, so already in our range, right, before the end of the year. And I think at the beginning of this year we said that we'd get there by the end of the year, so clearly, we're achieving what we said. With the order rates, no, as long as we're in a growth environment, we're going to leverage at a pretty solid rate.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [44]

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And lastly, for me. If you're not able to find any viable targets in the next year or 2, would you consider returning more cash to shareholders?

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Max H. Mitchell, Crane Co. - President, CEO & Director [45]

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Always part of our analysis is capital deployment and allocation, and shareholder return is always -- is part of that equation well we'd evaluate.

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Operator [46]

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Our next question is coming from Ken Herbert of Canaccord.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [47]

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Max or Rich, I just wanted to first ask about Aerospace & Electronics margins, very strong in the quarter. And I know you clearly looked -- looks like you benefited from mix. Can you somewhat -- can you talk about anything else, maybe onetime or unique in the quarter that contributed to margins in the segment? Or maybe how much of a benefit mix was in the quarter?

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Richard A. Maue, Crane Co. - Senior VP & CFO [48]

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Yes. When looking at the overall performance in the quarter, it was largely mix, and it was tied to the aftermarket in that regard as you know. So that was the primary driver in the quarter. No unique one-off benefits that were recorded, Ken, in the quarter.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [49]

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Okay. And as you look, similar commentary, I mean, is it fair to assume that the full year margin assumptions for the segment, barring any significant change, should be ahead of the full year guide provided back in January at the Investor Day?

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Richard A. Maue, Crane Co. - Senior VP & CFO [50]

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Yes. Yes, we would expect to finish stronger than the 23.7%, I think, guide that we had. Not a whole heck of a lot stronger, but we'll finish stronger on the year.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [51]

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Okay, great. And another -- I mean, against very sort of strong growth a year ago, another quarter of very good growth in the backlog at Aerospace & Electronics. Can you just provide any more detail again on where you're seeing the strength and timing of what's flowing into the background in terms of what's getting shipped maybe this year and into 2020 and how we should think about the growth and where it's coming from and the timing of deliveries?

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Richard A. Maue, Crane Co. - Senior VP & CFO [52]

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Yes. It's a little bit tougher. We're seeing the growth in the backlog come from a lot of different spots, right? A large portion of where we're seeing it over the last, call it, 6 months has been in the power area, defense power and sourcing some nice opportunities on the defense side that are rolling in. I would say the order rates from -- on a year-to-date basis coming through commercial or -- they're coming through on the platforms that I know you're well aware of that we're on. So how they cascade into 2020, I'm not really prepared to give you a whole heck of a lot of granularity on that at this point, Ken. But I think the overall message here is that we're seeing broad strength on the commercial side, on the defense side, on the aftermarket side and the OE side. And I would leave it at that and let us come back to you as we give guidance on next year when we do that in January.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [53]

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Okay. Okay. That's helpful. And if I could just one final question. I mean, it sounds like we may finally start to get a little more direction or certainty around Brexit. And can you just level-set us again on maybe your exposure or implications for your business or how you're thinking about that and the potential impact?

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Richard A. Maue, Crane Co. - Senior VP & CFO [54]

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Yes, I mean on the Fluid Handling side, I would say the primary spot where we have an exposure there -- ah, exposure -- whatever comes of it, right, is part of our -- again, a part of our Fluid Handling business on the commercial side. We have a U.K. business that has exports, and it's the area that would be most susceptible. But honestly, we don't see it having a big impact on us as we think about the balance of this year or next year.

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Operator [55]

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Thank you. At this time, I would like to turn the floor back over to Max Mitchell for closing comments.

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Max H. Mitchell, Crane Co. - President, CEO & Director [56]

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Thank you, operator, and thank you all for your time this morning. We had a very a solid first half of the year driving growth from, improving our cost base and positioning Crane for the future. Our results are a testament to the strength of the Crane team and the value of the Crane Business System.

It was also an eventful quarter with our offer for CIRCOR. While ultimately disappointed with the outcome, our approach should reinforce that we are prepared to make bold moves, but we will remain disciplined both strategically and financially.

In closing, I will leave you with the words of the recently deceased renowned Chinese-American architect, Ieoh Ming Pei, "Stop worrying about missed opportunities and start looking for new ones." Thank you for your interest in Crane, and have a great day.

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Operator [57]

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Ladies and gentlemen, thank you for participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.