Crane Co. (NYSE:CR)
February 27, 2013 8:30 am ET
Richard E. Koch - Director of Investor Relations and Corporate Communications
Eric C. Fast - Chief Executive Officer, Director and Member of Executive Committee
Max H. Mitchell - President and Chief Operating Officer
Richard A. Maue - Chief Financial Officer, Vice President of Finance and Principal Accounting Officer
Thomas J. Perlitz - Vice President of Corporate Strategy and Acting President of Aerospace
Robert E. Tavares - Group President of Electronics
Thomas J. Craney - Group President of Engineered Materials
Bradley L. Ellis - Group President of Merchandising Systems
Louis Vernon Pinkham - Group President of Fluid Handling
Clifford Ransom - Ransom Research, Inc.
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
Richard E. Koch
So at this point, let me just briefly overview the day for you. We will begin with Eric Fast, who will give you an overall view of the corporation. Max Mitchell will take you through the kind of an operations and strategic overview. Rich Maue, our CFO, will talk to you about our 2012 and 2013 financial results. And then we'll have division presentations by our division presidents. And so we'll have Tom Perlitz talk about Aerospace. Bob Tavares will talk about the Electronics business. Jeff Craney will talk about Engineering Materials. Brad Ellis, Vending. Kurt Gallo, struggling with a difficult voice this morning, will take us through the Payment Solutions part of the business. And then Louis Pinkham will talk to us about the Fluid Handling business.
We will have a brief Q&A after each of the division presentations. And at the end of the day, Max and Rich and Eric will talk to you about any overall Q&A that you might have.
So we should finish up about noon, and we'll have a break probably in the 9:50 to 10:00 kind of timeframe.
No presentation would be complete without asking you to look at the forward-looking language that accompanies the presentation.
And so at this point, it's my pleasure to introduce you to Eric Fast.
Eric C. Fast
Thank you, Dick. Good morning. Thank you for your interest in Crane Co., coming out on what's a rather miserable morning here. I'd like to first acknowledge -- we have 4 directors of Crane in the audience. I'd like to acknowledge, and maybe you can raise your hand, Dick Forté, Phil Lochner, Gen. Cook and of course, our Chairman, Shell Evans. Where's Shell?
I'd also like to acknowledge and thank Andrew Krawitt. As you know, Andrew has been our co-CFO here for the last 3 years. He's been our Principal Financial Officer. He's -- as you know, he's leaving us to get his Doctorate in Statistics. He's transitioning through the end of May. Many of you, I know, know Andrew and share with us our respect for his integrity, his intellect and his analytical insight. He's just been a terrific member of the team. We very much appreciate what he's done, and we wish him all the best. Frankly, personally, I'm somewhat in awe as I continue to struggle with basic high school calculus myself.
So let me -- I've got a brief 10 minutes -- hopefully, not too much longer than that -- to talk about strategy. But first, I'd like to at least acknowledge that we are -- we did have a record year in 2012 on top of a record year in 2011.
Earnings are up 9% to $3.75 on a GAAP basis. Record operating margin of 13%. Balanced capital deployment, which we've had that discipline for quite some time, I think in addition to the dividend and the stock repurchase. The announcement of the potential acquisition of MEI is really important. Really, a record year in our free cash flow. And I think we were early to reposition our cost base in Europe given those end markets.
Many things have changed in the last 10 years, but the strategy hasn't. Those of you who've been to this meeting, this chart is exactly the same as it was 10 or 11 years ago, except we've just changed the design format of it. And that strategy and execution of that strategy is what's now producing our record results, and we expect again record results in 2013.
Briefly, we consider ourselves a diversified manufacturer of highly engineered products. We focus on niche markets under a couple billion dollars of market, where you're not going to find Siemens or GE because it's too small. Typically, even a sophisticated audience like this can't name our #2 competitor. And we like markets that have a size where a company our size, where we can use our free cash flow and capital to consolidate and become the market leader.
When we become that market leader, that gives us customer intimacy so that we can get our new products right and, hopefully, price leadership. Whenever we can, we try to have proprietary custom technology. We want to be the critical element in a larger system. Brake controls for Boeing are a perfect example. A brake control chip set costs $200,000. The plane costs $200 million. And we have to work every time.
Payment Systems is, while it's not quite as critical, is very similar in that our Payment Systems go in unattended transaction services. Again, critical elements, where we -- our technology is highly valued. And what you see is when we get that right, you start to see the kind of performance out of Crane with very high returns on our capital and free cash flow.
We spend a decade trying to become a more integrated operating company, which through the development of the Crane Business System, and we've only bought companies that strengthen our existing businesses. We have a core value of integrity that I think our employees are proud of, that customers respect and it's done an excellent job of keeping us out of the front pages of the newspapers.
As I said, we worked hard for a decade on becoming a really good operating company. We've developed the Crane Business System, which is all about common processes throughout the company to better enable the leadership to produce consistent results. Those common processes go from strategy, strategy deployment, annual plan, all the way down to when you go in a plan at Crane and box it [ph] to Germany or Bombay, India, or Burbank, California, you'll know it's a Crane plan.
So that's -- those processes focus on materially improving our business by everyone, everywhere, everyday. We think we've created a lot of value for what -- with fancy words, we call strategic linkages. That's a combination of portfolio trimming. If it's small, disparate and we can't leverage it with a whole, we sell it and trim it. And if we've got P&Ls, common P&Ls serving common endmarkets, in Crane, we put them together and merge them. We call that internal mergers. And again, we've only done acquisitions to strengthen our existing businesses.
We feel we're in a unique position today with our manufacturing base. So we've demonstrated that if we can grow core sales that on those core sales, we can leverage it $0.25 on the dollar or 25% operating margin. Now that compares to our record operating margin as a company of 13% this year. So growing organic sales with that 25% will create a constant positive upward pressure on that operating margin end. And the core strategy is to drive those core sales. I should -- we think our manufacturing base is perfectly positioned for this. This is our capacity utilization by plan. As you can see, generally, we're running about 60% capacity. That's 2 shifts, 5 days a week. And what that means is as we can take on this core sales growth, no bricks and mortar. So our capital and our people are all focused on how do we get core growth.
And this slide starts to lay out some of the initiatives that we've done. You don't see it, but, for example, we've reorganized internally all around what we call vertical marketing organizational structure, which is to get dedicated teams focused on these end markets to give us that intimacy. So we've got our fingers on the pulse of those end markets. We're putting every sales person, marketing person and leadership member of Crane to formal sales training. We're putting in a common CRM system throughout the whole company.
In Fluid Handling, we've done a terrific job and made big bets in the emerging markets. That infrastructure is there. Now we're using that infrastructure to drive international expansion for our other business units.
New product development is more focused today than it ever has. But more importantly, we're getting better at it. We have formal stage gate processes that give us -- and combined with our leadership positions, give us a higher degree of comfort that we're going to get those new products right. And we constantly focus on safety, quality, delivery and cost so that we've got superior customer metrics to compete in the marketplace.
And finally, let me just say this. It's amazing how you can get your attention to people with compensation. And we've redone our compensation program from primarily a return on capital to one focused on growth.
So as I said, we think we've created a lot of value with our strategic linkages. We sold 19 businesses over the last decade, 10% of Crane sales, $250 million, generated $0.25 billion of capital. Most importantly, this reduces risk and volatility in the portfolio.
At the same time, you can see we've also done 19 acquisitions. We spent $1.1 billion. The sales of those acquisitions are roughly the same amount. If you think of that in the context of Crane being a $2.6 billion company, and we've only bought businesses that strengthen our existing businesses, in effect, we've doubled our bet and given us a much stronger leadership position in these markets.
Simplify and streamline. 10 years ago, there were 25 different P&Ls at Crane. Today, there's 10. So this has -- this is after 19 divestitures, 19 acquisitions, countless internal mergers. This has given us a fewer number of larger units. It's allowed us to have deeper, stronger management teams with a lot more global sophistication, to focus on growth priorities globally. And when you do a merger, you take out costs. You don't see this from the external world. But believe me, we feel the benefits of this every day below the surface.
I think the announcement of the MEI is a powerful addition and now gives us a third growth platform. We're paying $820 million for this. I think that's -- we think that's a very reasonable multiple when at 9.6x 2012 EBITDA for a company growing sales greater than 10% and an EBITDA margin at 21%. We've got 5 wonderful end markets. We bought the #1 leader in the industry, and we've got synergies that increase over time. You can see how this transforms the portfolio from where we are today to -- this is a pro forma MEI on the right, with Fluid Handling at 43%, Aerospace & Electronics at 24%, Merchandising at 26%. And 74%, 75% of Merchandising becomes the rapidly growing Payment Systems with the high margins. We've got Controls down to 2 Fluid businesses. And we're going to fold both of those businesses into our Fluid Handling, so we're down to 4 segments.
And there are powerful growth -- underlying growth drivers, too. These 3 focuses, you all intimate with the backlogs at Boeing and Airbus, 7 years in commercial aerospace, Fluid Handling, Chemical, Energy demand, driven by the infrastructure build. And obviously cash transactions requiring the need for it as a very high percentage of consumer transactions. Even in the United States it's 37%, requiring the use of our Payment Systems.
