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Executives

Richard E. Koch - Director, IR and Corporate Communications

Eric C. Fast - President and CEO

Timothy J. MacCarrick - VP, Finance and CFO

Analysts

Deane Dray - Goldman Sachs

Shannon O'Callaghan - Barclays Capital

Wendy Caplan - Wachovia Securities

Curtis Woodworth - JPMorgan

Ronald Epstein - Merrill Lynch

Matt Summerville - KeyBanc Capital Markets

Crane Company (CR) Q3 FY08 Earnings Call October 28, 2008 10:00 AM ET

Operator

Good day everyone and welcome to today's Crane's Earnings Release Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to the Director of Investor Relation, Mr. Richard Koch. Please go ahead, sir.

Richard E. Koch - Director, Investor Relations and Corporate Communications

Thank you operator. Good morning everyone. Welcome to Crane's third quarter 2008 earnings release conference call.

I'm Dick Koch, Director of Investor Relations. On our call this morning, we have Eric Fast, our President and CEO; and Tim MacCarrick our Vice President of Finance and CFO.

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 on this call may include some forward-looking statements. We would 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 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.

Eric C. Fast - President and Chief Executive Officer

Thank you Dick.

Last time we reported third quarter of 2008 net income was $36.1 million or 0.60 per diluted share compared with the third quarter 2007 net loss of $196.9 million or $3.29 per share, which included a $250 million after tax provision or $4.18 per share to extend the time horizon of the company's estimate of its asbestos liability from 2011 to 2017.

Excluding the provision, third quarter 2007 earnings were $0.87 per diluted share. While I know you've read the press release, let me now highlight several key items in the third quarter. I am disappointed in our third quarter results, which reflected an unexpected sharp slow down in orders beginning in August in several of our short cycle businesses further weakening in engineered materials end markets and the continued high level of engineering spending in Aerospace.

During the past six months, we have taken significant steps to reduce costs in our early cycle vending and engineered materials businesses by cutting headcount by 16% and 32% respectively and by taking a variety of other actions to shrink our cost base.

Reflecting the short form of our third quarter earnings and our expectation of a more difficult operating environment, we are taking further steps to reduce costs, a portion of which could resolve in a fourth quarter of pre tax charge of up to $25 million, primarily non cash or $0.27 per share.

These actions will include plant closures, work force reductions, and stringent spending controls throughout the company. We are reducing our EPS guidance for the year from the low end of $3.45 to $3.60 range to 2.75 to 2.90 before the anticipated charge, and $2.48 to $2.63 post the charge. Principally reflecting the decline in earnings free cash flow guidance is being reduced from $170 million to $130 million.

With $278 million in cash and $300 million available under our bank revolving credit, we have a strong liquidity position, which will allow us to continue to fund targeted growth opportunities and selectively continue to make acquisitions. We expect to emerge from this difficult economic period as an even stronger company.

Now turning to specific segments comments starting with Aerospace & Electronics. Aerospace group sales of $101 million increased $4 million or 4% from $97 million in the prior year period. OEM sales grew 8% compared to the third quarter last year and after market sales declined 1% on a comparable basis. The OEM after market mix was 61%, 39% compared to last year's third quarter of 59% to 41%.

Operating profit in Aerospace declined $12.9 million reflecting the $14.7 million increase in engineering expense due to the heavy investments in the 787 and A400 and a higher OEM mix. Absent the heavy investment and new programs for future growth, operating margins were consistent with our long-term goal of 20%. Our Aerospace engineering spending in the third quarter of 2008 was $33 million compared to the second quarter of 2008 of $26 million and $18 million in the third quarter of 2007.

This increase in engineering spend all of, which is expensed is due to the heavy investment in 787 and A400 programs. Both of these programs are expected to reach key milestones during the fourth quarter including delivery of initial set of hardware and software for first flight.

Our aerospace engineering spending is running at about 25% of sales in 2008, and will begin to be reduced in 2009 during a transition year in which we expect both the 787 and A400 will be completing their test flights and should approach 12% of sales in 2010.

Based on 2008 sales level, this would provide us with about a $50 million pretax tailwind to our operating profit during this period, which will help mitigate the expected aftermarket decline. Our engineering spending on the Boeing 787 and A400M will account for about 65% of our engineering expenditures of approximately $113 million this year.

