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Executives

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

Eric C. Fast - Chief Executive Officer, Director and Member of Executive Committee

Andrew L. Krawitt - Chief Financial Officer, Vice President and Treasurer

Analysts

Matthew W. McConnell - Citigroup Inc, Research Division

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Brian Konigsberg - Vertical Research Partners, LLC

Ronald J. Epstein - BofA Merrill Lynch, Research Division

James Foung - Gabelli & Company, Inc.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Crane (CR) Q4 2012 Earnings Call January 29, 2013 10:00 AM ET

Operator

Good day, everyone, and welcome to the Crane's Fourth Quarter 2012 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.

Richard E. Koch

Thank you, operator. Good morning, everyone. Welcome to Crane's Fourth Quarter 2012 Earnings Release Conference Call. I'm Dick Koch, Director of Investor Relations.

On our call this morning, we have Eric Fast; Max Mitchell; Rich Maue; and Andrew Krawitt. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just a reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K, and subsequent filings pertaining to forward-looking statements. Also during the call, we'll 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.

I would like to invite you to attend Crane's Annual Investor Conference on Wednesday morning, February 27. Please save the date on your calendars, and let us know if you can attend.

Now let me turn the call over to Eric.

Eric C. Fast

Thank you, Dick. Before commenting on our fourth quarter and full year earnings, let me review the management changes we announced last night. First, I'm very pleased to announce that Max Mitchell has been promoted to President of Crane Co. He retains the role of Chief Operating Officer, a position that he has held since May of 2011. I have previously indicated my desire to retire prior to reaching age 65, and that point is getting closer. I worked closely with Max over the past couple years, and he continues to drive profitable growth and influence Crane's strategic direction. This announcement represents the next step in our CEO succession planning process, and Max and I will continue to work together very closely.

I would also like to note that Andrew Krawitt, who has been our Principal Financial Officer since 2010, has decided to leave the company in order to pursue a doctorate in mathematics. I'm happy to report that he will stay with Crane through May, which will enable a smooth transition of his responsibilities. Andrew will be missed, and I would truly like to thank him for his contributions over the past 6 years and wish him well.

In conjunction with Andrew's intended departure, I'm also very pleased to announce Richard Maue as Crane's Chief Financial Officer. Rich is highly qualified to lead our finance organization with 20 years of experience as a finance professional. He joined Crane in 2007 as Vice President, Controller and Chief Accounting Officer and has shared CFO responsibilities since 2010. His knowledge of Crane's businesses is outstanding and he's played an integral role in shaping our finance organization. Rich's promotion to CFO will be a key enabler of continued Crane success.

Now I'd like to move on to 2012 results. Excluding special items, as outlined in our press release last night, Crane's full year EPS of $3.75 increased 9% over 2011 and represented the second consecutive year of record performance for the company and in line with our most recent guidance range. On a continuing operations basis, also excluding special items, full year 2012 EPS increased 10% to $3.70 versus $3.37 in 2011. I would point out that this strong performance excluded the anticipated $0.05 per share R&D tax credit that Congress did not pass into law until early January of 2013.

Our adjusted full year operating margin was 13%, a substantial improvement over 12.3% last year. In the second half of 2012, operating margins in our Fluid Handling segment were 14%, after adjusting for repositioning costs and in line with the guidance we provided last July.

Fourth quarter results capped off a very successful year in 2012. Sales impacted by a slowing global economy grew a modest 1.6% in the quarter, all of which was core growth. Excluding special items, operating profit in the quarter increased 9% and margins expanded to 13.4%, up from 12.6% last year.

Disciplined pricing, sound project management and improved operational efficiency all contributed to the solid execution in the quarter. Our teams executed well on the repositioning actions that we announced at the end of the second quarter, and we look forward to continued strong earnings growth in 2013. As a reminder, pretax savings associated with these actions will approximate $12 million in 2013, of which $10 million relates to Fluid Handling.

In addition to record -- the record earnings that we delivered in 2012 we maintained a balanced capital deployment strategy, raising our quarterly dividend 8% to $0.28 in July, repurchasing $50 million of our common stock and announcing plans to acquire MEI, enabling that third large growth platform in our portfolio.

