Good day, everyone, and welcome to Crane's First Quarter 2013 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. Richard Koch. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Crane's First Quarter 2013 Earnings Release Conference Call. I'm Dick Koch, Director, Investor Relations. On our call this morning, we have Eric Fast, Max Mitchell, Rich Maue and Andrew Krawitt. We will start off our call with a few prepared remarks. After which, we will respond to questions. Just as a reminder, the comments we make today 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 comparable GAAP numbers in a table at the end of our press release, which is available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Eric.

Thank you, Dick. Before commenting on our first quarter earnings, I would like to briefly touch upon the management changes we announced yesterday. As mentioned in the release, I will be retiring in January 2014. It's been a privilege to lead Crane over the past 12 years and I'm very proud of all that we have accomplished. We posted record earnings per share and free cash flow in 2012, and we expect another overall record performance in 2013. In December, we announced the acquisition of MEI, which will create a third growth platform for the company, and our stock price reached an all-time high during the first quarter. Max Mitchell has played a key role in many of our accomplishments, and I'm pleased he was chosen by the board to succeed me. I'm confident that he will lead Crane to continued profitable growth. As we have been for the last several years, Max and I will continue to work closely together over the next 9 months to ensure a smooth transition. Now I'd like to move on to our first quarter 2013 results. As outlined in our press release last night, excluding MEI transaction costs, I am pleased to report record first quarter EPS of $1.04 per share, an increase of 21% versus $0.86 last year. Operating profit increased 15%, as margins reached 14.3%, a substantial increase over 12.1% last year, with improvements broad-based across the organization. Although we experienced a modest decline in sales and remained cautious on the global economy, our backlog position and improving order and quote activity during the quarter was encouraging and it supports our full year 2013 sales and earnings guidance. As I mentioned a moment ago, we have an agreement to purchase 100% of the equity of MEI Conlux Holdings for $820 million or approximately 9.6x MEI's 2012 adjusted EBITDA. We structured this transaction to use at least $180 million of our international cash and $70 million of U.S. cash, for a total of $250 million, and we plan to borrow the remaining amount of approximately $570 million. We have commitments in place for all financing requirements. The acquisition remains contingent upon regulatory approvals, and we are working to obtain these approvals as quickly as possible. We continue integration planning in connection with the acquisition, and look forward to a successful closing late in the second quarter. Rich Maue will now take you through the businesses and provide some additional financial information.

Thank you, Eric. I'll turn now to segment comments, which compare the first quarter of 2013 to 2012. Aerospace & Electronics sales decreased 6% to $165 million compared to $175 million in the first quarter of 2012, while operating profit increased 5% to $40 million. Operating margin improved 260 basis points to 24.3% from 21.7% from the prior year. Sales in the Aerospace Group were $104 million compared to $109 million last year. Commercial OEM increased 1% as strong sales to large aircraft and private jet manufacturers was offset by a decline in regionals and in our seat actuation business. Military OEM was also down modestly. Aftermarket sales were lower by 8% compared to the first quarter of 2012, with a decline in commercial spares and in military modernization and upgrade sales. The decline in military modernization and upgrade sales largely reflected the completion in late 2012, with the carbon brake upgrade program for the C-130 aircraft. The OEM aftermarket mix was 62% to 38% in the first quarter of 2013, which compares to 61% to 39% in the first quarter of 2012. Operating profit in the Aerospace Group increased by approximately $2.6 million driven by productivity and solid cost management, as well as lower engineering spending due in part to this timing of certain development programs. Market conditions in the aerospace industry remain positive. The International Air Transport Association is forecasting slightly improved profitability for the airline industry in 2013, with passenger traffic projected to increase 5% worldwide and air cargo volumes expected to increase 3%. We continue to benefit from increasing OEM build rates across a broad range of platforms, and we are cautiously optimistic about commercial aftermarket spares improving in the second half of the year. The Electronics Group sales were $61 million in the first quarter…

Thank you, Eric and Rich. This marks the end of our prepared comments. Operator, we are now ready to take questions.

[Operator Instructions] And we'll take our first question from Brian Konigsberg from Vertical Research.

First, will you just touch on maybe what margins -- I guess, if you could just focus on merchandising system to start? Obviously, that was extraordinarily strong quarter, much better than we had expected. I'm just curious about your view of the sustainability of that margin profile through the year. Was there anything special that kind of tails off after the quarter? Maybe give us some color on that.