As we mentioned our previous calls, we are in dialog with certain customers concerning cost recoveries for engineering work and those discussions are continuing. Electronics group sales of $59 million decreased $3 million or 5% largely because of lower sales in the custom power business. While sales declined overall, the sales mix was favorable because of higher standard power sales, which increased electronics group operating profit 10% compared to the third quarter of 2007 and provided improved operating margins.

In the third quarter, engineering material core sales decreased 22.5 million or 28% reflecting substantially lower volumes in the company's traditional recreational vehicle and transportation component customers and further deterioration from that experienced in the second quarter.

In the third quarter of 2008, we saw a 29%... excuse me, in the third quarter of 2008. We saw a 49% decline in sales to our recreational vehicle customers up considerably from the 25% decline in the second quarter. A 22% decline in our sales to transportation related customers consistent with reduced trailer build rate and a 7% decline to our building product customers. The percentage decline in transportation and building products were in the same range as the declines we saw on the second quarter.

Operating profit declined 72% primarily as a result of lower volume. In the first six months of the year, our headcount was reduced by 24%, and we took a further 8% production in the third quarter. So in total, we are down to 32% year-to-date. We have disciplined costs, expense controls in place and are actively reducing costs through better material utilization, product migration to more efficient machines, and various business model changes.

We continue to explore additional costs reduction opportunities reflecting what is expected to be a continuing depressed market. We are determined to take the actions necessary to maintain attractive margins in these businesses even in these difficult conditions.

Longer term, the demographics of growing number of baby boomers buying RVs remains favorable and FRT products offers significant benefits of low rate, durability, and attractive appearance for transportation, and building products application. We view the near term disruptions in the marketplace as opportunities to support our customers to win market share and actively develop new products for both current and emerging applications such as fiber glass, truck bodies, and ocean-going containers.

Merchandising system; despite a strong growth in payment system sales and continued market shares gains in vending, overall segment sales declined 5%, reflecting difficult market conditions in North America in vending. Operating profit increased $1 million or 12%, and operating margins improved 170 basis points to 11.6% reflecting discipline, cost management in vending, and higher margin payment solution sales, which improved our sales mix significantly.

Global demand for payment systems remains good with increased market penetration in broad based acceptance of new product offerings particularly our new Currenza Bill Recycler. We have recently introducing a number of new vending products, including our new snack machine called Merchant, our Bev3 can and bottle machine, our Currenza Coin Changer and Currenza Clip for vending application. We believe these new products will stimulate demand and help us to continue to grow market share.

In our July call, we noted that we are responding to declining North American vending machine demand by reducing headcount in our North American vending business by over 16% as compared to January 2008. And we have minimized labor costs further by operating in our plants consistent with demand during the third quarter. Despite difficult market conditions, I am pleased to note that merchandizing systems in on placed to post record earning this year and should exceed the guidance we provided at our February Investor Day.

Fluid Handling, which represents about 43% of Crane's total sale, had mix results for the quarter; but for the year, we are still expecting record sales and operating profit. The muted third quarter of 2008 sales growth of 1% was more of a reflection of issues related to getting product out the door, and certain customers extending shipment dates rather than a lack of demand.

We estimate the third quarter sales were negatively impacted in excess of $10 million by these delays. But those shipments are expected to be made in the fourth quarter. Demand from the global chemical pharmaceutical and energy industries and building products and services outside the United States continues to grow, but as... but not at quite the same growth rates as earlier this year.

Third quarter operating profit decreased $2.6 million or 7% and profit margin decrease to 11.9% as a result of shipment delays, decline in foreign exchange due to the strong dollar, higher SG&A costs and costs in disruptions associated with Hurricane Ike.

I would note that Fluid Handling operating margins in the first half were extremely strong reaching 15.5% in both the first and second quarter. Third quarter margin were lower at 11.9% reflecting a modest decline in sales due in part to the shipment delays, reduced benefit from price achievement versus material costs, and foreign currency headwinds as we have very strong operations in Europe and Canada.

We do expect fourth quarter profit to increase from third quarter level as we cleared the delayed shipments. February 2008 guidance, for Fluid Handling reflected operating profit of $162 million, up from $140 million in 2007, and almost a full point of margin improvement from 12.3% in 2007 to 13.2%. We are on track to exceed this guidance.

