Crane Company (CR) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Crane Co’s Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference call, the Director of Investor Relations, Jason Feldman. Sir, you may now begin.

Thank you, operator, and good morning everyone. Welcome to our second quarter 2015 earnings release conference call. I’m Jason Feldman, Director of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Chief Financial Officer. We’ll start off our call with a few prepared remarks, after which we’ll respond to questions. Just a quick 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.

Thank you, Jason. Well in spite of strong execution across most of our businesses, we continue to face difficult market conditions within our process valve business and Fluid Handling. Customer capital spending patterns across the oil and gas, chemical, power and general industrial end markets continue to result in a high level of uncertainty and lack of predictability. As outlined in our press release last night, excluding special items, Crane’s second quarter EPS was $1.06, down 8% compared to the second quarter of 2014. Sales of $711 million decreased 5%, driven by unfavorable foreign exchange and 1% impact from divestitures, partially offset by positive core growth of 0.6%. Operating margins, excluding special items, were 13.9%, a decline of 70 basis points compared to last year, reflecting a lower volume negative mix and the impact of foreign exchange. That said margins were up 60 basis points sequentially from the first quarter. Starting with Fluid Handling. The sequential order improvement, we saw during the first quarter, installed over the last few months. Second quarter orders were not consistent with the level of sales pick up we had forecast to support the second half of the year. We don’t believe conditions are worsening rather customer activity levels seem stagnant at fairly low levels. We still aren’t seeing outright project cancellations, but project delays are being extended and the timing of project releases is proving very difficult to predict in this environment. Further, we are seeing continued pricing challenges, particularly for projects in the emerging markets. We now expect sales in our process valve business and Fluid Handling in the second half to be down slightly compared to the first half of this year. In response to these challenges, we are taking appropriate cost actions and have initiated incremental repositioning. Our other three segments are on track to achieve their full year February guidance targets, but given our revised outlook for Fluid Handling, we are reducing our full year EPS guidance, excluding special items, by $0.20. While we are disappointed that we are reducing guidance, the weakness in our primary fluid markets is broad based and consistent with information we’re seeing impacting the entire industry. While market softness is lasting longer than we had expected, we do remain confident in our long-term prospects. We continue to be very pleased with the performance of Payment & Merchandising Technologies. We saw continued sales strength across both our Payment & Merchandising platforms and margin improvement was driven by higher sales, integration synergies, and productivity. Payments saw particular strength in China, largely from the transportation vertical. We’re also very proud of the progress we have made at merchandising, where our product innovation and continued focus on productivity has improved the businesses margin profile. Externally, most of the focus at payment has been related to the margin expansion story, however, innovation and new product development is a critical part of this business. Most recently, we launched our SCR bill recycling product with applications across multiple verticals including gaming and financial services. The product is a substantial improvement over earlier products with improved liability, better security, lower cost of operations and two-denomination recycling. The SCR product was launched in the first quarter of this year and we are very pleased with adoption rates. Important OE customers are marketing their adoption of SCR as a differentiating factor. There is only one example of the differentiated innovation that drives future growth for this business. Growth rates of Payment & Merchandising will moderate over the next two quarters, but we continue to believe this business will deliver mid single-digit sales growth over the long-term and there were substantial margin opportunity from synergies, ongoing productivity initiatives and volume leverage. From an execution standpoint, we’re slightly ahead of plan to realize $9 million of incremental synergies this year. Aerospace & Electronics performed as expected in the quarter. Last quarter, we explained that the timing of aftermarket sales will be weighted towards the second half. Overall, we are confident in sequential improvement over the next two quarters in both sales and margins. At our Investor Day in February, we discussed having secured $5.3 billion of lifetime content value on major aerospace programs, with another $1.5 billion in pursuit. I'm pleased to report substantial progress on the opportunities we pursue with $460 million of additional lifetime content recently secured across our power, fluid, sensing, rate control and cabin solutions. In April, we announced the expansion of our Lynwood, Washington facility, where we’re building a new testing and manufacturing facility for fuel flow transmitters supporting some of these recent wins. Over the next couple of years, the current round of aircraft platform launches will be complete and our market share for fuel flow transmitters will approximately double as we’ve secured this content on all of the high volume narrow-body platforms. And in Engineered Materials, we delivered solid margins and good growth in the second quarter although sales was slow in the second half. Like our other segments, Engineered Materials continues to focus on new product development. Earlier this year, we introduced our newest product with the proprietary formulation that delivers a higher gloss finish to the RV industry at an attractive price point. Customer’s feedback has been excellent and we are midway through converting customers to this new product. Let me now turn the call over to Rich Maue, who will provide some additional financial information and details of our revised guidance.

