Good day, everyone, and welcome to Crane's Second 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 our Second Quarter 2013 Earnings Release Conference Call. I am Dick Koch, Director of Investor Relations. On our call this morning, we have Eric Fast, our Chief Executive Officer; Max Mitchell, our President and Chief Operating Officer; and Rich Maue, our Chief Financial Officer. We will start off our call with a few prepared remarks, after which, we will respond to questions. Just a reminder. The comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also on our annual report 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the 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 second quarter earnings, I'd like to briefly touch upon the MEI update that we announced on Friday. As mentioned in the release, the European Commission has cleared the pending acquisition of MEI. The clearance by the European Commission is conditioned upon Crane Co.'s entering into agreements to implement remedies regarding 2 of our product lines. As agreed, we will be divesting our B2B bill recycler product line and related assets, as well as providing a technology license covering our Currenza coin recycler product line for the European vending market. The B2B bill recycler product line is sold primarily in transportation markets in Europe and North America for fare collection and off-street parking. These 2 remedies only affect the operation of Crane's Payment Systems business. And MEI will continue to offer its competing lines of coin and bill recycler products in these same markets. As previously reported, we are in negotiations with Bain Capital and Advantage Partners, the owners of MEI, concerning the economic effects of these required actions. The time necessary to implement the remedies will shift the anticipated closing of the acquisition into the fourth quarter of 2013. We remain excited about the potential acquisition of MEI. This acquisition is consistent with our strategy of niche market leadership. A combination of MEI with our CPS business creates a global platform to drive product innovation and integration for the benefit of customers in developed and emerging markets. We are hopeful that we will be able to come to agreement with MEI's shareholders over revised pricing and timing to allow us to complete this acquisition. But as we previously announced, no assurance can be given that a mutually satisfactory adjustment to the transaction terms will be achieved. Now I'd like to move to our…

Thank you, Eric. I'll turn now to segment comments, which compare the second quarter of 2013 to 2012. Aerospace & Electronics sales decreased 3% to $172 million compared to $179 million in the second quarter of 2012, while operating profit declined 5% to $37 million. Operating margin decreased slightly to 21.5% from 21.8% in the prior year. Sales in the Electronics Group were $107 million compared to $111 million last year. Commercial OEM increased 5%, and strong sales to large aircraft and private jet manufacturers were partially offset by a decline in regionals and in our seat actuation business. Total aftermarket sales were lower by 14% compared to a strong second quarter of 2012, with declines in commercial and military spares and military modernization and upgrade sales. The decline in military modernization and upgrade sales reflected the completion in late 2012 of the carbon brake upgrade program for the C-130 aircraft. The OEM to aftermarket mix was 63% to 37% in the second quarter of 2013, which compares to 58% to 42% in the second quarter of 2012, reflecting the aforementioned continued strength in OEM and lower aftermarket sales. While sales declined, operating profit in the Aerospace Group increased by approximately $1.3 million, and margins were strong, driven by productivity and solid cost management, including lower pension expense as well as lower engineering spending due, in part, to the 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 industry load factors to average 80.3%, which is a record high. We continue to benefit from increasing OEM build rates across a broad range of platforms, and we are cautiously optimistic about commercial…

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

[Operator Instructions] And our first question comes from Matt McConnell from Citi Research.

Could you talk about that Fluid Handling margin? I know you've been talking about getting to 15% for a while, and -- so that 16.2% looks really nice. How big a contributor was mix in the quarter? Because I know there's a lot of nuclear valve service activity. Was that a big driver of that? And I know the expectations are for a step down. Is mix a part of the kind of second half step down as well?

Matt, just to an extent, yes. Most of the benefit that we actually saw from a margin perspective was in our core process ChemPharma and Energy business. We did see some mix benefit from valve services, but the expectation, going forward, leaning more towards that 15% is due in part to some of the removal of valve services but also to a greater extent, more on that mix of project to MRO, as we move into the balance of the year. So no significant -- I would not point to significant mix issues in the quarter for Fluid Handling.