We are living in an uncertain environment. And so our guidance for sales is very moderate, 1% to 3% in that uncertain environment. But we do this so that we properly structure our cost to be successful in a difficult environment. I didn't want to get into the year and have to worry about my cost base in April because sales went down. And the key here is that even with this modest sales growth, we're going to grow operating margin by 130 basis points. So we expect to do an operating margin of 14.3% this year. That's on top of a record -- all-time record of 13% in 2012 and 12.3% in 2011. And we believe that this demonstrates not only a successful strategy but a successful execution on the strategy that we've done, providing these, again, record results in a difficult environment. And we feel that it starts to give the outside world some insight into just how much we've transformed the existing portfolio through the acquisitions, the divestitures, the internal mergers and importantly, a decade of every day, everyone working to materially improve our businesses. And we think that the quality of this portfolio is able to provide these results.
So keep in mind in that 14.3%, 130-basis-point improvement in margin is coming from the existing portfolio. So that does not yet include the positive portfolio impacts from the MEI acquisition.
And with that, I'll hand the podium over to Max Mitchell, our President and Chief Operating Officer. Thank you.
Max H. Mitchell
Good morning, everyone. Thank you, Eric. Thank you for joining us today and for your interest in Crane. My name is Max Mitchell. I'm the President and Chief Operating Officer. A number of new faces in the audience today, I look forward to meeting you at break and after the conference as well.
As Eric highlighted, we're proud of our continued record performance as we stay focused on our core strategy to drive sustainable value. We are positioned to drive enhanced margin -- leverage as we do not need additional capacity to support our growth, as Eric mentioned. While Eric briefly described the pending MEI acquisition, I would like to provide you with a more detailed overview and update you on the strategic fit and the state of the transaction.
I'm now going to expand on Eric's remarks on value creation opportunities and why we believe Crane remains a solid investment. Then I will briefly touch on our outlook for 2013 and finish up with a few remarks about each of the businesses.
This is an exciting time at Crane, and as we approach our third consecutive year of record earnings from our existing portfolio of businesses, coupled with the challenge and opportunity that comes from integrating MEI, the largest acquisition in Crane's history, and realizing the future potential of the combined entity.
We view MEI as a great strategic fit with Crane's existing Payment Solutions business. Our customers value the highly engineered solutions in these critical applications and end markets where speed, accuracy, reliability and cost need to be targeted to provide the optimum level of service and benefit to the end user.
We both play in the same 5 key end markets, which have broad-based global position and growth. In the retail market, think of self-checkout machines at your grocery store. Our customer base includes leading companies like NCR, Toshiba, Fujitsu who, as OEMs, sell to major retailers.
In gaming, we view this as having primarily 2 submarkets that are about the same size: traditional casinos, where MEI is strong; and the space, which is characterized by required regulatory approvals that can be difficult to penetrate. And in Europe, with what is commonly referred to as AWP, or amusement with price, where we have a strong position and is characterized by highly legislated environments.
In the transportation segment, there are 2 primary subsegments: fare collection for subways and rail systems, in which cash and coin deposits generate the travel ticket; and on-street off-street parking, where collection is used to pay for parking time. MEI tends to be stronger in fare collection, and Crane in parking.
The financial services payment market is particularly exciting from a growth standpoint, in emerging and rapidly growing markets like China, Russia, India that have large unbanked populations that use cash at payment kiosks to pay bills for everything from utilities to mobile phones. We see the markets just mentioned as growing faster than GDP and on a global basis, sustaining mid to high-single digit compound average growth rates.
And lastly, vending, in which MEI is very strong, with Coke and Pepsi and the global bottling organizations, and Crane, which is strong in North America with full-line operators.
So we're in the same spaces in exciting markets and with complementary positions that we will benefit -- that will benefit our customers with full competitive solutions as I would generally note that MEI has greater strength in bill validation and Crane has had greater historic strength in coins.
I'd like to take a minute to discuss Crane's Payments Solution existing business and how we've built this up over time. We've been in the Payments business since 1985, when we purchased UniDynamics, which included a European coin business called NRI. Over time, as part of our Merchandising group, we felt that we either needed to build out this business or exit it. We decided that we liked the characteristics of the business as it fits our strategic corporate objectives, and we wanted to grow it through acquisition to achieve an important position in the marketplace.
In 2006, we were able to buy a very high-quality bill business called CashCode. This was important because it added our first presence into bill validation, as well as existing coin for complete Payment Systems solutions. Immediately following that, we were given the opportunity to buy Telequip, which was primarily a U.S. coin dispensing business.
And then in 2010, our most recent acquisition was Money Controls, which broadened and strengthened us both in bills and coins. Since 2006, we have invested over $220 million to build this business.
Crane Merchandising System segment had $372 million in sales in 2012, of which 47% was from Crane Payment Solutions and 53% from Vending Solutions. If you pro forma the roughly $400 million sales of MEI, you'll see that this segment now becomes 74% Payment Solutions, which becomes the bulk of the segment, giving us a total sales of $771 million and creating another higher growth platform for Crane.
Our financial targets for the pending MEI acquisition remains unchanged from what we've previously communicated. Excluding inventory step-up impact and one-time transaction costs, we would expect accretion in the first year of $0.25. This is in the first full year of the acquisition post the close. About $0.05 of that is from synergies, which we think is a conservative number. We expect to reach $25 million of pretax annual synergies by 2015.
In terms of the closing and the regulatory approval process, we're making 3 antitrust filings, and the process is moving along as expected at this point in time. We're moving forward toward an expected closing later in the second quarter, and we've been moving aggressively with integration planning activities.
While MEI and Crane Payment Solutions businesses are being run separately until closing and are still acting fully as competitors in the marketplace. We've had several closed signing integration planning meetings with senior Crane and MEI executives. Our goal is to be ready to go as soon as we close to put our integration actions into effect, and realize the synergy savings and growth opportunities that are available to us.
We are well on our way to identifying our targeted synergy opportunities and in planning a smooth integration transition. We are very pleased that Mike Hayes, President of MEI, has agreed to remain on and run the new entity, reporting directly to me. And we will be able to leverage the best of both MEI and Crane cultures.
I'm also very pleased that Kurt Gallo, President of Crane Payment Systems, who you will hear from later today, will take on the role of Chief Operating Officer, heading up our integration efforts.
As a diversified industrial company, I'd like to take a few minutes to elaborate on why Crane remains an exciting investment opportunity and the synergies that are brought about as an integrated operating company, even with businesses in such seemingly disparate end markets.
As Eric mentioned, there are 4 key critical characteristics we think of when -- regarding shareholder value creation for our customers and shareholders. We have carefully continued to focus our portfolio over time and as we move forward. We target and participate in niche markets, generally below $3 billion in market size, in which we can have strong share positions with highly engineered solutions to challenging customer needs.
As a diversified manufacturer, we are able to leverage our integrated operating company under the structure and discipline of the Crane business system, along with global scale and infrastructure investments, which lay the foundation for superior performance.
When the acquisition of MEI is complete, Crane will have 3 large higher-growth platforms where we are clearly recognized as a global provider of critical components and solutions. Our strong technology, coupled with our strong overall value prop, enables us to earn a very attractive margins, and those margins provide us with strong free cash flow. In 2012, our free cash flow was a record $205 million.
As you can see in 3 of our 4 businesses, we are participating in markets that are less than $3 billion. While the Fluid Handling market is much larger and fragmented, there are really only a handful of recognized global leaders with valve sales in excess of $1 billion who offer their products on a global basis.
And the individual solutions in the serve spaces we play are generally under $3 billion target market, and we maintain high brand awareness and position.
As a company that was founded in 1855 and has grown over the past 158 years in part due to acquisitions, we have many well-recognized and highly regarded brands, along with a comprehensive value proposition that have helped us build strong market share positions now and into the future.
These are just a few illustrations of the highly engineered and complex customer solutions that we provide at Crane. In our Aerospace & Electronics segment, we provide solutions such as lubrication and scavenge pumps for the Pratt & Whitney A320neo engine. We make highly sophisticated braking control systems for numerous commercial and military aircraft and create components that form high-precision microwave radar beams.
Our strong, lightweight fiberglass reinforced plastic is made on highly specialized equipment, where process and formula technology is a key differentiator to us for our customers.
In our Merchandising Systems business, you will hear how later, how we continue to lead the transformation of this business from a pure vending machine provider to a technology integrator, with solutions to our customers such as Software as a Service, cashless payment solutions, to branding and advertising revenue streams.
In Fluid Handling, we continue to provide highly-specific customer solutions in demanding chemical and energy applications and processes that grow more demanding in terms of pressure, temperature and emissions.
And our strong brands and technical solutions allow our businesses to continue to provide us with leading market share positions across our platforms.
Our portfolio of companies also provides us a good balance in our revenues, with about 70% of our sales coming from OEM and the remainder from aftermarket. As with many companies, our aftermarket revenues normally have higher margins associated with them.
We also have a balance in the end market cycles, and our long cycle revenues have remained relatively stable, at around 60% of our total sales. This balance helps us mute volatility over the cycle, helping provide consistent and repeatable results.
Our global sales footprint has continued to grow over time, with added investment in high-growth market infrastructure and resources and through focused portfolio acquisitions.