Thank you, Max. I’ll now provide segment comments, which compare the second quarter of 2015 to 2014 excluding special items as outlined in our press release, slide presentation and the accompanying non-GAAP tables. After the segment comments, I’ll provide some comments on our revised 2015 outlook. In the second quarter, Fluid Handling sales of $292 million declined 10%, reflecting an 8% impact from unfavorable foreign exchange, a 1.6% core sales decline, and 1% divestiture impact. Adjusted operating margins were 12.9% with the 330 basis point decline primarily attributable to lower volumes, unfavorable foreign exchange, unfavorable product mix and price. Fluid Handling backlog was $287 million at the end of March, sequentially the backlog declined 6% or 7.5% adjusting for foreign exchange. Compared to the prior year, backlog declined 22% or 15% decline after adjusting for foreign exchange. As Max discussed incoming orders were weaker than expected, demand for process valves remains uneven and uncertainty persists. Customers continue to defer capital spending. Customer behavior is impacted by the generally soft economic conditions and lower commodity prices. And we’re seeing some continued distributor destocking. We still have not seen a trend of project cancellations. The timing of projects remains very unpredictable and pricing challenges persist. The market has not significantly worsened relative to the first quarter, but we now believe the modest demand improvement, we expected in the second half, will not materialize. Weakness across the chemical markets is broad-based particularly in China. There are few pockets of activity in the Middle East, but continued project delays in North America. Power markets remained weak in Europe, the Middle East and particularly in China. We expect a modestly better year for power in the United Stated related to coal to coal – coal to gas conversion projects. Refining markets remains soft across geographies with the most pronounced year to date weakness in China and the Middle East. Europe appears stable at low levels, but remains uncertain. North American turnaround work appears to have been further delayed and we no longer expect a pickup in the second half. Our commercial valve business performed reasonably well across most geographies with modest improvement in Canada and the Middle East, although the UK was softer. Looking forward, we now expect Fluid Handling full year organic sales down in the mid single-digit range with full year margins in the 13% to 14% range given weaker volume, negative mix in a more challenging pricing environment. We have initiated incremental repositioning activities, reducing head count at selected facilities. Incremental costs this year will be approximately $5 million with $8 million at annualized savings most of which will be in 2016. Moving now to Payment & Merchandising Technologies, sales of $187 million increased 1% versus the prior year. Core growth of 9% more than offset a 7% impact from unfavorable foreign exchange and 1% divestiture impact. Core sales increased across both our Payment & Merchandising businesses. We are very pleased with the performance in the quarter. A portion of the second quarter strength is timing related although we do expect solid growth going forward. Adjusted operating margin of 15% increased 340 basis points from last year driven by the higher volumes, synergies and productivity initiatives. In the second half of 2015, organic sales growth of this business will moderate. However, we are clearly trending towards full year organic sales growth nicely above the 3% we discussed in February. We expect second half 2015 organic sales growth in the low to mid single-digit range with margins slightly above the segment level guidances provided in February. Aerospace & Electronics sales decline 6% to $167 million and segment operating margins decreased to 19.4% from 21.1% in the prior year. OEM sales decreased 7% driven primarily by lower shipments to defense-related customers. Total aftermarket sales decreased 3% driven primarily by lower military aftermarket sales. Commercial aftermarket sales increased 1%. The OEM to aftermarket mix was 73% to 27% consistent with last quarter and compared to 74% to 26% in the second quarter of last year. The decline in segment margins is primarily a result of the lower volumes. Aerospace & Electronics backlog was $448 million at the end of the second quarter, compared to $397 million at the end of the second quarter of 2014. Full-year organic growth is likely to be slightly weaker than the 3% we guided to in February. However, in the second half, we do expect organic sales growth in the high single-digits given our aftermarket backlog and the ramp up of the large defense contract we have discussed in the past. We expect full-year margins to be similar to what we provided in February. Engineered Material sales increased 4% to $66 million, margins increased to 18.5% from 15.4% last year with the improvement attributable primarily to productivity along with higher volumes and lower material costs. We expect the RV markets to flatten out in the second half of 2015 with difficult year-over-year second half comparisons. Consequently, we expect – we now expect full-year organic growth to be approximately flat with margins modestly above February guidance. Turning now to more detail on our total Company results and forecasts. The total EPS impact of unfavorable foreign exchange in the quarter was approximately $0.10 compared to the prior year. Our second quarter tax rate was 31.5% on a GAAP basis, compared to 30.9% in the second quarter of 2014. Excluding the impact of the special items, our second quarter tax rate was 31%, which compares to 31.3% in the second quarter of 2014. Our full year tax rate assumptions remain unchanged. In the quarter, free cash flow was $48 million, compared to $53 million in the same quarter last year. Historically, this substantial majority of our free cash flow is generated in the fourth quarter. We ended the quarter with $326 million in cash compared to $346 million at the end of 2014. Total debt at the end of June was $872 million compared to $850 million at the end of December. As Max mentioned, we are reducing our 2015 EPS guidance excluding special items to a range of $4.10 to $4.30 per share from our prior range of $4.30 to $4.50 per share. The $0.20 reduction primarily reflects a weaker outlook for Fluid Handling as we are not seeing the improvement we had expected. We now expect full year core growth of down 1% to up 1%, one point below our prior forecast. Free cash flow guidance was also reduced to $190 million to $220 million, down from $200 million to $230 million, reflecting the lower earnings outlook partially offsets by solid working capital and CapEx management. Other elements of guidance are unchanged. Given the current market weakness, we are taking all appropriate and necessary cost actions while continuing to invest for long-term growth. Now let me turn it back over to Jason.