Okay, great, helpful. And then as we think about that $0.25 first-year accretion target for MEI, how would that be impacted when you're going forward without the 2 product lines that you have to divest? Would those be material enough to impact that target?

So Matt, what I would say -- first off, we're in -- it would be inappropriate, I think, for us to comment here, while we're negotiating economic terms with the owners of MEI. I -- what I would say is what we've said publicly, which is, together, we've got a $600 million, $625 million sales business. And we've announced publicly that the 2 products that are involved here that would be -- that are conditions of closing represent less than 10% of the combined sales. And what I would say, and this is all I'm going to say to it, is that, in my view, represents a relatively modest impact but an important one, which is why we're having the discussions with Bain and Advantage as the owners of MEI. And I think -- I just think, because there may be other questions here, we're going to leave this at -- with that comment until we conclude -- hopefully, conclude, those negotiations.

Okay, certainly understood. And then maybe even independent of MEI, how has Crane's Payment Solutions business performed over the past couple of quarters? Just to give us a sense of how the end markets have performed since, maybe, year-to-date, I guess, would be helpful.

So we -- I would say, it's on track with good margins, and we like what's going on with our current -- our business. And good results in vending, good results in retail. Gaming is fine, a little weak in AWP or [ph] with prices over in Europe, tracking and good execution. Rich, you can correct me.

Yes. No, we're excited about performance in Payment Solutions year-to-date, Matt. First quarter, we were up in a big way, in a core basis, and that continued in the second quarter. And when we look at our plans, we're feeling really good about how they're executing and meeting their plans.

Which is in spite of all the integration planning.

And our next question comes from Matt Summerville from KeyBanc.

A couple of questions. You mentioned, Rich, in your prepared remarks that aftermarket was down 14%. Can you maybe give a little more granularity in terms of military versus commercial around that 14%?

Sure. I mean -- so overall, we're down 14%. I think from a commercial point of view, we're down 6%. And that's a combination of spares, MNU and R&O [ph]. So recall though that commercial -- total aftermarket includes military modernization and upgrades. We have the headwind from the C-130 program, but at a high level, I think...

From last year.

From last year, so at a high level, I think that provides the color, I think, you're looking for.

I think the C-130 program ended...

October of last year.

October of last year. So we've got that comparison through October.

Got it. And then, I guess, the year-over-year delta [ph] in commercial spares, is that starting to trend favorably? If you look month-to-month, is your order rate in the commercial aftermarket piece of the business starting to show any inflection?

We expect it to increase as we move through the balance of the year. So our forecast would indicate that, that progression should start occurring.

More commercial spares. Mostly in the fourth.

Okay. And then question on Fluid Handling. The performance in the second quarter doesn't sound like there were any major aberrations there, which is encouraging. So do you rethink the long-term margin profile target for this business? And the other question would be the quote in order activity you're seeing in Fluid would support what kind of book to bill, do you think, in the back half of the year?

Yes. So it's -- I don't think we're going to comment on the go forward book to bill. But I would say that for the margins in the quarter, at 16.2%, that's a high water mark executed really, really well in the quarter. That followed really strong execution in the first quarter. And we made comments here that suggest that we should see it come down in that 15% range for the balance of the year. From a long-term perspective, we would expect that to continue to improve as we continue to see sales leverage come down. So as we grow, we would expect margins to continue, to also improve.

The core strategy for the whole company, recall it, as we're running at 60%, 65% capacity, 2 shifts, 5 days a week, is as we grow core sales, we can leverage that $0.25 on the dollar. So this is just as true for the rest of the company, but, particularly, for Fluid Handling. So I can get -- we can get constant, positive margin pressure as we grow core sales. So we've been fighting that headwind in the first half, so that would be my first comment. The second comment would be that -- remember that in our process -- we consider that the process valve business is a higher-margin business than the commercial valve business, although commercial valve business, for what we got invested in, is a very good business, and we've changed those business models. So we start to run in a little bit of a mix tension with Crane Supply up in Canada, our commercial valve business versus process, when you start to look at overall margins. And that has to be considered. But clearly, in process valves, that's a good business that long term will do better than what it's currently doing.