Upon completion of the MEI acquisition, our Rest of the World sales will increase as a percentage of the total, primarily reflecting MEI's sales in Japan while maintaining emerging markets sales of 14% or approximately $420 million on a pro forma basis.
I'm particularly pleased with our efforts in targeted emerging market opportunities in 2012.
In the Middle East, Crane will be supplying a range of high-pressure valves to the Barwa Financial District in Doha, Qatar. The project will consist of 9 high-quality building towers ranging from 21 to 52 stories in height. Qatar's market growth rate has been over 12% since 2010 and is expected to continue.
In 2012, the Meed Trading Company, a subsidiary of the Saudi-based Mawarid Group, and Crane Merchandising Systems signed an agreement making Meed the sole distributor for Crane vending machines in Saudi Arabia. Meed will be installing state-of-the-art Crane wirelessly enabled vending machines outside of many of its 325 convenience stores. It also plans to develop the market for vending machines in schools and hospitals. Over 1,000 machines were shipped in 2012 to Saudi Arabia, with more orders pending.
In India, throughout the region, our bill and coin dispensing components are being used in terminals for fare collection. We recently had our first major project win for Viking Johnson flange adaptor couplings in India. The project market in India for water couplings is expected to grow over the next 5 years by 9% per year, as water efficiency in piping systems grows even more critical in delivery.
And Crane is supplying valves to the AP1000 Westinghouse nuclear power plant in China, 2 million of content per plant. And the balance of our valve sales in China have been growing nicely there, with our total Fluid Handling sales doubling from 2008 to 2012.
We're very excited to participate in the emerging China commercial aircraft market, where local development and demand is rapidly growing, and Crane is well positioned to participate in this growth.
Our Aerospace group won the brake controls and the door processing for COMAC 919. And our Electronics Group won a sole-source life-of-program contract with Honeywell to provide the power conditioning module for the 919. These contracts and others we have won in China will provide for engineering development over the next 2 years, with initial production expected in 2016 to 2017.
It's presently estimated that the value of the Aerospace & Electronics sales for aircraft to be built in China after 2015 over the expected life of those programs is estimated to be nearing approximately $1 billion in revenue over 20 years for Crane. It's completely new business for us and not in the P&L today, all great examples of how Crane is bringing solutions to our customers' demanding needs in emerging markets.
And regardless of the platform or geography, there's a commonality in our solutions across Crane that's driving our technical advances to our customers, reducing weight and size as an important trend to many of our customers. Our state-of-the-art brake control systems reduce the weight of the Boeing 787 by 200 pounds per plane. It provides fuel savings over the 20-year life of the aircraft.
The defense industry requires integration technology to fit highly complex circuits in smaller spaces with higher power efficiency.
Ocean-going containers, made with Crane fiberglass reinforced panels offer weight savings, increased payloads and reduced fuel consumption, with both the shipping lines and even the truck lines that deliver the containers to specific sites.
Many customers are concerned about efficiency, environmental concerns, and we address these needs at a number of products. Crane's new global line ball valve reduces fugitive emissions from valves, controlling hazardous substances. Our GreenGuard certified decorative wall panels are environmentally friendly. SmartStem Tire Pressure for aircraft saves time, increases tire life, improves safety. Just a few examples of how Crane supports these common trends across all of our solutions.
Now let me provide a brief overview of each of our business segments. As Eric mentioned also, Crane now has 4 business segments, and over the past few years, we've created an end market vertical structure within these to focus on our key markets and customers. We believe this has gotten us closer to the customer, has contributed to market share gains and provided greater focus to our new product development activities.
We've transformed our mindset over the past decade from being a seller of just products to market and customer-driven focused enterprise, and the results of this shift are reading through.
As described, projected sales in '13 of 1% to 3%, being cautious in terms of the economic outlook notwithstanding the sluggish global economy, we expect to grow our earnings per share at 11% to 16% compared to 2012 to record operating profit margin of 14.3%.
The implied operating profit leverage of 80% is driven by core growth, strong productivity measures, the freeze of our U.S. defined-benefit plan and the repositioning actions that we took in 2012.
And I would remind you that our 2013 guidance does not include any impacts from the pending MEI acquisition, and Rich Maue will give more color on this, on '12 and '13 following me.
Over the past 4 years, we've seen significant improvement in our Aerospace & Electronics segment sales and operating profit. We are forecasting further gains in 2013, with operating margin estimated to be 23%. Both our Aerospace & Electronics groups benefit from leadership positions in niche markets. Our Aerospace business has a significant OEM backlog position with an attractive aftermarket business. Tom Perlitz will provide additional insight in a few minutes.
In our Electronics group, approximately 2/3 of our sales are defense-related and 1/3 commercial. We're expecting growth in both defense and commercial sales in 2013, with defense sales improving from intelligence surveillance and reconnaissance and commercial sales increasing from commercial aircraft market. Bob Tavares will talk further about our strength in ISR shortly, as well.
In Engineered Materials, a wonderful niche business, where we have high market share in North America created by superior technology and excellent end market and customer focus. With our end markets remaining quite flat for several years, the only minor growth we expect in 2013, although RV is showing some upside strength, we continue with an intense focus on our productivity and cost yield. We continue with our effort called pound-based yield that seeks to improve material utilization in a business where material costs are typically about 50% of sales.
In addition, in 2012, we shut down a plant in Alton, England that was small and uneconomical. It's part of our repositioning actions that we're primarily focused on Europe.
We're continuing our new product development activities, focused on improving our market share and increasing our content per unit. And Jeff Craney will provide additional details later this morning.
Merchandising Systems segment is another strong niche business for us, and we have market leadership positions in both Vending and Payment Solutions. The path to improve financial performance in Merchandising has similar characteristics to our Engineered Materials segment, and the sales have been fairly flat over the past 2 years. And improvement in 2013 is expected to be modest, so productivity and cost management are key drivers.
Brad Ellis and Kurt Gallo will have additional information on the developments in both Vending and the Payment portions of our business.
Our Fluid Handling segment, which now includes 2 businesses that were formerly in the Controls segment, comprises 50% of Crane's annual sales. Since 2009, sales have grown at 5% per year. Operating profit has increased at 9% per year, and operating margin has increased 140 basis points, excluding special items. We're expecting further growth of sales operating profit and margins in 2013. This progress reflects positive market growth, certain market share gains, new products, improved execution, productivity and disciplined cost management.
Those who have followed Crane for some time know that in 2005, Fluid Handling's operating profit margin was 8%. Significant progress has been made over the years to increase margins to 13.5% in 2012. We've reduced our manufacturing footprint over the past 10 years, including shutting 3 large foundries and moving to low-cost country manufacturing where possible. In 2012, we took significant repositioning actions, primarily to address issues in Europe, resulting in an expected $10 million increase in our operating profit in 2013.
Louis Pinkham, our new Group President of Fluid Handling, who replaced me in the role, will have details on this later in the morning.
And no presentation will be complete without talking about the power of our Crane Business System that we deploy across our entire company. We believe we have a state-of-the-art business system that includes the best of Lean Six Sigma, intellectual capital, strategy deployment that we leverage across our businesses. We know that our holistic management system drives results, and during the course of today's presentations, you will see examples of the progress we continue to make.
It starts at the top and it takes full leadership to support. And believe me, at Crane, we walk the talk through all ranks of the organization. You'll hear more examples of our Crane Business System deployment in the business presentations that follow.
So let me summarize my remarks today by repeating again that Crane is positioned with a strong portfolio of businesses, positions us well for future growth of sales and profits and shareholder value. The portfolio has been carefully shaped and focused in select niche markets. Through technology engineering and marketing, we have created excellent value propositions for our customers, resulting in strong market shares. And we have made the investment to compete on a global scale. We have developed an excellent business system. We leverage across Crane as an integrated operating company, and it drives us toward excellence in all we do based on a culture of values, strong ethics and continuous improvement. Taken together, we are confident we can achieve solid EPS growth generated by share gains and productivity even in a generally slow but positive global economy.
And finally, we are excited about the prospects of MEI, and our integration planning process that's well underway, identifying synergies so that we're ready on Day 1 after closing to realize the full potential of this acquisition.
So before I introduce Rich Maue, I would like to just highlight there's a number of new speakers this year, for those of you that have attended our presentations in the past, and we'd like to introduce our speakers.
Crane has a wonderful executive pool of talent and long-term employees, some I'm very, very proud of. Some are in the back of the room today. Representing Fluid Handling, Tom Frazer, the head of our Crane Supply business, well over 30 years. Elise Kopczick, our Corporate VP of HR, over 30 years with Crane. So Crane has this wonderful blend of both long-term tenured talent that understands the industry, understands our customer base and customer intimacy, coupled with newer executives that we have brought in over the years, including some that have been part of this transition like Tom Pozda, who's heading up our ChemPharma and Energy group. And I apologize to everyone else that I'm not going to mention today.
But I would like to just go through quickly in terms of our speakers. Rich Maue is going to follow me. Rich was just recently named Vice President and Chief Financial Officer. And Rich joined Crane as Vice President, Controller, in August of 2007. In May 2010, Rich's responsibilities were expanded to include oversight of tax, environmental health and safety, real estate acquisition, due diligence. And in December 2011, with the promotion of other financial -- other finance personnel, Rich's title changed to Vice President and Principal Accounting Officer.