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

[Operator Instructions] Our first question comes from the line of Shannon OCallaghan from UBS. Please proceed with your question.

Good morning guys.

Good morning, Shannon.

Good morning, Shannon.

So, as you asses the most recent delays in Fluid Handling, last year start off there was you know labor and engineering shortages then we had the big drop in oil and the currency swings. I mean as you look at kind of the uptick in 1Q and then the pullback, I mean if there are anything [indiscernible] customers in terms of this most recent push-out that that different from those things you’ve heard in the past, give us kind of the latest color you are hearing?

Yes, Shannon, you know as I look back, we saw this early. We had a very strong quarter in 2014 Q2, which gave us strong hope on the balance in the year. We saw a softening beginning Q3, which we explained and we really saw it earlier and brought that to light. We had a very, very soft Q4. We saw a sequential improvement in Q1. What I’m continuing to look at, study, analyze, read, not only from ourselves, but across the market is just this unpredictability in the release of projects and a timing that can impact one quarter to the next. We – with that sequential improvement as we expected the results in Q1, my sense was that with the project backlog that we have, projects that we don’t see getting canceled, momentum in the projects that we track that we are going to see some improvement that really didn’t occur. There was not a worsening however. My sense is that we’re at a bottom. That is my best guess as we kind of generally at the bottom and there is really a question of how long, [indiscernible] and when do we see an increase and what's the ramp of that increase. And we looked at the run rate from Q1 to Q2 and basically made some assumptions that is not going to materially improve and this is what caused us to reduce our guidance for the balance of the year.