And then from a -- last question. From a restructuring standpoint or cost take-out standpoint, you mentioned seeing cost pressure in military. You've already taken some actions there. Is there anything you're doing and/or contemplating in the vending business in response to what sounds like a pretty big downdraft relative to your initial forecast?

We already did it.

Yes.

When would you have incurred those expenses?

In the second quarter.

And our next question comes from Michael Callahan from Topeka.

I guess, firstly, I wanted to dig into a little more -- just on the commercial aftermarket side of things. Minus 6%, I guess, is somewhat of a disconnect to like system-wide-capacity increases that have taken place globally here in the quarter. I just -- in your guys' minds -- what do you attribute that to? Is it more new builds entering the system? Or just what are your thoughts around that?

So we would not necessarily be comparable to some of the others, right? We have -- most of our commercial spares are on condition, whereas others would not be on condition. They're more sort of engine repair. They're on fixed schedules based on usage of aircraft. So you're going to have a disconnect in comparing, I think, Crane to other larger organizations that are centered around engines, for example. So that would be the primary reason for a disconnect in comparison.

I think, secondly, there's -- our sense is as we've talked to the marketplace, that there was some over inventory here early in the year, and that's been worked down, which is one of the reasons we expect an improvement in the second half, which I would add to Rich's comment.

And then kind of along those same lines, as it relates to margin improvement in that segment, can you guys achieve margin improvement in the back half without an improvement in just overall aftermarket?

So look at -- the way I would answer that is I think that aerospace -- the Aerospace Group, as part of the Aerospace & Electronics segment, Aerospace Group had an excellent quarter. Sales were down slightly, but a negative mix with a lot of OEM and a weak aftermarket, and yet, operating profit was up 1.3% -- excuse me, $1.3 million, driven by productivity. So we clearly executed well in Aerospace. And we look at our backlog, and our OEM backlog looks solid and in really good shape. And we're anticipating better commercial spares here as we -- particularly, as we get towards -- more towards the end of the year. So that would be how I would characterize Aerospace. And we feel quite good about those results. And the commercial spares will come. It's just a matter of timing. In the Electronics business, we had down sales, and we had a negative mix in terms of our short-cycle, higher-margin businesses in that segment that impacted margin, and we had a couple of programs that shipped that -- big shipments on programs that were at low margins. As we sit here -- so that's what happened in the second quarter. We expect the third and the fourth quarter in Electronics to be better. We -- with some of the orders on the short-cycle, higher-margin business, looking to us, indicating that they should be a little bit stronger. And as we mentioned, we've already had some cost take out in Electronics that's already behind us. So the combination of those 2 factors give us confidence that the third and fourth quarter will be better in Electronics.

Okay, great. And then maybe one last thing here. On Merchandising Systems side of the business. I guess, it seems like the focus on Payment Solutions, MEI will, obviously, kind of greatly enhance that product offering. On the flip side, vending has been weak and appears to be taking another leg down here for several years. Is there a point at which maybe you guys exit that business altogether and just focus on Payment Solutions? Or have you guys given any thought to that kind of thinking?

We're not prepared to exit the vending machine business, which I've been consistent on as we go through here. You want to deal with the buy-in drops?

Yes. So as Eric mentioned, committed to the segment for sure, it's still strategic for us. In the period, we saw a few customers who we obtained routine forecasts from experience senior management changes that impacted those forecasts and reduced capital spending. And it really impacted us here in the second quarter. We expect that the balance of the year for the demand to improve. So when you're looking at it sequentially, first half to second half, we do expect revenues to come back. I would point out that there hasn't been any share loss, which is important to us, naturally. And to Eric's point earlier, we've taken cost out already to make sure that we can see the margins continue to improve as we move through the balance of the year. But strategically, no change in direction.

[Operator Instructions] Our next question comes from Brian Konigsberg from Vertical Research.