Prior to joining Crane, Rich worked at Paxar Corporation as Vice President, Controller and Chief Accounting Officer. And prior to Paxar, Rich worked at Protiviti as Director of Internal Audit Practice, and started his career with Arthur Andersen.
Tom Perlitz is going to be presenting Aerospace for us. There was a bit of change. Dave Bender, who was running our Electronics group -- later took over Aerospace -- decided to leave for other opportunities in January of this year. We have a present search underway. We've got a very strong tenured group within Aerospace that continues. But I'm very pleased to have Tom Perlitz acting as President full-time in the interim of the Aerospace group. Tom has been an officer of Crane for 7.5 years, most recently served as President of the Controls group until it merged into Fluid Handling at the end of 2012. Tom also serves as the Vice President of Corporate Strategy and previously of the Crane Business System.
Prior to Crane, Tom spent 10 years with Danaher in the dental division, fluid instruments and controls and [indiscernible] brake and various commercial operational and general management roles after he achieved his MBA from Harvard. So Tom will be presenting to us shortly.
In Electronics, a new presenter this year, who I'm pleased to have joined us, or should I say rejoined Crane, Bob Tavares, in March of 2012, just shortly after our last Investor Day. Bob was our Vice President and General Manager of the Microwave portion of our Electronics group for over a year before being recruited to ev2 (sic) [e2v] as President of North America. I was very pleased to re-recruit Bob back into Crane and welcome his expertise, technical knowledge and strategic, as well as commercial vision in guiding our Electronics group as President. Bob comes to us with an extensive background in the microwave electronics and defense industry. After achieving his BS in Engineering from the University of Massachusetts Darthmouth, Bob joined M/A-Com as a design and development engineer. From '91 to 2008, bob held successive promotional roles with his Tyco subsidiary, from engineering management to product management to general management, eventually overseeing the entire $320 million in revenue for the M/A-Com division, which is an RF microwave semiconductor and components subsystems provider. So I'm really pleased to have Bob with us today to present to you.
Jeff Craney, who you've had the pleasure of presenting -- haven't been presented to in the past, President of Engineered Materials, joined in May of 2007. Prior to Crane, Jeff held a broad and a seasoned career with Owens Corning, where he held responsible roles in operation sales, customer service, Vice President, and General Manager of a $500 million commercial and industrial insulation, business, and in his last role, running with a $1.9 billion of North American sales team.
So a lot of a fantastic industry-specific experience.
Brad Ellis will be presenting, who we're all very familiar with. He joined Crane in '97. Brad has held roles from our Chief Information Officer to the Crane Business System to Merchandising. And he's been instrumental in helping us continue to build our Merchandising platform to what it is today.
Kurt Gallo joined Crane, who is the President of Payment Systems. He joined in April 2008. Kurt brings to Crane a broad experience of both business and management sales experience. Prior to joining Crane, Kurt spent 10 years with Danaher, where he held progressively larger roles in 3 of Danaher's businesses as Company President. He started his career in American Power Conversion.
And our last presenter is Louis Pinkham. I'd like to introduce Louis. Louis has the 5 businesses in Fluid Handling reporting to him, plus the 3 Regional Presidents in China, Middle East and India. Louis joins us from the Eaton Corporation, where his last role as Senior Vice President and General Manager of the Critical Power Solutions division. Additional roles he held at Eaton were Vice President and General Manager of Low Voltage Components. He's held roles in Shanghai as well as Switzerland. Has fantastic global experience.
Prior to joining Eaton, Louis held engineering and quality management positions at ITT Sherotec Division, responsible for biopharm skid manufacturing and is a process design and development engineer with Molecular Biosystems.
Louis holds a Bachelor of Science in Engineering from Duke, majoring in Biomedical Engineering and specializing in Mechanical and Electrical Engineering. And he also holds a dual MBA and Masters in Engineering from Northwestern's Kellogg and McCormick Schools. So I'm very, very pleased to have Louis join the Crane team, and you'll be hearing from him.
So at this time, with no further delay, I will introduce Rich Maue, who will give us a little deeper dive on '12 and '13.
Richard A. Maue
Thanks, Max. Good morning, everyone, and welcome to Crane's 2013 Investor Day Conference. Again, my name is Rich Maue, and I'm Crane's Chief Financial Officer.
Today, I'll briefly cover our 2012 operating results as well as highlight key elements of our guidance for 2013.
From a GAAP perspective first, for 2011 and for 2012, we've reported earnings per share of $0.44 and $3.72 per share, respectively. However, these results were impacted by a number of special items in both years. Specifically special items in 2011 included a charge associated with extending our asbestos liability to cover claims filed through 2021. And we also recorded a charge related to additional remediation activities at our legacy environmental site.
In 2012, we recorded $0.29 per share of charges related to repositioning actions that both Max and Eric mentioned, primarily to address continued market softness that we saw in Europe. We also recorded $0.07 per share in connection with costs associated with the pending acquisition of MEI.
And lastly, we recorded a gain of $0.33 per share in 2012 related to the divestitures of 2 small businesses in our Controls and Fluid Handling businesses.
So after special items, 2012 was our second record consecutive year of performance, both from an earnings and margin perspective. Our sales in 2012 were up 3% overall, and we delivered 4% of core growth, in what proved to be a challenging economic environment as we did close out the year.
Our operating profit increased by 9%, and our operating profit margin improved 70 basis points to 13 points, which followed a 130-basis-point improvement that we realized in 2011 when compared to 2012.
We delivered earnings per share of $3.75, which reflected a 9% improvement over last year. And on a continuing operations basis, EPS improved 10% to $3.70 per share.
These results excluded the anticipated benefit of the R&D tax credit, which passed into law in the first week of January. This would've provided an incremental $0.05 per share benefit in 2012.
From a cash flow perspective, we generated an increase of $85 million in cash flow from operations before asbestos when compared to 2011. I would point out that in 2011, pension payments were $43 million higher than 2012, which included a $30 million discretionary pension contribution. Excluding the difference in the pension contributions, our year-over-year growth was about 15%, which exceeded our expectations and was driven largely by working capital performance.
Our asbestos-related payments were generally stable. Our capital expenditures were down slightly. And our resulting free cash flow before dividends was $205 million, which again represented a record performance for Crane.
Our margin improvement over the last couple of years and our objectives for margin improvement going forward reflect in part our very prescriptive approach to productivity. Our approach is grounded in a strategic objective to achieve double-digit EPS growth year-over-year.
This mindset did lead to the repositioning initiatives that we completed during the second half of 2012, which was focused, again, on improving our cost structure in certain European locations, primarily within our Fluid Handling business.
From a tactical perspective, we view productivity as a means to fund growth investments that we make year-over-year within our businesses. This enables us to deliver at least 25% operating profit leverage on every incremental sales dollar, as Eric referenced earlier in the presentation.
Our approach requires that improvements must come from every area in the business, from manufacturing activities to our selling and administrative activities, as well as our engineering activities. Very important is that our approach here is a continuous process that we monitor and report out on a monthly basis, not only the results that we achieved in a particular month but what our expectations are for the businesses moving forward.
So in summary, we had a record year overall, with EPS, operating profit margin and cash flow reaching all-time highs for Crane. We maintained our balanced capital deployment strategy, which included the announcement of the pending acquisition of MEI, providing that third large growth platform for the company; the divestiture of 2 small nonstrategic businesses and folding the remaining Controls business into our Fluid Handling segment; raising our quarterly dividend 8% to $0.28 per share, as well as completing $50 million of share repurchases, which more than offset the dilutive impact of stock-based compensation.
And lastly, again, we completed the repositioning actions during the second half to support continued margin expansion as we think about 2013.
So getting into 2013 and before getting into the details, specifically and to highlight a schedule here that Eric put up in front of you a few moments ago, I'd like to provide some perspective on the path that we've been on from both a growth and margin perspective.
You can see the downturn that we experienced back in 2009 from a revenue point of view and the path to get back to the 2007 sales level. As you can see, the power of the cost takeout on the right side, and the focus on productivity reaped through our operating results.
Our margin was 11.2% in 2007. And in 2012, on roughly the same sales, we generated OP margins of 13% or a 180-basis-point improvement. And as you can see, this year, we're expecting over 14% in operating profit margin.
Getting into the details of our guidance, we are expecting our third consecutive year of record earnings in 2013, with EPS in the range of $4.10 to $4.30 per share. And as Max mentioned earlier, our guidance does not reflect the impact of the pending acquisition of MEI.
We do remain cautious on the global economy, and we expect -- we reflect that caution in our 1% to 3% guidance that we provided on core growth. This is consistent with our communication back in January.
We expect slow growth in developed countries, including a continued depressed European marketplace in particular and while a higher and more tempered outlook for growth in the emerging regions. Our Sales guidance reflects the combination of the underlying growth in those markets, as well as our ability to gain share and some price in those same markets.
Importantly, we expect continued operating profit margin expansion, as I've already stated, targeting a 130-basis-point improvement over 2012. We expect to drive that improvement through strong volume leverage, achieving our previously stated savings from our European repositioning initiatives and the impact of our decision to freeze our U.S. defined benefit plan.