Okay great. That’s helpful…

And then Shannon, the only thing that I would add – I’m sorry Shannon, the one thing that I would add, as Max mentioned, coming out of the fourth quarter, we saw sequentially the improvement I think on an FX neutral basis, we set up 3% overall for Fluid Handling. And then the comment Max mentions here about it is not worsening. It came down 3% on an FX neutral basis and excluding some seasonality that we typically see in valve services. So if this bumpy was up a little bit here coming out of Q4 into Q1 and then came back down to that same level. So sort of that consistent – that consistent level of demand is what we’re seeing…

Okay. And then on the commercial aftermarket piece in Aerospace, I mean, there has been a lot of movement across different companies depending on platforms you’re exposed to it better at this quarter. Can you explain a little bit more the back half load there and if its platform related or provisioning or just a little more color in terms of your visibility into the second half in commercial aftermarket?

Yes, sure. So just to backup, at the beginning of the year, we had guided to plus 3% overall for aftermarket. So I think we’re appropriately conservative when we provided that guidance back in February stepping back or coming forward actually to today and what we’re experiencing, as I look at the quarter-over-quarter comparisons of Q2 to Q2 of this year where we saw the weakness that’s really – it is more on the project related side. M&U projects and commercial and military spare is being really strong last year whereas this year not as strong, but we expected that frankly. It was not a surprise to us here in the quarter. From a commercial spares perspective, we did see growth from Q1 to Q2, which was nice to see. And as we think about the balance of the year, which is more – perhaps more directly related to your question, it is largely coming through programs, military retrofit, other OEM military projects, military spares. A lot of which has already booked. And so, if I look at my order book in Q2 versus what my order book was in Q1, I’m – double-digits higher from an orders perspective in aftermarket in Q2 that helps to support our outlook for the balance of the year.

And that’s more military driven than commercial?

There is also – there’s also sequential improvement in commercial that we expect to see as well.

Okay. All right, great, thanks guys.

Some of that of which is booked as well.

Thanks, Shannon.

Thank you.

And our next question comes from the line of Brian Konigsberg from Vertical Research. Please proceed.

Good morning.

Good morning, Brian.

Good morning, Brian.

Hey Max, I just wanted to follow up on the question previously asked in your comment about hopefully seeing a bottom not to certain when that will improve. But maybe you can talk about your thoughts just on price, I mean, even if you think volume may have bottomed, do you think that we’re at a bottom at – from a price perspective as well. And maybe also just talking about the pressures that you’re seeing today, do you anticipate that will be – those pricing pressures will be realized this year or are we going to see a lot of that going into 2016?

Yes, that’s a good question. As we look at price and the way we framed it up, in February, I think we are one of the earliest ones to talk about just even in all my years in the flow business and talking about the price if I could see a change in some of the competitive pricing that we had to undertake. As we’ve looked at it Brian, we probably of the decline that that we see in total margins. It’s probably estimated at about 150 basis points of price impacting quarter two. As I look forward, we think we’re at the same level through the balance of the year. So, I don’t necessarily see it worsening. I think it’s a spot based competitively. It’s particularly challenging in some of the emerging markets. But to answer your question, I don’t see it worsening, but I do see it’s having an impact through the balance of this year. Whether it impacts 2016 at all, it’s too early to tell them and I think we’re going to – have to wait a bit here to see how the rest of the year shakes up.

Okay, the backlog that you have today, I mean, there is a – for the most part believed in – is it basically recognized in 2015 or are you booking stuff for 2016 that that will show some of that pricing pressure.

Most of it is in 2015 right now.

Most of it’s in 2015, okay. And then on the guidance, so just conceptually taking revenue down a point organically, but taking out $0.20, it just seems like the decremental is particularly large, maybe just speak to just the drivers there. Is it really – is it just overhead absorption, a little bit of price in Fluid Handling…

Sure…

What are the different components driving that?

Yes, Brain, it’s Rich.

Hi, Rich.

Yes, I think, if you’re going from guidance-to-guidance, yes, you’re going to see a larger decremental. If you just look at what's been delivered in the first half and then compare that to what we’re expecting to see in the balance of the year with our revised guidance, you’d see that decremental improving quiet a bit from a guidance-to-guidance view. So look at your first half, what did we actually performed, look at your second half and what's the implied decrementals in that regard and you’ll find that that’s much improved. And the reason for that is because we were a little bit weaker here in the second quarter than we anticipated perhaps coming out of the first quarter as it related to both price and some unfavorable mix.