I saw -- or I heard that you had mentioned -- I apologize, I was a little bit late to the call, so if you have said this, my apologies in advance. But North American chemical, you mentioned, was still weak. I think you've been saying that for a couple of quarters. Maybe just give us your take on how this market unfolds. Are you starting to see projects start to materialize, as far as bids and quotes? Maybe just start with that, and we can add on.

Yes. I think North American chemical, where our products have strong application are in severe service applications. So where demand I think is occurring today is in the more sort of traditional chemical applications, not necessarily requiring severe service valves. So that would be the primary reason why we're not seeing a strong pickup, maybe, compared to others that are supplying valves into the North American chemical market space. That said, we are seeing activities and quotes reading through and projects on the horizon. We would expect a lot of that to kind of start to read through towards the first half of 2014.

Okay. Do you see the pricing on those projects coming into '14 fairly stable? Or is it that you kind of ramped that you potentially see a little bit more competitive than your typical projects?

No, I wouldn't say it's -- I wouldn't characterize this as us seeing price pressure in any way. It's the normal sort of pricing routine that we go through, so nothing unique.

So on these process valves and chemical plants and power plants, typically, you have to be on what's called the AML list. So you've got to be approved by the chemical company. They typically approve 2 or 3 different vendors. For different severe service applications, you got to be on that approved list. So it's -- there's always price competition, but it's among a high-quality group and a small group.

Got you. And then just lastly, on just -- on aero margins, so took a step down in Q2. I think you're suggesting you were going to see a little bit of a pickup in the second half, especially as spares picks up. I'm just curious, as far as kind of the customer base, obviously, you guys are just pruning [ph] money in that business. Longer term, do you think -- and I know you're spending a little bit less on R&D than usual, but are we thinking kind of sustainably that you're within 20% plus for an extended period of time? Or is this kind of an elevated period, which maybe is kind of temporary in nature and should come down to a more normalized level?

No, I wouldn't suggest that there's anything necessarily temporary. I think our margin profile has been consistently growing through -- mainly through us, executing in a different way, increasing our productivity, continuing to look at cost.

You can see the productivity in the Aerospace Group reading through on down sales and down aftermarket 14% and the profitability. This is -- that's making money the old-fashioned way.

And the customer base isn't pushing back on it? I guess, that's my question.

Well, again, these are long-term contracts. It's price where we've got niche, special technology. So you've got a $200,000 brake control on a $200 million plane that's got to work every time. This is -- the technology on the 787 brake control is in the wheel well operated wirelessly from the cockpit, never been done before with software as emergency brake back up versus a mechanical. I mean, this is -- costs $110 million to develop. So this is niche special -- there's 2 people in the world who can stop a big commercial airplane. This is...

Fair enough. Just last question. Just on -- so in R&D, I think you -- I didn't hear it, but I remember you said in Q1 that you were expected to step up to 8% of Aero sales on the R&D front. Do you anticipate it's going to remain around these levels for some time? Or does it drift back to that 10% to 12% that you had previously talked about as the normalized range?

What I would say is engineering is going to be a little bit higher in the second half than it was in the first half. And we've clearly got some nice winds here in the marketplace. So I would expect engineering to go up a little bit. But we manage that, and we're careful about it. Some of the big programs we've already won, for example, the 919 has taken a lot longer than what the original schedule was, so that offsets it. So we're very sensitive about where that engineering expense needs to be through a combination of making sure we win the right -- win the best programs, make sure we're on the right ones, and manage it in a way to produce a good return for our shareholders. And we'll lay out what that engineering expense is going to be when we do our investor conference in February.

I think you said, for the year, around 8%. That's still the view?

It's going to be slightly higher in the second half than the first half. [indiscernible]

Yes, given -- so given that we're seeing some sales decline through the lower aftermarket, it's still going to likely fall in that 8% range. But from an overall dollars perspective, we're pointing to about $35 million in...

For the Aerospace.

Total for the Aerospace Group.

And I'm not showing any further questions at this time. I would now like to turn the call back to Richard Koch for any further remarks.

Thank you for joining us today and for your continued interest in Crane. Bye-bye now.