Our assumption for the tax rate is 30%, reflecting the added benefit of the R&D tax credit that passed into law in January, offset by the impact of a mix -- unfavorable mix of earnings that we see in European markets. From a free cash flow perspective, we expect to be in the range of $190 million to $220 million, reflecting strong conversion of operating performance, partially offset by higher pension contributions, as well as pre-close transaction costs associated with the acquisition of MEI.
Overall, we're not forecasting any significant impact from foreign exchange. Accordingly, our top line guidance of 1% to 3% or core sales of $50 million is entirely attributable to core sales growth. From a sales guidance perspective by business, you can see our midpoint of 2% is generally shared across our segments, but each having their own unique facts, which you'll hear about from our presidents as we move through the day. By way of example, in our Aerospace Group, while we expect continued strong growth in large commercial transport, we have headwinds related to the completion of 2 critical military MNU programs that we enjoyed in 2012. Tom Perlitz will cover this in greater detail during his presentation.
Also by way of an example, in Engineering Materials, while we had a solid year on our RV business, our sales were down slightly in 2012, reflecting challenging end markets in both our building materials and transportation businesses.
In 2013, we see continued strength in our RV business and a gradual improvement in our building materials and markets.
In our Merchandising Systems segment, we expect continued growth in our Payment Solutions business, which Kurt Gallo will reference later in his presentation, through share gain initiatives driven largely by new products. And while we're excited about the long-term prospects in vending, we see continued challenges in that market space, particularly in Europe.
Lastly in Fluid Handling, we see relatively flat market growth compared to 2012, with continued concerns again around Europe. But we expect continued progress and share gain initiatives by sales execution across our vertical markets, and again, our new President of Fluid Handling, Louis Pinkham, will share some of the progress that we continue to see.
With respect to operating profit, to reiterate, we have an underlying goal of achieving double-digit EPS growth on a year-over-year basis. This is something that our senior management team is passionate about and committed to delivering. We continue to drive our approach to productivity as we developed our 2013 operating plans. Not only is it funding the investments across the business, but it is driving incremental margin expansion, and so it inspired our core operating leverage rate of at least 25%.
During 2012, we initiated a process that resulted in the repositioning actions that we previously discussed, all designed to ensure that we deliver improvement in 2013. We expect this to drive $12 million in incremental benefit in 2013.
Also driven by our productivity mindset, we will generate a $15 million benefit in 2013 from the decision that we took at the end of '12 to freeze the benefits associated with our U.S. pension plan.
So overall, we expect a 12% increase in operating profit, resulting in a record 14.3% operating margin performance in 2013.
When looking at operating profit by segment, and you can see the growth from $335 million to $375 million in total on this chart, you can see the vast majority of the improvement is coming from our Aerospace & Electronics segment and our Fluid Handling segment. These 2 segments contributed about 80% of operating profit in each of the last 2 years, and we expect that same trend to continue in 2013.
I'd like to highlight the notable improvements in our Engineering Materials and Merchandising Systems segments, where our operating profit growth is expected to far exceed historical levels. You'll hear later about -- from the teams about how they continue to drive productivity, and as a result, position both of these platforms to capitalize on the continued recovery that we're expecting to see in North America.
We expect significant operating margin expansion in all of our segments in 2013, driving a 130-basis point year-over-year improvement. We're pleased with what we have accomplished so far, and we're excited about what we believe we can still accomplish moving forward.
From a cash flow perspective, cash flow provided by operating activities is expected to be down a bit in 2012, driven by an $11 million increase in pension contributions, together with incremental payments associated with pre-closed costs associated with the pending acquisition of MEI.
Excluding these differences, our cash provided from operations would approximate the expected growth in earnings and the continued strong working capital focus that we have.
We see a modest improvement in asbestos-related payments, which I'll speak to in a minute, and capital expenditures are planned to increase modestly to support all of our key growth initiatives.
In total, we expect free cash flow to be in a range of $190 million to $220 million.
With respect to asbestos, we generally expect those payments on an after insurance after-tax basis to be between $40 million and $50 million per year. In 2013, we expect it to be about $46 million as we have slightly higher insurance receipts this year.
Importantly, as you can see from the dark green area at the bottom of this chart, the cash flow related to our asbestos payments is a relatively small portion of our overall free cash flow, which leaves us with ample cash flow to fund all of our growth initiatives, including acquisitions.
We have a very strong balance sheet and access to capital. We ended the year with $424 million in cash, and we have access to a $300 million revolving credit facility.
As a reminder, we have $400 million of outstanding debt, $200 million, which is due in the third quarter of this year and $200 million, which is due in 2036.
In that regard, in December, we obtained $600 million of bank loan commitments in support of the acquisition and the intent to refinance our long-term debt. The commitment supported a $200 million expansion of our current multiyear facility and an additional $400 million 364-day credit facility.
Subsequent to the transaction, we expect to term out a significant portion of the outstanding borrowings under that facility.
Importantly, we'll be using approximately $250 million of existing cash balances that Crane has, including over 2/3 of International cash, which together with our bank commitments, to acquire MEI. And moving forward, we expect to repay approximately $100 million of debt annually.
As we previously communicated, we're committed to our investment grade rating. Subsequent to the announcement of the transaction in December, both Moody's and S&P confirmed their current credit ratings with Crane given both the strength of our existing strong balance sheet, our expected strong free cash flow on a standalone basis and stronger free cash flow on a combined basis with MEI.
We believe in a balanced capital deployment strategy, as Eric outlined earlier. First, we want to make the internal investments to drive organic growth. And we've stayed on the offense in that regard as you've heard from both Max and Eric. And we seek to fund those investments with our disciplined approach to productivity. Acquisitions remain a very essential part of our strategy, and while we'll be focused on MEI in the near-term, this will continue to be an area of focus as we move forward.
We believe in an attractive dividend yield relative to our peers and we make share repurchases mainly to offset the impact of stock-based plan dilution. And we're committed to meeting the obligations of our pension plan.
We expect capital expenditures to grow modestly from about $30 million in 2012 to $35 million in 2013. These expenditures are primarily related to profitable growth initiatives, including new product development and productivity improvements overall.
Reinforcing an important point that Eric made earlier, our investments here leverage our existing facilities. So we have no significant bricks-and-mortar investments in our plan in pursuit of our near-term growth initiatives.
This chart shows our history of raising dividends from $0.10 per share back in 2004 to a quarterly dividend of $0.28 in 2012. Our
dividend payout ratio is 28%, and this is in a range that we feel comfortable, and our yield is at 2.1%.
We make share purchases again to offset the impact of stock plan dilution. From 2009 through 2012, our share repurchases have actually exceeded that dilution.
With respect to our pension plans, the aggregate funded status deteriorated in 2012, as it did for many companies.
When we look at the funded status of our plans where liabilities are greater than our assets, the underfunded position is about $223 million, which we believe is very manageable in the context of the size of Crane.
We expect pension expense to decrease by $15 million in 2013, primarily reflecting our decision to freeze the benefits associated with our U.S. pension plan. And as I stated earlier, cash contributions or payments to our pension plans in 2013 are expected to be about $11 million higher, but also very manageable.
So in summary, we do have and remain with a cautious outlook on the global economy, but we're excited about where our portfolio is positioned. We're passionate about delivering a strong year-over-year EPS improvement, leveraging existing facilities and our strong approach to productivity, and overall, we expect to deliver what we believe will be another record year for our shareholders.
With that, it's my pleasure to introduce our Vice President of Corporate Strategy, Tom Perlitz, who is currently our acting President of the Crane Aerospace Group. Tom?
Thomas J. Perlitz
Good morning. And thank you to Rich and Max. I am Tom Perlitz, the acting President of Crane Aerospace. I'll be presenting Aerospace Group results and our focus going forward in 2013. The first few introductory charts will refer to both Aerospace & Electronics Groups because we report as a single entity in Crane.
The Aerospace & Electronics segment had record sales of $701 million in 2012 and contributed significantly to overall Crane profitability, delivering $156 million in operating profit in 2012. Bob Tavares, Group President of Electronics, will be presenting the Electronics Group results and outlook.
The Aerospace Group is known for providing critical systems for tough environments, such as the harsh conditions found in aircraft engines and landing gear. We have 4 main product solutions, Landing, Sensing and Utility, Fluid Management and Cabin Systems. The Electronics Group consists of the Power, Microwave and Microelectronic solutions that Bob will cover.
Crane Aerospace & Electronics has a rich brand heritage that goes back to the early 1900s. Each of the brands is proven in the marketplace, are recognized globally and maintain a large market share in the niche markets in which we serve.
You can see in this chart that the Aerospace Group makes up 62% of segment sales, while the Electronics Group represents 38%.
The Aerospace Group is predominantly a commercial Aerospace business, while the Electronics Group is more heavily aligned with the defense market.
Together, we are split about 60-40, commercial and defense, which provides a very balanced mix and enables us to more easily weather market conditions.