In 2013, we are expecting a third consecutive year of record earnings, with EPS in the range of $4.10 to $4.30, continued operating margin expansion and a strong free cash flow conversion. Given our cautious outlook on the global economy, and with the 2013 sales forecast for Crane of between 1% and 3%, we continue to drive productivity initiatives and a cost-conscious culture across the company.

In the fourth quarter of 2012, we took further cost actions, including freezing our U.S. defined benefit pension plan and replacing it with a defined contribution plan.

From a top line respective, while we expect a challenging global marketplace, we do expect continued share gains, driven by our enhanced sales and marketing processes, greater international presence and new product launches.

On December 20, we announced an agreement to purchase 100% of the equity of MEI Conlux Holdings for $820 million, approximately 9.6x MEI's 2012 EBITDA. We structured this acquisition to use at least $180 million of our international cash and $70 million of U.S. cash for a total of $250 million, and we plan to borrow the remaining amount of approximately $570 million. We have commitments in place for all financing requirements, and importantly, our credit ratings were reaffirmed by both S&P and Moody's. The acquisition remains contingent upon regulatory approvals, and we are working to obtain these approvals as quickly as possible. We continue to expect the transaction to close sometime in the second quarter of 2013. And we have already appointed a core team of Crane employees focused on the plans for integrating the MEI and Crane Payment Solutions businesses.

The acquisition of MEI is very exciting for us as it is highly strategic and a strong cultural fit with Crane. In combination with Crane Payment Solutions, it establishes a third large growth platform for Crane.

On a pro forma 2012 basis, as a percentage of sales, Fluid Handling would represent 43% of total Crane sales; Aerospace/Electronics would represent 24%; and Merchandising Systems, led by the combination of our Payment Solutions and MEI businesses, would represent 26%. Rounding out the portfolio, Engineering Materials would represent 7% of sales.

Please note that starting in 2013, the results of our 2 remaining Controls businesses will be reported as part of the Fluid Handling segment.

2012 was a record year for Crane, and we are poised to deliver even better performance in 2013. We will provide more segment-specific details in our Investor Day next month.

Andrew will now take you through the businesses and provide some additional financial information.

Andrew L. Krawitt

Thank you, Eric. I'll turn now to segment comments, which compare the fourth quarter of 2012 to 2011. On a continuing operations basis and before special items, Aerospace & Electronics sales increased 2% to $176 million, compared to $172 million in the fourth quarter of 2011, while operating profit increased 1% to $39 million. Operating margin declined slightly to 22.3% from 22.6% in the prior year. Sales in the Aerospace Group were $111 million compared to $108 million in 2011. OEM revenues increased 3% compared to the prior year. Consistent with trends seen earlier in 2012, sales to large aircraft manufacturers and business jet OEMs increased, while sales to regional aircraft manufacturers declined.

Commercial sales increased 4% over 2011, while military-related sales were down just slightly compared to a year ago.

Aftermarket sales increased 3% compared to the fourth quarter of 2011, driven by higher commercial, modernization and upgrade sales, which more than offset a decline in spares. The OEM aftermarket mix was 60% to 40% in both the fourth quarter of 2011 and 2012. Operating profit in the Aerospace Group increased by approximately $2 million, driven by higher OEM and aftermarket sales and lower engineering spending.

Market conditions in Aerospace remain generally positive and we expect modest sales growth over the next several quarters. The International Air Transport Association is forecasting slightly improved profitability for the airline industry in 2013, with passenger traffic -- passenger traffic projected to increase by 4.5% worldwide, and air cargo volume is expected to increase 1.4%.

We continue to benefit from increasing OEM build rates across a broad range of platforms. And we are also cautiously optimistic about the Aerospace aftermarket, particularly as we approach the second half of 2013.

Electronic sales were $65 million in the fourth quarter of 2012, $1 million higher than in 2011. Although operating profit decreased as a result of unfavorable product mix and some higher manufacturing costs, operating margins remained in the teens.

Aerospace & Electronics backlog was $378 million at the end of the fourth quarter, down sequentially from $393 million in September, impacted primarily by lower defense-related orders in our Electronics Group. Several of our customers continue to push out defense-related Electronics orders, and we expect this trend to continue in 2013 given the uncertainty around potential sequestration.