Great. And then if I just nick one last. And just with the expansion in the Lynwood facility that you spoke to, can you just give a sense of the size of the spending expect and how long would you anticipate that that will continue for?

Yes, so…

Where is the decremental?

Yes, so – it’s included in our guidance, our CapEx guidance that we set forth at the beginning of the year. So at our Investor Day, we talked about investments in our aerospace business in support of all these new program wins that we’ve had in our fluid solutions group within the Aerospace Group. So we didn’t incorporate that in our guidance profile, so it’s nothing incremental to that figure in 2015, if that’s your question.

Yes, all right, thank you. I will pass on.

You’re welcome.

Thanks, Brian.

And our next question comes from the line of Matt McConnell from RBC Capital Markets. Please proceed with your question.

Thank you. Good morning.

Hi, Matt.

Good morning. Matt.

So just a follow-up on the previous question and maybe specific to Fluid Handling, your sales are certainly holding up pretty well relative to what's [indiscernible] reported, but the margin is down pretty substantially. Is that strictly pricing or maybe could you talk about the mix that – or the effect that mix are absorption or other factors might be having on that Fluid Handling margin expectation for this year?

Sure. And so, I guess to start with the first part of your question, which was on the quarter itself on the 330 basis points. It’s a combination of elements, as I mentioned in my prepared remarks. Probably about 50 basis points to 60 basis points of it is foreign exchange and the balance I would say is split fairly equally between volume, price and mix. So on the mix side; we have some seasonality with respect to valve services that we always have to be mindful of. You’re familiar with the average seasons that we experienced across the year and each of the years and that has an impact on us and so that’s part of the mix profile that was unfavorable in the quarter, but it was completely expected. This business generates margins – very high margins and they read through as expected. The other two areas from a mix point of view that were a little bit more challenging was on the – the project based business that you would expect, given the softer demand in the fluid space and then in our building services and utilities business in the UK. Commercial end markets are down there and that’s where we participate in some pretty high margin work. And so demand levels are softer, but in that same business was stronger in the Middle East, where margins are weaker. So it was really just the mix of projects across a number of our businesses that contributed to about 100 basis point degradation there in the quarter. Looking out, as Max pointed out, the balance of year, we provided the guidance figure here of 13% to 14% overall for Fluid Handling margin. So if you pick a midpoint there of 13.5% on margins, that’s a couple of hundred basis points off our initial estimate for guidance in that business. And I would say, roughly 150 basis points of that is price, and with the balance coming through from the volume and some incremental mix.

Okay, great. Thanks. That’s helpful. And so, on the pricing pressure, is that specific to new projects or are you also starting to see pressure on MRO sales as well?

New projects.

Okay, great. Thanks very much.

Thanks, Matt

Thanks, Matt.

Our next question comes from the line of Joe Radigan from KeyBanc. Please proceed with your question.

Hi, good morning guys.

Good morning, Joe.

Good morning, Joe.

First question is on aero. On the OE business, I mean, that was down I believe mid single-digits in the first half. Do you still expect modest growth there for the year?

Yes, we do. And the primary OE improvement will come from the defense contract that that we have in our defense electronics business.

Okay.

So that’s still on track.

Okay, thanks Rich. And there has been others in the space that have commented on the fact that the business jet market has weakened materially in the last few months. Have you seen that – I think you guided originally to growth in that market. Have you seen that at all or does that pose any risk to that guidance?

No, it doesn’t. I mean, bizjet for us is not as significant as it is for others in the industry. It’s just not a big component of our comp position of sales. So it’s not – it’s not something that we see as a significant weakness for us as we think about the second half.

Okay, and then lastly from me. On Payment & Merchandising, another really strong quarter there of high single-digit organic growth, I think you said that steps down in the back half. Why does that – why do you expect that to decelerate? Is that timing of project activity as its seasonality just a little bit of kind a color around the back half?