Crane Aerospace & Electronics is a global enterprise with locations strategically placed near our key customers. The Aerospace Group has 4 manufacturing sites: Burbank, California; Lynnwood, Washington; Lyon, France and Elyria, Ohio. We also have several engineering sales offices including one in Wichita near Cessna, one in Filton, U.K. close to Airbus and one in Shanghai to align with COMAC. We also have resources and leverage our Crane emerging market offices in Dubai; Pune, India and Beijing.
As I mentioned, the Aerospace Group organizes its products into 4 solutions: Landing Systems is made up of predominantly our brake control systems, which fly in all Boeing commercial aircraft in operation today. Our Sensing and Utility Systems solution includes our proximity sensors and control boxes, which are used to monitor and control landing gear, passenger doors and flight controls.
Also a part of this solution is the SmartStem Wireless Tire Pressure Measurement System, which is standard equipment on the Boeing 777 and 787, as well as a number of business jets.
Our Fluid Management Solution includes engine lubrication pumps, as well as fuel pumps and fuel flow meters.
And finally, our cabin solution provides seat actuation systems, from the recline controls used in economy class seating to the more complex Power seat actuation and lumbar support systems used in the premium seats found in the business and first-class cabins.
We have a global customer base made up of virtually every major aircraft and engine manufacturer, as well as every major Tier 1 integrator and seat manufacturer.
We also have a large aftermarket base, including many of the leading global airlines, as well as the U.S. Air Force and Navy.
As you can see, Aerospace Group sales have grown consistently over the past 4 years to a record of $437 million in 2012. In 2013, we're estimating another record year with sales of $445 million. The combined Aerospace & Electronics operating margin has also increased significantly over the past 4 years from just 14.4% in 2009 to over 22% in 2012, and we're planning for continued margin improvement in 2013.
We look at our business from several perspectives. The top chart shows our OEM sales to various commercial segments. Here, you can see that the sales for large commercial transport make up over half of our revenue. Other important commercial segments include business jets, cabin and regional jets.
Another way of looking at the business is OEM compared to aftermarket, which is 59% to 41%.
Here, we especially keep an eye on the strength of the aftermarket as it represents higher margins for the business.
Finally, as noted before, we look at the commercial military split. All in all, we strive for a diversified and balanced portfolio, and the different mix as shown here, have remained consistent for the past few years.
Crane has disciplined processes to drive operational improvements focused on safety, quality, delivery and cost. The Crane Business System is a part of the culture in Aerospace, as in the rest of Crane, and last year we conducted more than 120 Kaizen events. We are continually focused on taking cost out of our business. One of our biggest successes in 2012 was a reduction in the cost of poor quality by 21%.
In 2012, we saw positive growth in the large commercial transport business, driven by higher production rates from both Boeing and Airbus. Sales for regional jets declined as the regional jet manufacturers continue to lose market share to single aisle large commercial aircraft.
Business jet growth increased significantly over 2011 as production rates for those aircraft ramped up.
Military sales also increased primarily due to sales for the Joint Strike Fighter and OEM opportunities on the C-130. And the commercial aftermarket demand for spare parts was softer than we expected, but was offset by stronger demand for retrofit programs and overall, a slight increase of 2% over 2011 sales.
Our military aftermarket sales were also stronger, driven primarily by C-5 and F-18 retrofit programs, as well as increased repair and overhaul.
The Aerospace Group has a very strong core business. We have significant content on virtually all programs in production today, and as this chart shows, our solutions are well-positioned on these programs. This gives us a very solid foundation on which to drive future growth.
Now let's look at development spending. We're entering our fourth straight year of maintaining engineering spending at a substantially reduced level from the previous 3-year period.
In fact, in 2012, we projected to spend at a rate of around 10% of sales and actually came in at 8% of sales, a level we are looking to maintain in 2013. We're doing this by being very strategic and selective with the investments that we make. Some of the major programs in which we will be investing in 2013 include COMAC's C919 single-aisle aircraft, where we provide both brake control and proximity sensing solutions. The pure power and leap engines in which we received significant contracts for our Fluid Management solutions and the mcX seat motion control system, which is now entering production.
We are investing in programs that will provide revenue for decades to come.
In 2012, we had a solid year of strategic wins in all 4 of our solutions. We were selected to provide proximity switches for the thrust reverser actuation system on the Airbus A320neo and the Bombardier Global 7000, 8000. Our product reliability and application support were key to winning these programs.
We're also continuing to gain traction with our A320 LGCIU retrofit programs, winning a recent contract with United Airlines to retrofit their entire fleet of A320s.
We were also selected by Cessna to provide the brake control systems for the new Citation, the Citation X, the M2 and Latitude business jets.
We've been supplying Cessna with brake control system since they developed their first Citation business jet in the early 1990s.
Our Fluid Management solution had several recent wins to supply fuel flow transmitters for the next generation of aircraft engine. It's including LEAP, Passport and Silvercrest. Finally, mcX, our new motion control system for business and first-class seats is now certified and flying on the Boeing 777. We're under contract to deliver this system for virtually all large commercial airplane programs in production today.
One of the key differentiators for the Aerospace Group is our superior technology enabled by our unique engineering capabilities.
In many areas, we pioneered the technology and have continued to advance it through the years. In each of the examples shown here, you can see the theme towards weight savings, fuel efficiency and reduced cost.
In 2013, our outlook is for continued growth in our core large commercial transport business and slight growth in the business jet market. We're anticipating flat to declining sales in our military and regional jet markets.
Our commercial aftermarket business is showing mid- single-digit growth, driven by a recovery in demand for spare parts, and continued growth in our retrofit programs and repair and overhaul.
Our military aftermarket business is projected to decline in 2013, primarily due to the C-130 carbon brake upgrade and the C-5 wheel speed transducer programs winding down. Military spares are also declining due to budgetary constraints.
Now I'd like to highlight some of our key commercial aircraft platforms and the significant content we have on each of them. On the Boeing 787, we have the brake control system, the tire pressure indication system and seat actuation systems, as well as engine lube and scavenge pumps and fuel flow transmitters.
On Boeing 737, we're also represented with all our solutions, including brake control systems, fuel pumps, proximity sensing systems and seat actuation systems.
Similarly on the Airbus A320, we provide landing gear control and indication, proximity sensing, fuel transmitters and seat actuation systems.
With the re-engined models of the 737 and A320 in development, we plan to benefit from sales of these existing product solutions and new additional airframe and engine content that we are currently pursuing or have recently won. This provides us with many years of continued revenue growth.
The 2 key military programs for us in 2013 are the Airbus A400M military transport aircraft and the F-35 Joint Strike Fighter. First deliveries of the A400M are scheduled in 2013, and our content includes brake controls, fuel flow transmitters and a number of proximity sensors. And the F-35, which is in low rate production, we also have the brake control system, as well as lubrication pumps, engine pressure sensors and proximity sensors.
On Both the A400M and the F-35 programs, the majority of the R&D costs are behind us, and we expect the programs to generate significant revenues for years to come.
From an upgrade standpoint, we're offering Boeing operators of 737, 747, 757 to DC-10 and the MD-10 new fuel pumps with significantly improved reliability. The large number of fielded fuel pumps provides us a significant ongoing upgrade opportunity. Our A320 landing gear control interface unit, or LGCIU, provides operators significantly increased reliability, as well as reduced maintenance cost.
In 2010, our LGCIU became the production standard on all A320 aircraft. And it is available as an upgrade for about 4,000 in-service aircraft flying today.
Finally, you may be familiar with the SmartStem Wireless Tire Pressure Indication System as it has been a large part of our marketing efforts for the past few years. It offers operators a business, regional and large commercial aircraft, a quick and easy way to check tire pressure, plus provides enhanced safety and decreased maintenance cost.
SmartStem is now certified on 7 business jets, the Bombardier Q400 regional aircraft and the Boeing 747-400. It is also standard equipment on the Boeing 777, the 787, as well as the COMAC C919 when it enters into production.
We have an expanded -- we have expanded our presence in China with an increasing number of product solutions on the COMAC C919 single-aisle aircraft. The C919, we are providing the brake control, the tire pressure monitoring system, as well as the door signal system. We're currently pursuing opportunities for our Fluid and Cabin Solutions as well.
In addition to the C919, we're providing proximity sensing components, including sensors and sensor electronics, on the Xian Aircraft Company MA60 turboprop. We expect this to lead to opportunities on the MA700 next-generation.
We're expanding our presence in China to include in-country resources to support these programs and other opportunities.
In 2013 and beyond, we're looking for continued production rate increases for large transport aircraft with nearly 9,000 aircraft in backlog for Boeing and Airbus combined. The demand for these aircraft is largely driven by growth in emerging economies and a need for more fuel-efficient aircraft.
Additionally, we expect global passenger traffic to continue to grow, further fueling demand for aircraft and aftermarket products.
We're confident that the de-stocking we saw last year in the commercial aftermarket is largely behind us and we're looking for modest commercial aftermarket growth.
So in summary, we're confident in our strong position on growth platforms such as the Boeing 737, Airbus A320 and others. We anticipate continued revenue growth in our commercial OEM business, with an associated recovery in commercial aftermarket.
With our C-130 carbon brake and C-5 wheel speed transducer programs winding down, we are expecting a reduction in our military aftermarket business. Even though overall revenues only expected to increase 2% through our focus on productivity from the Crane Business System, we're projecting an increase in profitability in 2013.