In terms of our current backlog, that is, orders we expect to ship in the next 12 months, we have seen a slight sequential improvement in Aerospace, which was more than offset by a decline in our Electronics Group backlog. Overall, we believe our Aerospace & Electronics backlog, combined with orders we expect to receive in 2013, is supportive of a modest increase in sales for 2013 with an accompanying increase in operating profit, aided by strong productivity initiatives.

Engineering Material sales increased $2 million or 4% to $47 million. Demand for our RV-related applications increased 27% versus the prior year as RV OEM build rates remained strong with both dealer and retail demand continuing through the quarter.

Building products-related sales increased 2%, reflecting generally soft commercial construction markets and transportation-related sales declined 6%.

Operating profit increased to $4.7 million, just slightly ahead of 2011. And operating margin was 10%, roughly flat compared to the fourth quarter of 2011, reflecting the slightly higher sales and effective cost controls, partially offset by higher raw material costs, particularly for resins.

For 2013, we expect only nominal sales growth with further improvement in operating profit from continued cost management initiatives and the benefits of the repositioning actions completed in 2012.

Merchandising System sales of $94 million increased $8 million versus the prior year or 9%, reflecting generally higher sales across most vending product lines, particularly to bottlers, and higher sales in most Payment Solutions vertical markets despite a soft European economy. Segment operating profit of $11.8 million increased $4 million, reflecting the impact of the higher sales and strong productivity gains in both businesses. And operating margin increased to 12.6%, which compares to 8.9% in the same quarter of last year.

We expect modestly improved sales in 2013, led by global demand for both Vending and Payment Solutions. Operating profit in 2013 is also expected to increase, driven by continued strong productivity and the benefits of the repositioning actions completed in 2012.

Fluid Handling sales declined $2.5 million to $292 million, reflecting a core sales decline of 1%, primarily from weaker European end markets. Backlog was $327 million at the end of December, down slightly when compared to $331 million at the end of September, but $13 million higher than in December 2011.

In Europe, market conditions in the fourth quarter remained subdued. While larger European-based chemical customers are still committed to projects on a global basis, certain orders have been delayed into early 2013.

Although chemical industry demand in North America slowed in the quarter, as compared to the pace in early 2012, productivity remains encouraging. Chemical investments in the Middle East are generally moving forward. While refining quote activity has also slowed somewhat, demand remains positive and we anticipate refinery turnaround activities will continue in 2013.

Demand from global power markets is still soft, but some project releases did materialize in the quarter. We continue to remain cautious about power projects in China and India.

In Canada, stable to growing commercial construction and mining activity has benefited our Pipe Valve and Fitting Distribution business.

Fluid Handling operating profit of $41 million increased 6%, primarily reflecting better project execution, improved productivity and solid cost management. Operating margin increased 90 basis points to 13.9% compared to 13.0% in the same quarter last year.

Our outlook for 2013 is below single-digit sales growth, with improvement in both operating profit and margins, driven by expected market share gains, strong productivity and savings from previously announced repositioning actions. Pretax savings from these actions are expected to approximate $10 million in 2013, and we believe we are well-positioned for further growth of Fluid Handling sales and operating profit in 2013.

Turning now to more detail on our total company results and forecasts. While we experienced raw material cost pressure on certain commodities in the quarter, the effect was fairly modest in aggregate, and the increase in our selling prices more than offset this impact. However, as mentioned earlier, Engineering Materials experienced input cost pressure from resins that was not covered by price increases.

In the fourth quarter of 2012, the impact of foreign exchange was negligible. On a full year basis, the headwind from currency translation was about $0.05 per share in 2012.

Our fourth quarter tax rate associated with continuing operations, excluding special items, was 31% in 2012 compared to 28% in the fourth quarter of 2011.

Throughout 2012, we had assumed that legislation would be enacted during 2012 which would have extended the U.S. Federal Research -- which would have extended the U.S. Federal Research tax credit retroactive to January 1, 2012. Accordingly, we included a $0.05 per share benefit for this in our 2012 earnings guidance. Because the legislation to extend the tax credit was not enacted until early January 2013, we were unable to include the $0.05 per share benefit in our 2012 earnings. However, we will record this benefit in our first quarter 2013 earnings. Including this item, our tax rate guidance for 2013 is 30% on a full year basis.