Little bit of everything, Joe, in terms of some project wins and timing, some specific geographic strength in the first half versus expectations in the second half. It’s just been – the team has been doing a fantastic job and really had a quiet stronger first half year. And it’s just – we don’t expect that as we move forward. As we have talked about – we do feel strongly that this is a mid single-digit long-term growth rate business and should come back down to those levels.

Got it.

And Joe to your point also in the fourth quarter, we do experience seasonality in the business, so we would expect a natural decline as well.

Okay. So would you – in terms of the profitability of that segment, Rich, do you expect second quarter to be the peak for the year or some of the productivity actions you’re taking there, do you think kind of this mid-teens margin. I know longer-term there is upside of that to kind of worse that today, but for the back half of the year, how should we think about it?

Yes, I mean, we feel pretty good about our back half for the year as well. So with productivity continuing to readthrough, the synergies continuing to readthrough, so we feel pretty good about the margin profile as we exit the year as well.

Okay, great. Thank you guys…

We have some offset with some of the volume degradation, but it’s just the core margin performance in that business and execution and achievement of synergies we feel good.

Thank you, Joe.

All right, okay. Thanks guys.

And our next question comes from the line of Nathan Jones with Stifel. Please proceed.

Yes, good morning Max, Rich, Jason.

Good morning, Nathan.

If you could just go back to Fluid Handling and some of the implied guidance for the second half, 13% to 14% margin if I pick the mid point implies kind of your guidance from 13% in the first half to 14% in the second half, which is not only an acceleration from first half to second half, but the – the margin compression is less year-on-year. Can you talk a little bit about – in the current pricing environment and demand environment where the improvement in margin is coming in the second half?

Yes, sure. So, it’s coming from a couple of different places. Again in the first half, we experienced a little bit more of some unfavorable mix in price and the price is going to continue as we moved through the balance of the year as we stated. It’s a about – we are looking at this as about an 80 basis point improvement in the second half to get to about that 13.5%. One of the big contributors, our valves services business, is actually going to have a stronger second half just given the seasonality in that business and the types of products that we sell. And then the other side of it is the repositioning benefits that we expect to readthrough from all the good work that we started at the end of last year and into the beginning of this year that are going to readthrough in the second half. So that’s probably the biggest component, if I was to point to one thing driving that improvement in the second half versus the first half.

So it’s repositioning benefits.

Yes.

Okay. So – and then again, you talked about nothing any cancelations yet thinking you’re kind of at the bottom, things not getting any worse. And I don’t make a pick on you guys here because a lot of companies have been wrong, has have eye in forecasting this kind of stuff. But we’ve been taking down numbers and expectations for a couple of straight quarters now, in the industry generally not just that Crane in the Fluid Handling business. Where does the confidence come from that, things are not going to deteriorate further and what could go right or wrong to get better than, this is the bottom?

Excellent question, excellent question, I do feel a degree of confidence, how do I best train this up, just again, hey, Nathan as we look at the projects that we continue to track that we expect to be released. I think we’re taking a very realistic approach to what we’ve seen over the first two quarters of this year and extrapolating that. Looking at everything from chemical market parameters to plan investments by country, to real rig count kind of bottoming, oil prices okay, they’re still hovering below $50 in WTI versus Brent $55. But it just feels, if you look at the global macroeconomic environment, that it’s going to continue to settle out at this level and it’s a matter of degrees of improvement not worsening, we can change that, global dislocations, shock, something else unforeseen. But in terms of foreseeable bench [ph] right now, based on all predictors, I think, we feel better at this point. Mitchell if you have anything to add.

Yes, I mean, the only thing I would add there is just if you look at what we have done in Q1, with respect to Fluid Handling from a sales perspective and compare that to what we did in Q2 and just at the order trajectory Q1 to Q2 coming off of Q4 and look at the trending it just – there is nothing that tells us based on what we’re looking at that there is going to be a material worsening, because based on our experience in the last three quarters.

Okay, thanks very much.

Welcome, Nathan.

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

Good morning, guys.

Good morning.