So no, I think some of the performance that we saw in the quarter in particular in a year-over-year basis had to do with the absence of the settlement charge that we had in the prior year...

$1.5 million.

Which was about $1.5 million last year. So from a year-over-year perspective, that did benefit us. I would say that the growth that we saw in Payment Solutions contributed, and then our ongoing process to ensure we achieve the productivity goals that we set forth at the beginning of the year. So the margins, from our perspective, were not a surprise and in line with what we would've expected and in line with what we expect on a full year basis for the segment.

Nothing unusual.

Nothing unusual, okay. And then just on Fluid Handling, so nice sequential uptick up there as well. Maybe you could just talk about how much of that was just core operations versus the benefits of restructuring actions already in place, and should that continue to improve through the year based on how those benefits actually layer in? If you could give us some color there, that would be helpful.

From an overview point of view, I don't think we want to break out the restructuring [ph]. The restructuring that we accounted on to get a full $10 million, the repositioning that we did in Europe in the second quarter we completed. We expect to get $10 million and we'll get $10 million through the course of this year. I don't think we want to get into trying to break out what was restructuring now. But we've got the $10 million, and we start to see it in the first quarter. I think the margins, we're a little bit concerned about mix among the businesses going into the first quarter. And frankly, margins in every business were a little bit better than what we anticipated, with the exception of Crane Supply, which is our distribution business in Canada, where we saw lower sales in end margins. But generally, the margin improvement was across the board in all the businesses other than that.

Is it safe to say that you have not hit your full run rate in Q1 as far as restructuring benefits in fluid?

No, we saw a full benefit of the restructuring in the first quarter.

So you're at the run rate? Okay.

Yes.

And our next question's from Matt McConnell from Citi Research.

So I wanted to start by saying congratulations to Eric for a great career at Crane, and it's great to see Max now officially named as the successor. So congratulations to you both on that.

Thank you very much. Appreciate it.

Thank you.

And then you talked about the driver of that 6% revenue decline in Aero & Electronics. Can you bridge the gap with how you get to the increase for the year? Is that mainly an improvement in commercial spares? Or did the year-over-year impact of the defense retrofits, was that tougher this quarter than the rest of the year? Can you just give some visibility to how that improves through the year?

Yes. With -- just start with the retrofits, it's going to be a headwind for the next 3 quarters primarily, so that is a piece of it. When you look at the decline that we had in the first quarter, it would imply that we need to have about a balance of year increase in core sales growth of about 4%, 4.5%. We continue to see OEM build rates being strong, passenger miles flown continue to increase. To your point, we also do expect commercial spares to come back in the second half, again, as passenger traffic grows and we see that outpacing, perhaps, airline capacity. From a defense-related perspective in electronics, we do see orders continuing to recover as we move through the balance of the year, although timing is difficult in that area, given uncertainty around defense-related budget actions. But I think the important point here with respect to defense is that we don't see orders being canceled necessarily and just delayed. So we see it from a backlog perspective as being a bit -- from a -- a bit timing. Overall, we think that the backlog in both Aerospace & Electronics where it sits today, and together with those orders that we expect, both in the aftermarket and in defense, to support the full year forecast that we have.

Okay, great. That's helpful. And between the pushouts and the roll-off of the retrofit project, is there any mix shift that's contributing to that margin? Because I think that, that might be an all-time high, at least it's a 10-year high, I think. But is there any mix issue that's contributing to that margin in Aero?

Yes. So the margin performance in the quarter, you're referring to, Matt?

Yes.

So our engineering expense was a bit lower in the quarter. We had been -- our expectation for the full year was 8% of sales, we ran closer to 7% in the quarter, which is about a $2 million benefit that we did see in the business. We were also perhaps just a little bit lower on Electronics. I think if you were to come back to that overall run rate that we do expect for the balance of the year, our margins would have been a little bit more in line with what we have expected or would have expected in the quarter and on a full year basis.

The other point I would make, we don't spend a lot of time talking about a business that are seat actuation, cabin business was a contributor to the sales decline, and the margins there are quite a bit lower than the rest of the business.

Okay, great. That make sense. And will the engineering expense kind of normalize out through the year? Was that a temporary step-down this quarter? Or...

Yes, it was more temporary, more in line with just changes in certain programs that we're working in terms of timing. We do still expect to hit our full year forecast in engineering.