Free cash flow was $146 million in the fourth quarter of 2012 compared to $78 million in the fourth quarter of 2011. As a reminder, we made a discretionary pension contribution of $30 million in the fourth quarter of 2011. Full year free cash flow was $205 million in 2012, coming in well ahead of our $150 million to $180 million guidance range and compared to $115 million in 2011, reflecting improved operating results and strong working capital management.

Capital spending for the fourth quarter of 2012 was $9 million compared to $7 million in 2011. For the full year, capital expenditures were $29 million, just slightly below our most recent guidance of $30 million.

Our balance sheet remains strong, and we ended the quarter with $424 million in cash. In addition, we have access to our $300 million revolving credit facility, which we recently updated and matures in May of 2017. Commitments are in place to cover 100% of the financing needs of the MEI acquisition, which is expected to close in the second quarter of 2013. We plan to increase the size of our current multi-year revolving credit facility from $300 million to $500 million, and also add a $400 million, 364-day facility in advance of the close of the MEI transaction. Later in the year, we expect to term out a significant portion of the acquisition-related debt.

Finally, let me expand on the 2013 guidance that Eric outlined earlier. Our updated guidance is for 2013 core sales growth of between 1% and 3%, which is about 1% lower than the preliminary guidance we provided last month. We have incorporated a slightly more cautious outlook on the global economy and adjusted our top line guidance accordingly. In addition, we have refined our pension expense forecast for 2013, which now fully reflects the curtailment of our U.S. defined benefit plan effective January 1 of this year.

Global pension expense is now expected to be about $15 million lower on a pretax basis in 2013 compared to 2012. And our previous guidance reflected only a portion of that benefit.

Lastly, we have included the benefit of the R&D tax credit associated with calendar 2012 that will now be booked in 2013. 2013 EPS is now expected to be in a range of $4.10 to $4.30, representing an increase of 11% to 16% over 2012 earnings per share of $3.70. That's before special items and on a continuing operations basis. We expect 2013 free cash flow to be in a range of $190 million to $220 million, including the effect of asbestos-related cash flows.

Our 2013 guidance does not include potential impacts from the pending acquisition of MEI. Excluding inventory step-up and onetime transaction and integration costs, we expect MEI to be accretive to earnings within the first full year of acquisition by approximately $0.25 per share, including $0.05 in synergies.

Segment-specific sales and operating profit guidance will be provided at Crane's Investor Day Conference on February 27.

Now back to you, Dick.

Richard E. Koch

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Matt McConnell of Citi Research.

Matthew W. McConnell - Citigroup Inc, Research Division

Now that the fluid repositionings are mostly complete, can you give an update on how that sets you up for 2013 profitability? And maybe touch on, of the $10 million of savings you are looking for, are you seeing any of that in this second half margin? You did that 14% in the second half. Does that include any of the benefits? Or is all of that $10 million incremental in the next year?

Andrew L. Krawitt

Okay. That one I -- let me handle the second part of your question first. The -- any impact we got from repositioning in 2012 was minimal. We would consider it insignificant. So we really expect, as we've been communicating, for the benefit from repositioning to begin in 2013. In terms of guidance for Fluid Handling, we're going to provide segment-specific guidance at our Investor Day next month. Let me provide a little insight to help paint the picture. We expect modest sales growth in 2013. And certainly, full year operating margins we expect to be higher in 2013 than in 2012. The improvement in margins is expected to materialize, though, over the course of the year. I would expect first quarter operating margins to remain in the 14% range, similar to fourth quarter 2012 levels. We're on track to reap the benefits of our repositioning actions. There are some mix impacts of a limit margin expansion in the first quarter. And on a full year basis, we certainly expect margin improvement in Fluid Handling.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. And will those mix issues in the first quarter, will they continue through the year, or is that specific to the first quarter for Fluid?

Andrew L. Krawitt

We just wanted to be a little bit cautious about the first quarter. And we've got some mix issues that are impacting us there. I think on a full year basis, we would expect margin expansion, as I mentioned, to progress over the course of the year.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. And switching to Aero, could you give your assessment of any Boeing impact and whether you've determined whether any of Crane's equipment is involved in some of the performance issues on the 787?