This is Philip Shepp following here. I'm on the call for Rob today. First question, I just want to clarify the change in EPS guidance of $0.20, is that all in Fluid or what percentage is in Fluid, because I’d expect, the Fluid impact is larger than $0.20 since there are some offsets such as stronger payment?

Yes I mean the guidance takedown is in Fluid Handling, that’s correct.

It’s all in Fluid?

It’s all in Fluid.

Okay. And then on Fluid on the orders it’s how to track in 3Q, and if you can characterize the performance of the various businesses and then markets within Fluid?

I’m sorry. Can you repeat that question?

Sure. So how were the orders tracked in 3Q? And how would you characterize their performance within the different end market within fluid?

Yes. So we are not going to comment on our 3Q to date order profile. We have a policy of not speaking about order trends prematurely. So but I think I would just point to the prepared remarks and the comments that Max made a little bit earlier in terms of weakness that we are seeing is generally broad based, it’s a weakest perhaps in China, but you are up spotty and bouncing along with any bright spot at all being in North America frankly, at this point, Middle East being okay, it depends and actually its depends on which end markets that you are actually talking about within those geographies. But nothing different I would say from what next that drives, and what we characterize in our prepared remarks.

Okay, thanks. And then finally on – since fluid how’s the Canada supply business tracking and how was the performance in 2Q?

Yes, so Canada is performing very well. End markets in Canada – in commercial construction starts, which is where we participate the end markets themselves are growing were between 6% and 8% as we read them. And we are winning frankly and we are showing core growth in Canada on a year-to-date basis.

Okay, great. Thank you.

You are welcome.

And our next question comes from the line of Ron Epstein from Bank of America. Please proceed with your question.

Hi, good morning. It’s actually Kristine Liwag calling in for Ron this morning.

Hi, Kristine.

Guys in the past few years, it looks like your organic growth has been lagging global GDP growth. Can you talk about your portfolio and what do you think it has to happen so that growth will begin to exceed global GDP again?

So I think we are well positioned to exceed the GDP growth. I think the things we’ve done highlighted in our February Investor Conference, we’ll continue to highlight some geographic expansion, new product innovation, winning a new platforms. I think we feel pretty good. I think this has been a challenging environment certainly most recently within the flow of space and I think we are seeing the same as everyone else, this thing is well Kristine.

Sure. And as a follow-up this quarter it looks like macroeconomic outlook for emerging markets is getting weaker and emerging market is about 19% of fluid handling. Can you provide color on what your base case is for emerging markets? And if we are in a multi-year emerging market downturn how would you expect to offset it in the future?

I mean, I think the primary concern that that we would have and others would have would be specific to China in particular. I would – I’m not sure, we’re prepared to recognize all of emerging markets at this point, but China for sure is one that’s concerning most of us. And if you look at training and its participation in terms of revenues in China and specific to Fluid Handling, it’s around $60 million range. So it’s not an overwhelming significant component within our Fluid Handling business. So from that perspective, we’ll just continue to monitor end-market demand and adjust our cost base accordingly like we always do. As it relates to the rest of Crane, where we participate most heavily in China would be in our Crane Payment Innovations business and in fact that business even in the quarter here in the second quarter we’ve seen growth with the particular applications in the transportation side of that business. So, you’ve got to look at it a little bit across each of the verticals that we have, you know, I would also point to our Aerospace & Electronics business where you have end markets demand coming from airlines out of China where we’re delivering products to Boeing to support that demand. So depending on how you look at it, again by each of the different businesses that we have. We would respond accordingly. But big picture here is about a $60 million exposure on our Fluid Handling business and we see a growth in China in our CPI business and feel good about growth in our Aerospace & Electronics business.

Great, thank you.

You’re welcome.

And our next question comes from the line of Ken Herbert from Canaccord. Please proceed.

Hi, good morning.

Hi, Ken.

Hi, Ken.

Hey, Rich and Max, I just wanted to first ask you, you alluded to this earlier, you brought the free cash flow guidance down a little bit. You typically have a very good second half, fourth quarter, in particular free cash and really see some, as we go through the year, significant improvement in working capital. With the concerns around obviously Fluid and some of the other segments, do you see any may be additional risks besides [indiscernible] guidance change captures in free cash or do we see a sort of a seasonal trend this year like we have seen in prior years?