Further, long-term growth is assured by our firm foundation and core platforms, as well as sustained focus on winning strategic platforms.
Richard E. Koch
At this point, we'll take some questions. Let's wait for a microphone there.
First, could you talk about your underlying defense budget expectations? And really, what I'm trying to get at is of the 22% aftermarket decline, how much of that is from the 2 programs that are winding down, and then how much of it is just from -- maybe frozen aftermarket spending as your customers try to understand what their budgets going to look like?
Thomas J. Perlitz
It's primarily from those 2 programs, the C-130 and the C-5. And we baked in some moderate reduction for the rest of what we've got in the aftermarket there.
Okay. So is that more of a one-time step down or is that -- would it be at a new base and that would increase going forward, or how should we think about defense after...
Thomas J. Perlitz
You should think about the number as the base.
Okay, great. And then maybe on the R&D cycle, you're back to just under 10% of sales in R&D. Is that kind of a sustainable rate or is there anything in the next couple of years that could get that back up? I know the 20% to 30% is probably not going to happen again, but anything out in the next couple of years that could drive that meaningfully higher?
Thomas J. Perlitz
Yes, the way I think about the R&D spending is we're a little bit south of $40 million in spend. And that level of spending sustains what we've got to do on the business. We've got significant programs that are highlighted that we're investing in, we've got sustaining engineering and we've got internal R&D that we're funding. We are stepping up our internal R&D funding within that number, and we're now working on technologies for 2020 and beyond. We've done a lot in that engineering spending number to get more productive. For example, in the past, say 4, 5 years ago, we would do the software from scratch on each new program of brake control, for example. And what we've spent a lot of time over the past 3, 4 years on is coming up with common software platforms that we can share across different OEM platforms. So what you're seeing in that number as well is our drive to increase our productivity on engineering spend.
So it sounds like China is a significant growth opportunity for you guys and you're building out your in-country support for the C919, but intellectual property is still a big concern for the region. So I was just wondering what you're thinking about when it comes to protecting your IP or preventing technology transfers.
Thomas J. Perlitz
Obviously, that's something we go into China with very open eyes on, and I can tell you that we and our legal team have been very focused in making sure that we protect our technology as we go in China.
Eric C. Fast
So we intentionally -- so we're very cautious and we have not entered into a joint venture relationship. We have not made any commitments on technology transfer. So we've been successful winning these programs and carefully moving forward and partnering with COMAC, but not taking that step.
No joint venture in China. All the software and hardware is in Burbank, California.
Richard E. Koch
Clifford Ransom - Ransom Research, Inc.
Cliff Ransom. How do you optimize that issue? How do you make me as a shareholder feel? I'd like to pick up on this R&D issue and Aerospace, particularly in the last 10 years when the OEs have pushed more and more of the developmental spending down to Tier 1, down to Tier 2, where you have to spend the money in order to win to get the 30, 40, 50 or nobody. How do you know that 10% is the right number? I understand increasing productivity in the new product development process, but how do we know that's the right number? How do you know that's the right number?
Thomas J. Perlitz
Well, the way we know it's the right number is that we have a long range strategic plan. In the case of Aerospace, this plan goes out, frankly, to 2030, okay? And we're looking at all the programs that are coming down the pike, we've got dollars associated with every one of those programs. We're looking at the next -- the Neo, the Max, and we're looking at the next-generation single-aisle. We're looking at all those internal R&D programs that we've got to be working on, and our focus is on product differentiation, technology differentiation for Crane Aerospace and our business model. So it's very detailed, it's very rigorous, it's down to every little line item on every program, and we roll all that up and that's where that comes out. Now could there be something big and unexpected that could come, that could knock that number up? Yes. But we're comfortable with that range. And if we need to go higher in the range, we will.
Eric C. Fast
It bumped up before on the 787. The supply base, the Tier 1s and the Tier 2s have a lot of learning from that. So that learning will also help in the discipline around the contracts, the detail on the contracts. Change clauses will give -- should give you a lot of comfort that those processes will change and that's not going to happen again.
Clifford Ransom - Ransom Research, Inc.
Excellent point. The second question is ...
Eric C. Fast
And by the way, unlike many people in the industry, we expense it all.
Clifford Ransom - Ransom Research, Inc.
On the issue of the $0.05 a share in synergies with MEI, are those cost synergies, revenue synergies, what?
Thomas J. Perlitz
Initially, it's cost and long term ...
Clifford Ransom - Ransom Research, Inc.
Sure, the $0.05 cost, but there ought to be significant -- I mean typically, a larger number somewhere down the road over time in cross-selling and cost distribution and all of that stuff. Is that -- would that be an accurate perception?
Thomas J. Perlitz
Yes, I mean currently, the synergies that we presented, both the ones through 2015 and the ones that we presented for the first 12 months, are largely around cost, but certainly, we're going to be pursuing opportunities on the front end to expand potential revenue opportunities as well.
Eric C. Fast
So they grow to $0.25 out to 2015.
Thomas J. Perlitz
A question on your pension expense. So it's not too often that we see pension as a contributor to earnings, and for you, it's about 40% of the operating earnings dollars growth in '13. So good to see that it's helpful. Maybe talk a little bit about that decision in changing the pension to defined contribution. I would imagine it was a tough decision, so just some background there. And then on 2013 specifically, if you look at the new pension expense, how does that compare versus what it would have been if you had continued under the old metric?
Richard A. Maue
I'll answer the second piece. So the benefit that we're seeing at $15 million is a direct reflection of the fact that we froze the benefits for the U.S. participants, okay? So the service cost associated with them is no longer going to continue. The second element of that, that also contributes to the benefit is the fact that we -- to make this maybe more simply stated, we have a liability that we have to amortize over a period of time to satisfy that expense. When you freezed the plan, that liability stretched now to, I think, 23 years versus previously an 8-year period. So we extended the expense, and this is all in accordance with GAAP, nothing aggressive, to a longer period of time. So those 2 things in combination have created this $15 million benefit year-over-year. So we would expect a level of pension expense to continue to be small. We wouldn't see that incremental pop every year, but we would see a lower expense -- pension expense as a result.
Eric C. Fast
So look at making this -- this is not an easy decision to make. Although many corporations -- corporate America's moved to this decision, I would note that a number of years ago, we closed the plant to new entrants. So we had half -- all the new people that had joined Crane in the last 4 years are around a defined contribution plan. And as we start to look at the cost base, we felt that over time, this would give us a consistent benefit across the whole company as opposed to being divided.
Richard E. Koch
Yes, let me -- we'll have time to answer corporate-related questions at the end. And if you could try to make them more business unit specific, we want to get to our break here, so if we can have one more question then from Cliff?
Clifford Ransom - Ransom Research, Inc.
It's Cliff Ransom again. I think I'm finally coming to the conclusion that all this hullabaloo in the press about sequestration really doesn't mean anything. It's great press, but it's just not going to affect very many companies. Can you talk to me, please, talk to us, please, about what you're doing, what you felt you needed to do to prepare for sequestration? And what the likely impact would be on you?
Thomas J. Perlitz
So sequestration. So our total defense dollars to the military every year roughly is about 10% of total Crane revenues. The biggest element in there is in our Electronics business, and Bob Tavares will cover some of this in his prepared remarks. The other element is in our Aerospace Group. If you look at that 10%, it's even frankly lower than that because we have a lot of foreign military sales that we also have in our defense numbers of that -- included in that 10%. So our number's probably closer to 7%, 7% or 8% of our total Crane sales. The other thing I would point to is, frankly, the devils and the details with respect to how this turns out, what programs are canceled, which ones are deferred and so on and so forth. To the extent by way of example, the F-35 is a program that's canceled that, frankly, could benefit other legacy programs that we participate on. For example, the F-16 and the F-18. So a difficult question and it's a very good question when you should ask. It devils really in the details, and I'm hopeful that you'll get even further clarity when Bob talks a little bit later today.
Richard E. Koch
Great. Let's take a break.
Eric C. Fast
We're going to take a 10-minute break here. There's coffee in the other room.
Robert E. Tavares
All right, thank you, and welcome back. Good morning. I'm Bob Tavares, I'm the President of the Electronics Group, and I'll be sharing with you the 2012 performance, as well as the view going into 2013.
As you know, the Defense business, as mentioned earlier, is more heavily weighted towards -- the Electronics business is more heavily weighted towards the defense portion of the business, and the Budget Control Act and sequestration does present some headwinds. But I think you'll see that our balanced portfolio of legacy and new programs is going to serve us well in this current environment.
As mentioned earlier by Tom, and you can see in this chart, the Electronics Group is 62%, defense; 38%, commercial, whereas our Aerospace business is more heavily a commercial and transport. But the percentages in 2012 and looking into 2013 remain very consistent over time with 2011.
Our defense-related sales volume consists of specialized electronics that are integrated by prime defense contractors who supply directly to the U.S. government.
Our commercial portfolio consists of Electronics predominantly for commercial air transport. Crane Electronics has design and manufacturing locations across the United States. We also are benefited by facilities in Costa Rica and Taiwan, which provide us with low-cost manufacturing options.