Andrew L. Krawitt

Sure. Well first off, let me start out by saying there's no indication that the 787 problems, which have been widely reported in the press, are related to any Crane-supplied products. A delay in 787 production would have some impact on our sales and operating profit. Our assumption at this point is that Boeing will continue building aircraft to stay on course with their build rate of schedules. And as we've mentioned in the past, we provide products for a very broad portfolio of Aerospace platforms. And the 787, although very attractive, is just one of many planes in the portfolio. So we're comfortable with our guidance, given what's going on with the Boeing announcement.

Operator

Our next question is from Matt Summerville of KeyBanc.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Just a couple questions. First, as you think about 2013, you mentioned raw material headwind that you saw in Engineering Materials. How are you thinking, as you move through the year, about pricing versus raws in that business, but also and more importantly, in Fluid Handling, coming out of a year where it looked like you guys did a pretty good job managing the raws versus price equation in that business?

Andrew L. Krawitt

Well, Matt, part of our core strategy is to pass through the impact of input costs through to our customers. So as part of our planning process, as part of our monthly review process, we are constantly looking at price versus raw material input costs and where we can get price increases. And we would expect to be able to cover any input cost the price increases would -- with customer price increases in general in 2013.

Eric C. Fast

Certainly, in Fluid Handling -- this is Eric, Matt. Certainly in Fluid Handling. In Engineering Materials, we've got a situation with styrene where there was a reduction in the number of key suppliers and styrene prices have stayed higher. So -- and there's a high material content in that product, and we've got some pretty tough competition. So that's why you see the pressures there but don't see them in other places.

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Can you also maybe just spend a minute talking about your Merchandising System segment, your core business there, in terms of what's driving the buying decisions on the part of the bottlers? Historically, I thought you guys didn't have a huge presence with the bottlers. Is that changing? Is the potential of bringing MEI into the fold helping you out in that regard? And then maybe talk about which markets you see as really being the driving factors in the Payment Systems business.

Eric C. Fast

I would separate Vending from Payment.

Andrew L. Krawitt

Okay, Matt, let me -- let's separate Vending from Payment, and first talk about Vending. We've had bottlers as customers for a number of years, in Vending, for a number of years and -- so that's not a new part of the business, and we've said major bottlers have been a key part of that business.

Eric C. Fast

So let me add to this, Matt. In Vending, with the bottlers, I mean, we are the leading supplier of glass front vending equipment to the major bottlers, and we've enjoyed that. And if anything, we're trying to grow internationally and add to that volume. In Payment Systems, you're absolutely right. We've had -- while MEI is very strong in the bottlers, we've been -- I don't want to say nonexistent, because we've got some trials and we've been working hard, but our real leadership position is with the full line operators in Payment Systems. Both Vending and Payment Systems had solid sales growth in the quarter.

Operator

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

Brian Konigsberg - Vertical Research Partners, LLC

Just curious, can you give us a little more granularity on MEI? So you're expecting $0.25 accretion in the first year. But do you expect that to be accretive in 2013, or is it more backend-loaded in that first year ramp?

Andrew L. Krawitt

Well, we want to make sure we're specific about the quarterly breakout of that, but we fully expect, that, that's understood. When we talk about $0.25 accretion, it's in its first full year of acquisition. So it's going to be dependent on when the acquisition closes in 2013. And I don't think we're at a point where we're going to get specific about the quarterly breakout of that. But we certainly expect to be able to achieve that in the first year and it'll probably improve over the course of the year.

Brian Konigsberg - Vertical Research Partners, LLC

Okay. And just the comments about a little caution being baked into the reduction in this top line outlook. Can you just give us a little more granularity there? Where do you see -- are there any specific segments where you see more risk? Is it associated with Aero and the 787? Is it some Fluid Handling trends that you're seeing? Some granularity there would be really appreciated.

Eric C. Fast

This is Eric. We continue to spend a lot of time, effort and money on enhancing our growth initiatives new product development, vertical organizations, enhanced sales force, sales force training, to drive more volume to our businesses. That being said, as we've gone through the second half of this year, our concern is that an uncertain end market environment out there globally, of course, the attitude's changed on this by the month, but typically, uncertain. So we took the position that, as confident as we are in the investment that we've made, that uncertain end market environment, we didn't want to have to count on the sales growth to produce the earnings. So as a result of this, really starting in the second quarter for Europe and our European repositioning, we have carefully gone through the company with -- to make sure we're hitting our productivity targets, unnecessary spending, a cost-conscious culture. You see the difficult position that we -- decision that we took on pensions to go to the defined contribution. So we really felt strongly that we wanted to be positioned from a cost point of view to be able to deliver really solid results for 2013 with a kind of a modest sales outlook. And that's really the attitude that we're taking to that plan.