[Operator Instructions] So we'll take our next question from Matt Summerville from KeyBanc.

A question on fluid handling. You mentioned things sort of got better as the quarter went on. I'd be interested if you can provide a little more detail on that in terms of, if you think about kind of the book-to-bill and where it appeared to come in for the quarter comfortably above 1, were you seeing -- was January -- do you see something like bad, bad, good? Or how -- describe more about how that cadence in book-to-bill sort of came together there, and kind of maybe also the magnitude of delays and pushouts you're seeing on the project side?

I would -- I'd like -- I kind of like the bad, bad, good in terms that it might be a little dramatic, Matt, but generally, we saw very strong margin terms of orders. I would -- just to give you some comfort, I mean, after January and February, we felt the need to focus here and the direction of business. We did even after March, we did -- we reviewed all the major businesses. We took a bottom-up formal forecast in terms of orders and sales and margins. Max, and Louis Pinkham and I spent last week in Europe on reviewing the Fluid Handling businesses. And generally, across the board, against much stronger in March, more quote activity and a fair number of open quotes, tempered by real price competition and the discipline of trying to hold price here on these project -- bids. But I would -- it felt -- it clearly felt better to us in all those reviews.

Has pricing started to firm up at all? Or is the magnitude of pressure similar to what you've been experiencing, or even worse?

I don't think there's a noticeable difference. It's a very competitive marketplace here.

And then just back to kind of the spares comment in the Aerospace & Electronics business. Does the dialogue you're currently having with customers support a view that, in fact, that is going to get better in the back half of the year? I guess, what's your sort of view on channel inventory as it pertains to the products you sell? And is cannibalization of the part fleet an issue for your spares business?

Yes. So certainly, we do have a bit of a tougher compare. We had very strong -- I think most companies had very strong order activity and sales activity early last year. We believe inventory levels, to your point, are improving a bit. Further destocking in '13 would look, from our perspective, to slow as we move through the balance of the year. And again, we point to commercial air traffic and the capacity of the airlines to address that increased traffic growth. So overall, we feel pretty good, cautious, but okay. On the last question on airlines and using, I think what you're referring to is used serviceable material, it's something that we do watch. We don't see it having a dramatic impact at this point, but something that we're watching closely.

And I would add, we don't see much of a change in the second quarter, so this is really kind of a second half call and it's not easy to get our arms around this. But our forecast, our commentary with customers would suggest that we should see a better -- and what's going on the business would suggest to us that we should see a stronger second half, but not till them.

Can you remind us what your comps in the spares side of the business look like in the back half of the year?

I don't know what they were.

I'm sorry, your -- the question again?

What your compares -- the compares since you're up against in the spares side of the business in the back half of the year? I'm trying to get a sense for how your comps evolved through the remainder of the year?

Why don't you deal with that this afternoon when you follow up with a call, Matt. I don't -- we don't have it right here with us.

And our next question's coming from Maharth Kapur from Crédit Suisse.

I have one question regarding the quote activity. Have you guys been seeing any lengthening of the sales cycle in that -- in the Fluid Handling kind of quote activity picking up? Or is it pretty much in line with historical averages in terms of longer cycle, the late cycle stuff being taking a while and the short cycle stuff being quicker?

I'm not seeing any changes there, really.

No. We'd say nothing inconsistent.

Yes.

And in terms of the quote activity picking up going -- as you went through the quarter in March, was that -- does that apply to the short cycle stuff as well or only the late cycle across the board or not basically?

I would say that even on the short cycle businesses, Canada was weak, North America was stronger in March, U.K. was nondescriptive, I would say...

Yes, I would say that for the majority of the momentum that we saw, as we moved through the balance of the quarter, it was mostly in project. But we did see some pickup in MRO, but mostly project.

Yes, that's fair.

Okay. And it just seemed like from for the press release that the quote activity kind of the commentary applies across all your segments, and -- but the previous questions seemed to focus mainly on Fluid. So I mean, is this -- is it mainly concentrated in Fluid, or would you say that you're seeing kind of quote activity in order buildup across all the segments?

I wouldn't say that. What I would say is that we had positive book-to-bill here across all the segments. In very strong way, you can see that our backlog, looking at both short cycle and the long cycle businesses, backlog is up $50 million since the end of last year, but I wouldn't -- we particularly felt that in Fluid Handling, I wouldn't characterize it -- I would say we started to feel that in Engineering Materials, didn't see it in Vending. Payments System is steady, nothing of particular note in Aerospace & Electronics.