As we look forward to 2009, our foundry restructuring efforts are in schedule with the Ipswich, England foundry closed in June and the Bradford, Canada facility on schedule for early 2009. These are important steps to increase our low cost country sourcing and improve profitability in 2009.

We have previously disclosed the estimated impact for the foundry closures and restructuring will increase these margins by approximately 75 basis points in 2009. As we prepare for 2009, we are being disciplined to make sure costs are in lien with potentially a more challenging sales environment.

In September, we acquire Delta Fluid Products in England for $28 million. Delta designed manufactured products for the natural gas and building services markets, which are very complementary to Crane's buildings services and utilities products line formerly known as Crane Limited.

This acquisition will broaden our product offering. Crane and Delta both have benefited from the infrastructure building and renovation in England, and in Middle-East countries, where British gas and water fittings are widely used. The transactions is consistent with our strategy of making acquisitions, which will strengthen our existing businesses.

Now let me turn the call over to our CFO, Tim MacCarrick, who will provide additional details on our results and strong liquidity position.

Timothy J. MacCarrick - Vice President, Finance and Chief Financial Officer

Thank you Eric. The third quarter reported tax rate was 30% compared to 38% in the third quarter of 2007 on an as-reported basis and 27% excluding the effect of the asbestos provision. We anticipate that the 2008 annual tax rate will approximate 29% reflecting higher R&D credits and lower high tax U.S. income. This guidance includes the reinstatement of the R&D tax credit retroactive to January 1st.

Our balance sheet remains strong, and we ended the quarter with $278 million in cash, because the company has substantial cash balances in euros. The strengthening of the U.S. dollar during the third quarter of 2008 reduced the company's reported cash position by $29 million. We have no significant near term debt maturing. It's half of our long-term debt of $398 million is due in 2013 and the other half is due in 2036.

We have reduced our estimate of cash provided from operating activities before asbestos-related payments from $275 million to $230 million. Our estimated asbestos-related payments remain unchanged at $55 million. We reduced our estimated capital expenditure this year from $50 million to $45 million consistent with our cost reduction initiatives.

This results in revised free cash flow guidance of $130 million down from $170 million principally reflecting the decline in our projected earnings. We remain very focused on cash flow for operations during this time of economic uncertainty through continue diligence on credit, collections, and inventory management.

The company has taken and will continue to take important steps to reduce costs. And these actions could result in a fourth quarter pretax charge of up to $25 million. We are evaluating productivity initiatives across the company and are committed to aligning our cost base with the respective market conditions of each business.

The initiatives currently being reviewed and analyzed includes potential consolidation of several clients, driving further headcount reductions over and above what we've done thus far and systematically eliminating all spending of a non-critical of nature. We will manage this process through the balance of 2008 and into 2009 to ensure our cost basis appropriately sized. We expect the same things in 2009 from these initiatives to exceed the amount of the fourth quarter charge.

It is now three months since I joined Crane Co., and this time has been spent running our businesses, operationally, financially, and from the perspective of our customers. Of course, it's clear that we are in a very challenging economic environment, but the diversity of our businesses, our demonstrated results, continued commitment to operational excellence, the deep commitment of our financial team to our customers and our strong balance sheet, all represents strengths, upon which we will continue to win in the marketplace and allow us to emerge well from these challenging times. Dick Koch and I look forward to ongoing dialogue with you in the future as required.

Now back to you, Dick.

Richard E. Koch - Director, Investor Relations and Corporate Communications

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

Question And Answer

Operator

Thank you sir. [Operator Instructions]. Our first question comes from Deane Dray with Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you, good morning. Can we start in Fluid Handling, Eric? And maybe you can step through for us the drivers behind the shortfall. What we saw was a core revenue decline of only 1%, but seeing the profit down $12 million, so it seems a little puzzling at why you would see such a margin hit. So if you could size for us SG&A, what the Ike factor was a hurricane and maybe the shipment delays if you could?

Eric C. Fast - President and Chief Executive Officer

The way I would characterize it, Dean, is that price versus material was about roughly $5 million of decline. Foreign exchange was $2 million or $3 million of the decline. Delayed shipments, if you tick the $10 million with another $2 million or $3 million of the decline. It's in... it's all on that order of magnitude. I would point out that the delayed shipments for the most part really weren't our fault. It was we had late delivery from some suppliers, and we had some customers postpone orders.

Deane Dray - Goldman Sachs

And those shipments will go in the fourth quarter?