Brian Konigsberg - Vertical Research Partners, LLC

Okay. So is it safe to assume that it's just a little bit of caution across the entire portfolio; it's nothing specific, but just general macro trends?

Eric C. Fast

I would say nothing specific.

Brian Konigsberg - Vertical Research Partners, LLC

Okay, great. And just finally, on Fluid Handling. So on North American chemical, things are slowing down a little bit, but still we have a lot of major chemical companies planning ethylene crackers, polyethylene facilities, really starting to get off the ground in probably mid to late 2013 if they go ahead as currently planned. How are you positioning the company for that opportunity? Do you feel like you are going to participate in a significant way in that buildout? Or maybe just give us a sense of what the Crane opportunity is there.

Eric C. Fast

I -- my reaction to that, Brian, we have a high degree of confidence in our severe service valve business and attach to the end market chemical business to make sure that we win not just our share, but more than our share. Sales force in place, the new products in -- particularly in the lined -- new lined check valve and the lined ball valve, are in place. And we -- I feel we're well-positioned and we're confident about it. If the market's there, we'll do a little bit better than the market.

Brian Konigsberg - Vertical Research Partners, LLC

And it sounds like you're not baking anything in until -- well, certainly not into 2013, is that correct?

Eric C. Fast

Well, we're being careful.

Operator

Our next question is from Ronald Epstein of Bank of America Merrill Lynch.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

So yes, so two quick questions. One, with the recent capacity reductions you made with the plant closure and the movements you've made in the company, if demand were to come back -- let's be optimistic. Like if demand were to come back quicker than maybe anybody is thinking, I mean, how are you positioned for that?

Eric C. Fast

No problem.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

No -- why -- why not?

Eric C. Fast

Because we generally feel like we're running the company -- if you look at capacity 5 or 6 days a week, 2 full shifts, that we're running the company about 60%, 65% at capacity generally across the board. And if we get -- our whole goal is to drive core growth because then we can leverage our fixed costs. And we think we can leverage those fixed costs at $0.25 on the dollar. And even with the dramatic margin improvement that we've had, we still -- our overall operating margin's at 13%. So our core strategy is to drive that growth. And we'll -- therefore, we'll be putting constant, positive pressure to continue to move up our operating margin from that 13%. And we're confident about having the capacity.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, great. And then maybe just a second questions.

Eric C. Fast

Well there's no -- Brian, said another way, there's no bricks and mortar in our CapEx plans. All the CapEx, and even the spending in the P&L, is on new product development, on training, on ERP systems. It's all about driving growth here.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, okay, super. And then maybe a quick one, I didn't hear if someone asked the mandatory commercial Aerospace aftermarket growth question. I mean, what do you see in there? And I think the expectation broadly is across the industry that we'll see things kind of pick up as we go through '13. Do you see any evidence of that, and kind of what's going on there?

Andrew L. Krawitt

So actually, for us on a sequential basis, commercial spares were up slightly. So there are some signs that customers are working off excess inventories, which as people have widely talked about, are potentially caused by some over-provisioning back in 2011. We're cautious about spares demand, but we do anticipate a pickup probably beginning in the second quarter. So -- and this is largely driven by the Aerospace market indicators remaining positive, passenger growth, et cetera. So we're cautiously optimistic that we'll see a pickup beginning and towards the middle of the year.

Operator

Our next question is from Matt McConnell of Citi Research.

Matthew W. McConnell - Citigroup Inc, Research Division

[Audio gap] upside of merchandising, but is there anything in that margin that you can highlight? I mean, anything abnormal? I think that's probably higher than we've seen in 5 years or so. Is that just more savings from money controls?

Eric C. Fast

There's nothing abnormal in that margin. This was a good, solid quarter, both in Vending and in Payment Systems and it's going in the direction it should be.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. That's good to hear. And is that -- I think it's been high single digits for the past couple years. But is low double digits kind of a sustainable rate to be thinking about?