Got it. And then just last question. In terms of some of the revenue weakness in the quarter versus street expectations, where -- and you guys have explained where the shortfall was in terms of -- and the reasons for that on the Aero side, but where would you say was the biggest shortfall relative to your plan going into the quarter?

I don't think it would be any different than what we outlined, frankly.

Yes. I would say that we were -- I would say that Vending surprised us from -- we expected the bottling business -- the business from the bottlers to be better, and Europe was a little worse.

And you expect that to pick up in the back half as well, or...

It's a book-and-ship business. It's hard to say.

And our next question is from Brian Konigsberg from Vertical Research.

I just had a couple of quick follow-ups. Just on MEI, to the extent that you could actually comment on it right now. Obviously, we've seen the yen come down fairly substantially over the last several months. How does that kind of play into your outlook for MEI's contribution? And maybe, can you just talk about the dynamics between -- obviously, Japan is a fairly big market for them. The sales versus the cost dynamics within that region, these are manufacturing-based in Japan, and how that transaction might impact you going forward? If you could comment on that, that would be helpful.

I think we would rather comment on MEI's specific pieces of their business after we close, Brian.

Again, we're holding exactly to what we said in terms of first year full year accretion and synergies that we're going to get here.

Okay. And that contemplates what's happened with the yen?

Sure.

Yes.

Okay. And then just secondly, just on cash. I believe you said you're going to roll a portion of your debt the second half in the year. And you still intend to pay down about, what, $100 million in '13, or is that a first-year comment? Can you maybe give a color -- some color on how much cash is going to go back to paying down debt related to the deal?

We didn't necessarily give, I don't think, a forecast in terms of what we were going to specifically pay in '13. We expect to be able to pay down a significant amount. We expect to be able to pay down that debt over time over the next few years, and we're comfortable in those projections. We look to use the domestic cash flow to pay down that debt and we'll see some cash build up overseas simultaneously, but we're comfortable in our projections there.

Yes, no changes there.

And I'm showing another question now coming from Michael Callahan from Topeka Capital Markets.

I guess, just a couple of details, I guess, of that segment here. On Merchandising Systems, you have mentioned that Vending sales were down in the quarter, kind of coming off the multiyear trough. Are you guys seeing any indication of improvement? Or you're thinking it may decelerate even further? Just kind of any color you can give us around that piece of the business.

I'd be surprised if it decelerated any further. We were surprised -- the bottlers surprised us a little bit and the big customer in Europe surprised us a little bit, but I'd be surprised to see any other deterioration there.

Okay. And I guess on Engineered Materials, similar kind of question there. RV sales were up. Can you give us just a little more color on transportation and, I guess, commercial building products as well there?

I would say, from a demand point of view, RVs been stronger than we anticipated. We don't yet see a commercial construction activity really coming through, and I think that's -- you would find those comments across the board that's not unique to us. And transportation is kind of -- is down but relatively stable. I would characterize the sales growth overall in Engineered Materials to improve. We would expect sales to be higher on a -- modestly higher on a year-over-year basis as we go through the next 3 quarters.

And I'm showing another question coming from Maharth Kapur from Crédit Suisse.

Just to follow up on the Vending business. That business has struggled for quite a while. I know you guys have talked about a low operating rate in that business, and I'm not sure if you ever talked about a low-cost tax -- as a lower tax basis or not. But what would it -- Eric, what would it take for you guys to consider some kind of strategic actions, just given that Payment Solutions is now obviously becoming a bigger part pro forma after MEI? I mean, is there -- how would you view that business in terms of fit strategically with the rest of the portfolio?

So we expect that business to get to 10% operating margins, and those of you who have followed us for a long time, we're actually in a interesting part of the cycle, and the Vending business would be hooking them up to the Internet, the sale of the cashless devices to complement the payment devices on these machines, the root efficiency they get from the Internet and then importantly, the display screens that are being introduced pretty much certainly on the snack piece has been out now for 6 months and will be over the next year on the glass fronts also. So I think we're encouraged by the growth prospects here with the new products and the efficiencies are going to come from the Internet.

And I'm showing no further questions in the queue at this time. I'd like to turn the conference back to your hosts.

Operator, thank you very much, and we thank you all for joining us this morning. Take care. Bye-bye.

Ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.