Eric C. Fast - President and Chief Executive Officer

Most of that will go in the fourth quarter.

Deane Dray - Goldman Sachs

And then broadly, in terms of your order book, did you see any major cancellations during the course of the quarter?

Eric C. Fast - President and Chief Executive Officer

We didn't see major cancellations on significant projects. What we saw was the slow down in our short cycle, more commercial valve and pump business, certainly more than we anticipated.

Deane Dray - Goldman Sachs

And then how you're feeling today about Fluid margins? I mean it was a lot of discussion earlier in the year, how they had been a step function to go from the 12% range up to 15%. And do you still feel this all 15% is a normalized run rate or do you think that back at 12% seems to be more appropriate given the current market outlook?

Eric C. Fast - President and Chief Executive Officer

I feel very strongly that the 15% is the right goal. We made it clear when we had the first half of the year that we didn't expect margins to be at that level in the first half of the year that I think I characterize it on the second quarter call that everything just kind a hit perfectly. And as I said I my prepared remarks, I mean, we are on track to exceed our guidance in Fluid Handling. And it's steady as she goes here in terms of the plans and prospects that we have. And I think we continue to execute on a very positive and sound way there.

Deane Dray - Goldman Sachs

And then just a quick question on the charge expecting for the fourth quarter; can you split at this stage how much you expect in head count versus facility closures and in the fact it's we said primarily non cash. Would that imply that there is going to be asset impairments and write downs?

Timothy J. MacCarrick - Vice President, Finance and Chief Financial Officer

Deane, this is Tim; good morning. We are still evaluating a variety of options. We are really not in position to give details of any spilt at this point. But as that becomes clearer, we'll certainly make that information available.

Eric C. Fast - President and Chief Executive Officer

I think we characterizes... Tim characterized in his remarks as several plants, we're really going through in details sizing all of the businesses appropriate for its markets and we'll be spending November doing all the plant review submissions, which we are just done

Timothy J. MacCarrick - Vice President, Finance and Chief Financial Officer

And we will be focusing on the infrastructures, as Eric Mentioned, and also headcount opportunities.

Deane Dray - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Shannon O'Callaghan with Barclays Capital. Please go ahead.

Shannon O'Callaghan - Barclays Capital

Good morning guys.

Eric C. Fast - President and Chief Executive Officer

Good morning.

Shannon O'Callaghan - Barclays Capital

Eric, on your outlook, I mean you are already in pretty bearish, I would say on the North American economy when we talked in the past. What really surprised you in the quarter? I mean it sounds like the RV and vending fluid a lot of weaker, but you are sort of talking about the push outs. I mean...

Eric C. Fast - President and Chief Executive Officer

I think it's absolutely the spot on question. I mean, as we went through July, July was okay. And really, what we saw was a sharp follow up in orders, pretty much across the board beginning in August that the business leaders didn't anticipate, and we hadn't anticipated. So, Aerospace after market vending both here and in Europe; RVs, we've been chasing that market all year as have the industry participants. I mean, RV orders were down, 50% as opposed to what was a 25% or 26% in the second quarter.

And then we've got the short cycle commercial part of our Fluid Handling business again really saw the impact in August and continuing into September. So the surprise here really was not on the execution side, but on the orders and the volume side of that we got; that was unanticipated and that we got caught by.

Shannon O'Callaghan - Barclays Capital

Okay. And as you are looking to the fourth quarter, I mean you are talking about fluid being up sequentially, the guidance for EPS is pretty cautious to say the least. So, what are the pieces you're really worried about in 4Q?

Eric C. Fast - President and Chief Executive Officer

Well, I think first off, fourth quarter is never a great quarter for us. It tends to be a little bit lower. And I worry about everything in this current economy. I mean I had never seen this kind of volatility in... prior to this. I think we are being careful and cautious here. But you can see the $0.03 or $0.04 in any given day move just on a one day worth of foreign currency change. So I think we've tried to take all this into account. We tried the account for the Boeing strike. So we try to be careful and cautious in our guidance, but it is an uncertain environment.

Shannon O'Callaghan - Barclays Capital

And then on pricing, I mean you should get some benefit I guess from some of these rows coming down at some point. Are you already seeing the impact in your pricing and when do you expect to see some benefits from the lower rows in your business?