Andrew L. Krawitt

We'll provide that guidance at Investor Day next month, Matt, if you can hold off for a few weeks here. Certainly, we've talked about, on a longer term basis, our goal is to get Vending margins to 10% and we view Payment Solutions as being a mid- to high teens margin business. So if you do a weighted average of those 2, that gets you to kind of a mid-teens margin over time.

Operator

Our next question is from Jim Foung of Gabelli & Company.

James Foung - Gabelli & Company, Inc.

I just wondered if you could just talk a little bit about the growth rate of the Payment System business. MEI had about 13% CAGR growth over the last couple of years. I just wondered if you expect that to continue, given the combination of 2 businesses?

Eric C. Fast

So you're absolutely right that MEI had been growing 13%, but as you know, we're not yet including it in our results as we're going through the antitrust reviews and we don't expect this to close until to -- late second quarter. That being said, MEI is the #1 competitor in the market. They've shown good growth, and we expect them to continue to grow. I don't know if it'll be 13%, but they've certainly growing faster than we've grown our business.

James Foung - Gabelli & Company, Inc.

And I guess, maybe you could just kind of give us a sense of, in the markets that they're in, what area do you see the greatest growth of the different markets they participate?

Eric C. Fast

I don't know how to -- let me just say, they've got these 5 end markets, Jimmy. And we actually -- with sales -- with retail, gaming, vending, transportation and service payment. And we just -- we like all these end markets. And there's different characteristics of growth going on in each one. We're going to -- we'd laid some of this out in our December call, and we'll certainly lay this out again in a lot more detail on our Investor Conference. But these are global businesses with diversified end markets. And as I've said before, even in a business like Transportation, there's both fare collection and parking. And in retail, there's, again, 2 or 3 different segments as part of that. So it's not like we're overly reliant on any one kind of market trend.

Operator

Our next question is from Michael Callahan of Topeka Capital Markets.

Michael Callahan - Topeka Capital Markets Inc., Research Division

I guess both of my questions really are around the Aerospace segment. Number one, on the OEM growth rate or really, I guess, the top line growth for rate for the Aerospace segment on the commercial side, it doesn't seem like you're getting that much benefit from higher OEM rates, particularly I guess at Boeing. Can you just speak a little bit to the mix that you guys have there and then why it's not maybe as high as some of the other guys report?

Andrew L. Krawitt

Well, our commercial OEM business is a mix of large transport, business jets and regional. We also have a cabin business. About half of the commercial is large transport-related. And I think that we're -- we are seeing the impact that we would expect, given the build rates on Boeing's major platforms.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. So I guess -- I don't know if you have this kind of detail, but the large transport, is that more like 10% on a -- maybe the regionals are flat to down. Is that what's causing the top line rate? Is that the right way to think about it?

Andrew L. Krawitt

We did see a decline in regional consistent with past trends. We did see regional -- sales to regional manufacturers decline. So we are seeing some softness there. But large transport was -- grew in the quarter.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. And then a little bit on Defense Electronics, I guess. It sounds like you were seeing some slowness in orders, if I heard you correctly at the beginning, throughout the last quarter. Has that accelerated at all? And then really, I guess, what are you hearing from the customers just as, I guess, we kick the can down the road a little bit here, but just as far as order flow so far.

Andrew L. Krawitt

I would say -- I wouldn't say it's accelerating. I'd say it's a continuation of trends that we've been seeing. And as there's been uncertainty -- and it's not just with sequestration. It's just a general -- generally with budget cuts, customers -- some customers have gotten a bit more cautious and delayed some of those orders. I think importantly, we've tended to see orders delayed rather than canceled. So a portion of this is timing-related. And overall, when we look at our Aerospace & Electronics backlog, combined with the orders that we expect to get this year, we think it's supportive of a modest sales increase for that segment in 2013.

Michael Callahan - Topeka Capital Markets Inc., Research Division

Okay. And then just lastly on that topic then, are you seeing maybe smaller quantity than more orders or any change there? And then also, what is the lead time for most of these orders?

Andrew L. Krawitt

I wouldn't say there would be -- there's not really a change towards smaller orders, anything discernible to that degree. And in terms of lead time, I mean, depending on what the product is, I mean, these products in Electronics could be 3 months up to 9 months. I mean, it could be several months.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back over to Richard Koch for closing remarks.

Richard E. Koch

Operator, thank you very much. And thank you all for joining us this morning. We appreciate your support of Crane. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.

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