Yes, I would say, it’s going to – we see it’s being consistent – consistent seasonal teams as in prior years. Nothing – nothing suggest to us through our forecast process and reviews of teams that we would have any incremental exposure given our guidance for the balance of the year as it relates to free cash flow. Working capital continues to be something that we look at it very, very hard at Crane. As you know, we’re not seeing – we’re very careful on receivables, bad debt, and are very discipline and have specific actions around that by business. So, we feel pretty good about the programs we have to make sure managing working capital appropriately in response to changes in demand as we move through the balance of the year.

Okay. And is it fair to say that again a lot of the change – I mean I know it’s a slight change, but the change in cash for the year is largely related to the Fluid Handling change?

Yes.

Okay, that’s helpful. I know you guys focused obviously very closely in working capital and usually you have a great performance as we go through the year. So, it’s good to hear that. If I could – Max, you alluded earlier in the call to some of the wins relative to what you talked about in aerospace early in the year to sort of where you are in capturing those. Would you say that – can you provide anymore detail on programs where those wins are coming from and would you say that’s tracking to plan or you maybe doing a little better than you perhaps expected three to six months ago?

We can’t disclose yet, Ken. We’d look forward to adding a lot of color to it on our next February Investor Day as well. I would say that it’s tracking to expectations just slightly to the upside as well as the projects that we are still have in pursuit is – remains exciting.

Okay, okay, that’s helpful. And then if I could just finally – a great quarter again, it’s been talked about on Payment & Merchandising. It looks like nice incremental margins in sort of the mid 30s. I know you’ve talked about maybe a little bit of a slowdown there in the second half of the year in terms of the growth. But is it fair to think of this business even in a mid single-digit growth as above 30 sort of incremental margin business? Is that may be too aggressive, not just for the second half of this year, but moving forward I know you’ve taken a lot of costs out of this business. Is that the right way to think about this business? Or is it maybe a smaller number?

You’re referring to the whole segment, right. So, potentially, yes, I think that’s probably a good number. What was the number, 30 you said.

Yes, about 35 in the quarter, but I know obviously you had some maybe one-time benefits in the quarter.

No, we had no – we didn’t have any one-time benefits in this quarter. I think you got to just keep in mind, the vending business has a slightly lower or a lower leverage rate on sales and it will be higher in payment. So that probably sounds about right as we look at it.

Okay.

Even at 3% level in terms of core growth, if that was your data point there.

Yes, exactly. Okay, great. Well, thank you very much.

You are welcome.

Thanks, Ken.

And our next question is a follow-up question from the line of Brian Konigsberg from Vertical Research. Please proceed.

Thanks for taking the follow-up question. Just another quick question, just on the comment on cancellation, so we’ve heard that from almost everybody in the space that a lot of delays, not many cancellations. I'm just curious, historically, when you look back to the [indiscernible] the periods before the allied had declines in oil. I mean have you seen significant delays in projects or is traditionally the trends within the market more about delays and just revenue continue to get push to right, and eventually it comes back but certainly that that could take a while to I guess to come back into the system. Could you just make some comments on that and what you’ve seen historically and how it compares what you are seeing today?

That’s a good question Brian and to be honest with you, I don’t have a reference point, I haven’t – but it’s a challenge to go back and take a look at. I don’t know how to respond to it on a historical basis…

And correlates what we need today.

Yes.

Okay. I will hop up with you guys on that.

Yeah, would you? That would be great.

Yeah.

And this concludes today’s Q&A session. I would now like to turn the call over to Mr. Mitchell for any closing remarks.

Super. Thank you, operator. Well as Rich and I discussed our Fluid Handling end markets are challenging. However, we’re pleased with our execution both the Fluid Handling and across our other segments. We remain focused on what we can control and we will take all necessary cost actions while continuing to invest for long-term growth. Thank you all for your time this morning and your interest in Crane. I look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for attending today's conference. This does conclude today’s program. You may now disconnect. Everyone have a wonderful day.