Eric C. Fast - President and Chief Executive Officer

We're doing everything that everybody else is doing, right? We are going back to our customers; and in a number of cases, we have long term agreements that takes a period of time; sometimes they are six months, sometimes a year, sometimes three months. So those row a lot. And the... but our customers are doing the same with us. So it's a very careful, a balancing act that we are going to go through here. I believe that the whole pricing environment is going to change from one, how do we get additional pricing to how do we hold what kind of what we got. Our experience in the third quarter, I think throughout the entire company excluding Fluid Handling. We basically were able to have a price offset materials, slightly negative, but almost not enough to even mention. And in the case of Fluid Handling, versus price versus material was very positive albeit as not as positive of variances it was in the second quarter.

Shannon O'Callaghan - Barclays Capital

Okay, all right. I'll leave it at that. Thanks a lot.

Eric C. Fast - President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Wendy Caplan with Wachovia.

Wendy Caplan - Wachovia Securities

Good morning.

Eric C. Fast - President and Chief Executive Officer

Good morning, Wendy.

Wendy Caplan - Wachovia Securities

Could you, as you did in Fluid Handling, kind of walk through for us in Aerospace, what the negatives were? The margin was significantly lower than what we had expected. And we had as you called out, engineering expenses related for the new programs last year. Can you walk us through that in terms of contribution?

Eric C. Fast - President and Chief Executive Officer

Again Wendy, the operating profit in the Aerospace group was down $12.9 million and our engineering expense was up $14.7 million quarter-over-quarter. So it's a very clear answer to 100% engineering expense. The engineering expense is up, I don't know. It's almost entirely due to the A400 and the 787. And I'll try to characterize how that's... how we see that unfolding over the next two years. In the third quarter, the Aerospace group still ran at a 40% type of growth margin. Now there's pressure on that as the OEM stays flat and aftermarket softens a little bit year here, which we expect, and that's clearly going to be one of our key challenges, but the explanation for the third quarter is the engineering spend on 787 and the A400.

Wendy Caplan - Wachovia Securities

Okay. And one more Fluid Handling clarification: the delays that you described, the $10 million. How much of that was the late supplier that you mentioned. How much of that delays that were requested by the costumer? And are you worried that there will be future issues with projects out there in terms of further delays. How should we be thinking about that, please?

Eric C. Fast - President and Chief Executive Officer

First off, I don't have the detailed breakdown. It's a little or both of those probably a little bit of us. So that's the American data called the third, third, third [ph]. Two-thirds, third customer, third supplier and maybe a third us in terms of missing a shipment date. This is... with big projects, you run this risk at the end of every quarter that it slips over. And I don't know how else to characterize. I think everybody in the world has that risk.

Wendy Caplan - Wachovia Securities

Well, and finally the question about the drop-off in August, were you... just to kind of get a feel for what you were thinking at that point, were you thinking that the vacation time in August in Europe was penalizing results in August and you had some expectations that September would sort of bounce back or did you know at that time that the things were turning South?

Eric C. Fast - President and Chief Executive Officer

First off, I understand the direction the question of our policy with respect to earning and announcing earnings. As we only give annual guidance and we only update our annual guidance at the end of every quarter; that's a stated policy. We did it over 18 months ago. That's our policy. In direct response to the question, we didn't know. This was the first time we've seen it. It was very different pattern than what we saw in July, and we frankly didn't know.

Wendy Caplan - Wachovia Securities

Okay, thank you very much.

Operator

Our next question comes from Curt Woodworth with JPMorgan.

Curtis Woodworth - JPMorgan

Yes, hi good morning.

Eric C. Fast - President and Chief Executive Officer

Good morning.

Curtis Woodworth - JPMorgan

What level of engineering expense are you forecasting for Aerospace in the fourth quarter?

Eric C. Fast - President and Chief Executive Officer

$30 million.

Curtis Woodworth - JPMorgan

$30 million?

Eric C. Fast - President and Chief Executive Officer

We said in my remarks $113 million for the year. If you add it up for the Aerospace group through the nine months, it will be $83 million. We spent $33 million in the third, and we're looking at approximately a $30 million here in the fourth. Even though there's been a Boeing strike and you're not shipping them OEM, the development work has continued.

Curtis Woodworth - JPMorgan

Okay, so I mean if look at all the engineering expense to-date for some of these OEM platforms and you talked about, I think $50 million of pre-tax EBIT tailwinds for 2010, so what would the ultimate kind of payback or when do you expect to breakeven on all these expenses that you've been booking?

Eric C. Fast - President and Chief Executive Officer

Look, I think the first thing is as... we expense as we go, so you don't have to worry about anything on the balance sheet. Secondly, this is a moving target. We need to finish these projects, and I think we are going to deliver first hardware and software here in the fourth quarter, and you can expect it to go down as I articulated. We really... we don't give out as a matter of policy what's the profitability of individual programs.

Curtis Woodworth - JPMorgan

Okay. And then for 2009, what would you expect the detrimental engineering expense to be for aerospace?

Eric C. Fast - President and Chief Executive Officer

We haven't... I intend... it would be our intention when we give the annual guidance, we give EPS in January; and then on our February Investor Conference, we'll detail that out. All we've indicated is that it should start to decline, because they are going to be flying half a dozen test planes all during 2009. And so people are going to be adjusting products and there's a fair amount of work to go on. So it will decline, but still at a higher level, but we do expect our overall aerospace engineering spending to approach approximately 12% of sales in 2010, that is of 2008 sales, which are what, $400 million plus.

Curtis Woodworth - JPMorgan

Got it.

Eric C. Fast - President and Chief Executive Officer

That's the way we characterize it. We are putting out the detailed plan together for next year. We'll have that next month.

Curtis Woodworth - JPMorgan

Sure, so it seems like it's safe to say that the $50 million you identified, the majority of that would fall into 2010?

Eric C. Fast - President and Chief Executive Officer

I haven't characterize it that way... I'm not going to characterize the shift between the two years until we have good handle on the detailed numbers.

Curtis Woodworth - JPMorgan

Okay, fair enough. And then back to the raw material issue and Fluid Handling, you commented that on a sequential basis about $5 million of the variance was price versus raws.

Eric C. Fast - President and Chief Executive Officer

Yes.

Curtis Woodworth - JPMorgan

And you said that...

Eric C. Fast - President and Chief Executive Officer

Compared to the second quarter of this year.

Curtis Woodworth - JPMorgan

Right. So and I think you were more or less at parity this quarter.

Eric C. Fast - President and Chief Executive Officer

Yes.

Curtis Woodworth - JPMorgan

So if you were... maybe you've got a benefit, a spread of $5 million last quarter. So if you were to kind of normalized for that, you're at 13.8% margin. So it's kind of guess back to Deane's question. If you... how do you think about to go forward basis and you normalize for price and we're clearly entering a period of what's probably going to be declining volume for Fluid Handling. Would it be a pretty conservative assumption to assume that margins would probably not be over 13%, 14% as we go forward in 2009 or...?

Eric C. Fast - President and Chief Executive Officer

First off, I am not going to get into a forecast, but for segment profitability and margins for 2009.

Curtis Woodworth - JPMorgan

Fair enough

Eric C. Fast - President and Chief Executive Officer

Because it's premature. Secondly, I don't want to... be careful here. Price versus material was less in the third quarter than it was in the second quarter, but it's still very positive and the group continues to do a very disciplined job on price versus material. It was less benefit of it than in the third quarter versus the second quarter.

Curtis Woodworth - JPMorgan

Okay.

Eric C. Fast - President and Chief Executive Officer

Again, we have a lot of initiatives going on to improve margins other than price including foundry closures et cetera.

Curtis Woodworth - JPMorgan

Okay. And just one final question on Fluid Handling; what percent of your business would you consider late cycle or short cycle there?

Eric C. Fast - President and Chief Executive Officer

I don't have that at the tip of my fingers. What did we say, Dick?

Richard E. Koch - Director, Investor Relations and Corporate Communications

50%-50%.

Eric C. Fast - President and Chief Executive Officer

Generally 50%-50%.

Curtis Woodworth - JPMorgan

Okay. Great, thank you.

Eric C. Fast - President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Ron Epstein with Merrill Lynch.

Ronald Epstein - Merrill Lynch

Good morning, Eric.

Eric C. Fast - President and Chief Executive Officer

Good morning Ron.

Ronald Epstein - Merrill Lynch

Can you maybe walk through a little more detail, what is the issue with development on both programs in the 78 and the A400? What's proven to be such a challenge, right?

Eric C. Fast - President and Chief Executive Officer

Well, I would say first off that we are in good company here, and the supply base to both these claims is spending more than what they had anticipated. Secondly as you truly well know both of these claims are very late. And so we are driving engineering here.

Thirdly, there have been substantial kind of changes in terms of that... if come out of Boeing, in terms of systems and pieces that we needed to change and a rework. And I think fourthly, we under estimated ourselves the cost of trying to drive the new technology and the solution that we presented; all of those factors.

Ronald Epstein - Merrill Lynch

Now, do you expect some former reimbursement from Boeing and/or Airbus on the changes that came from them?

Eric C. Fast - President and Chief Executive Officer

We have... the contract is one that provides for some remuneration for significant changes, and that's the debate. And as I've said in my prepared remarks, we have ongoing discussions with Boeing and GE on that.

Ronald Epstein - Merrill Lynch

Okay, okay. Great, thank you.

Eric C. Fast - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. We'll take our next question from Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc Capital Markets

Looks like question has been answered so just a couple of things. First in the merchandising systems business, I guess Eric, how do you feel about the sustainability, the growth, you've seen in payment system and what is really driving that in this environment? And then can you reminds us during the last economic downturn earlier this decade, how one of the drop off look like in your vending business?

Eric C. Fast - President and Chief Executive Officer

First off on payment system business, it's truly a global business. We have a world class technology, I think we are executing well in a number of different market verticals gaming, kiosk, retail, transportation; I feel good about it. I feel that we are obviously going to have some huge ForEx headwinds here in the emerging market, in our overseas business. A lot of that business is outside. Vast majority of that business is outside of the United States. And I think we are going to see those emerging markets, the rate of growth flows, and I think that will impact our business. I think that as we look out to 2009, we have enough new products and enough growth initiative that we should continue to see our growth in our payment systems business. That would be my general characterization.

The... in vending, it's hard for me to say, because we used to be just one of the number of competitors, and today we are the... by far the leading market share participant in North America. And I think the issue is whether we can on our own stimulate growth in the industry as we modernize that distribution channel. So we have a lot of new product that we are introducing here, which I test upon. We have, with the acquisitions, covered both distribution and the direct sales channel. We've got full product line offering now with the can and bottles, with our snacks. We're just competitively in a very strong position.

That being said, I mean you can look at Coca-Cola enterprise stock, I think it's at 8 bucks, down from the low 20s. So I mean even some of our significant customers there are clearly seeing headwinds in the marketplace. And I am confident about our strong leadership position. I am confident that we can take some market share here, but everything I see in the market has been more than challenging.

Matt Summerville - KeyBanc Capital Markets

With respect to the engineering materials across the three major verticals, have you seen any signs at all of stabilization? I guess, when we look at this year-over-year negative or declines in those three verticals, do you feel like based on what you are seeing now that's actually going to get worse before it gets better?

Eric C. Fast - President and Chief Executive Officer

I feel that our team in engineered materials like in merchandizing, like in Fluid Handling continues to execute well. They've worked, exciting the business; I see an intense customer focus, where one by one, they're starting to take some of the market share. And that there's some interesting new product developments going on there. As that being said, I don't see any improvement in the marketplace, and I'm not the one here to call the bottom.

Matt Summerville - KeyBanc Capital Markets

Okay. And then just last question: if you look across the portfolio, are you... what are you thinking about if anything in terms of the divestitures, and then with your stock at somewhere in the range of $11 to $12 right now? How you feel about buy back given all the cash you had on the balance sheet?

Eric C. Fast - President and Chief Executive Officer

We're not contemplating any divestitures or really of any significance. We are constantly turn around the edges as we have for the last five or six years. And we are in a fortune position of having $278 million in cash in our free cash flow business and not using our revolving credit for 300, so we've got a very strong liquidity position that doesn't force us to do anything.

With respect to stock, we... as those of you, who have followed us for a while, we never pre-announced what our intentions are with respect to our stock. We just announced it after the quarter. I might add that most of people that are historically pre-announced have, most of them have curtailed their program. So I don't think our policy is a bad one.

Matt Summerville - KeyBanc Capital Markets

Okay. Thanks Eric.

Operator

And there are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Eric C. Fast - President and Chief Executive Officer

Thank you operator, and thank you to all of you for joining us this morning; bye now.

Operator

And that concludes today's teleconference. Thank you for your participation. Have a good day. .

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Source: Crane Co. Q3 2008 Earnings Conference Call Transcript
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