Our customer portfolio consists of market leaders, both domestic and international. The composition of these has been stable over time, allows us a high degree of customer intimacy. I will note that none of these customers present more than 12% of our total revenue stream.
Our revenue with each customer is generally spread over multiple platforms and programs, limiting our exposure to any one program.
Our investments in new technologies and key programs have us well-positioned to take share with these customers.
Looking at the solutions we provide, the preponderance of our products are highly engineered in collaboration with our customers. Early engagement and a high degree of customer intimacy is required. Crane Electronics' Engineering works closely with our customers systems engineers to develop performance-driving solutions with focus on reliability and affordability. In these days of budget constraints, affordability is a keyword in our business.
Defense systems requirements are driving the need for higher-density, more efficient solutions. Radar, electronic warfare systems depend on advanced Power and Microwave solutions.
Crane Electronics is a leading supplier of both Power and Microwave. As a leading provider, we are well-positioned to take advantage of the need to integrate these 2 technologies together in these systems.
Electronic equipment requires power to operate. Our Power solutions include main DC Power, power generation, storage for the platform, as well as localized power conversion for various applications.
For example, our transmitter rectifier units produced a 28-volt DC required for distribution across the platform, while our DC-to-DC converters provide local power source for computing functions and other electronics. Most applications, we maintain a sole source position.
The Microwave portion of our business produces components and subsystems that are used in systems that transmit signals to the Aerospace. There's a wide range of applications for Microwave Systems such as signal intelligence, radar, electronic warfare and secured data and radio links.
In all of our markets, the platforms and systems we support remain in production or service for more than 40 years. This provides us the relationships with the customer to create intimacy we need, as well as the base to build our future growth.
As you see here, continued modest growth is planned in 2013. Sales projections are based on platform demands projected by our customers specific to the programs. Sales growth over the next 3 years does outpace market at 3% annual compounded growth rate. This is as our major investments begin to enter production with our customers.
Our broad portfolio and diverse position on multiple platforms mitigates potential impact of the Budget Control Act or delays in commercial program rollouts. Crane Electronics enjoys a healthy balance of legacy programs, along with new products launching into early production.
A little bit of the defense market. The U.S. Defense market is facing uncertain headwinds with the planned budget cuts. However, a deeper look at the specific programs reveals a concentration in 2 key areas that will allow us to grow.
First, potential Department of Defense cuts or delays in new programs creates need for legacy products, and extends the life of certain programs. As we mentioned in the question earlier, an example would be the delay or the reductions in F-35 would benefit F-16, F-18, where we have a significant install base and have a significant amount of dollars per aircraft on those platforms.
Second, within the defense market, there's still sales growth opportunities. Many of those are related to advanced technology needs in the C4ISR market. And these are the stated critical defense needs of our nation.
C4ISR stands for Command Control Communication Computers Intelligent Surveillance and Reconnaissance.
The ISR part of the market is where our heaviest concentration of products are. ISR consists of radar, electronic warfare and signal intelligence.
It is strategically critical area to the defense budget and it's where forecast do anticipate a 3% compounded annual growth rate over the next decade.
The growing level of sophistication of these types of systems increases the need for our advanced technology. Our ability to provide those technologies and integrate them together into higher density, more efficient solutions raise our value to the market and our customers.
Now let's focus a little bit on the commercial side, which we heard quite a bit from Tom on.
We teamed with the Aerospace Group and Tom's team, to provide a broad range of solutions in the commercial air transport market. As such, you will see that we have a strong portfolio of products in this market similar to those of the Aerospace Group.
The airport industry, by the way, stands alone as the only major industry segment to actually see growth during the 2008 and 2009 recession.
And going forward, Airbus and Boeing have announced their ambitious plans to increase production rates over the next 3 years. The first source of growth for us will be the new generation jets like 787, 747-8 and the Airbus A350 extra wide body.
Airbus and Boeing are also planning expansion of the legacy products like the 777, 737 and Airbus' A320.
In addition, we've gained positions with COMAC, the People's Republic of China, in development of their C919.
Speaking specifically to power, Crane Electronics does not generate power. Our products convert, manage, distribute and store power in a variety of applications, including main aircraft power, power computing, electronic motors, electronic warfare and communications.
We offer both standard catalog and custom products ranging from a few watts to 100 kilowatts.
Our standard products are preferred where size and reliability are critical. Our custom products are designed for unique applications such as high integrity flight control systems and mission critical situational awareness communications.
Custom product solutions represent 2/3 of our Power business. These solutions have high barriers to entry for our competitors, provide market share preservation and in the install base, to build upon future growth.
Crane Electronics is the largest merchant supplier of power solutions and supply into both aerospace and defense markets. Our strategy aligns our capture plans and technology roadmaps both in those markets.
We target modernization upgrades for new radars, avionics and electronic warfare suites on existing platforms.
Crane electronics delivers premium value to our customers. Customers look to Crane Electronics to provide critical system solutions based on our performance with these customers on past programs, our pedigree of reliability and our unique set of technologies.
We drive our business using the Crane Business System to reduce manufacturing costs and continue quality with affordability.
We have a long history in the commercial aerospace. Crane electronics has been supplying power equipment to Boeing since the 1950s. We have established a name for ourselves as a high reliability supplier. We have expanded our base to include high-end business jets produced by Gulfstream, Bombardier and Embraer. Crane Electronics enjoys growth in commercial power sales by winning content on Airbus, Gulfstream and COMAC, and we are well-positioned on platforms such as the A350, the Gulfstream G650 and now, the C919 that Tom talked about as well.
Many of our products are follow-ons from previous installations on those aircraft. For example, our 787 power products have its roots back in the 777.
Our G650 product was initially designed into the G450, and this will likely be used in future Gulfstream models as well.
Looking specifically at defense power, our strong position on legacy platforms coupled with the trend to upgrade mechanical systems to more electrical systems will benefit our Power business.
In addition to incumbent platform products such as applying main DC Power, power supplies for communications and onboard computing, opportunities exist in next-generation warfare -- electronic warfare and radar equipment, and should help us with overall share gain as these move to electronic systems.
As the largest merchant supplier of power in the commercial Aerospace and defense markets, we have a stable and strong base in ongoing production programs. This slide does show examples of those programs that provide a strong base and opportunity for future growth.
On the defense side of the business, we are well-positioned on targeted new programs where we support multiple primes. We also selectively target the right platforms for sole-source positions that we would maintain through the life of the program.
Moving onto our Microwave business, our Microwave solution is comprised of 3 very strong, well-established brands in the marketplace: Signal Technology, Merrimac and Polyflon. We have been serving the microwave radio frequency market since 1954.
As such, our products are well-established on a large number of legacy Aerospace and defense programs. These provide a stable foundation for our business growth. With the current fiscal climate, many of these legacy systems will see extensions of their service life requiring repair and upgrade.
On top of this stable base of legacy products, we have been able to leverage our strong reputation, cost-effective manufacturing and key technology discriminators to meet changing demand in the -- for advanced and affordable technology. The target systems that we deem to be the highest priority of our country are within the C4 ISR. This has us poised for growth as these systems move out of their development phases and into production.
The need for increased density and efficiency by new systems will provide growth opportunities in this market. Our acquisition of Merrimac Industries 3 years ago and the Multi-Mix technology, combined with our previously existing integrated module design capability from our Signal Technology brand, allows us to serve customers in a unique way. We provide a technology discriminator that allows customers to put more functionality affordably into small spaces.
And you can see this here is an example of a Multi-Mix product, where we can increase density by stacking product vertically in the system, which is unusual on a microwave application. Normally, we do everything horizontally.
The acceptance of this approach has been gaining a lot of traction in the marketplace, and many major primes have selected our solution as the integrated -- integration technology of choice for new systems, such INTOP, SEWIP, AMDR, Space Fence. I could throw out some more acronyms but -- we have discussed that the ISR market segment is a high priority in the defense market. As such, many of these systems are expected to be fairly insulated from the impacts of the Budget Control Act and sequestration.
This is where development money is being spent by the government and early engineering production phases are planned for 2013 and 2014. This slide shows some examples of the programs we are positioned on that provide future growth. These growth programs are currently being competed amongst the major primes: the Lockheeds, the Boeings, the Raytheons and Northrop Grummans of the world.
Crane Electronics is positioned at different levels with each prime, and we've won and executed on development contracts in support of the prime's proposals to the government. In many cases, we are positioned as the sole source provider, with long-term agreements in place. In total, these new programs could provide up to $400 million of revenue over the next 10 years. These programs, in most cases, are U.S. military status highest-priority development programs and, thus, position us well in the face of budget cuts.
As you've just seen, our plan for 2013 is one of modest growth, selected investment, key technologies to drive our growth in both the commercial and DoD markets. We feel confident our product and technologies investments are properly focused. Our strategy includes co-investment by our customers in many cases for mission-critical components, where our products enable their competitive advantage.
So in summary, Crane Electronics remains positioned well for continuous growth in both key market segments. Our investments in technology and advanced manufacturing meet up well with the challenges our customers are facing today for advanced technology with affordability.
Richard E. Koch
Thank you, Bob. Any questions for Bob and Electronics?
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
So maybe if you could comment on the commercial business a little bit, on the underlying dynamics. It looks like you're projecting flattish revenues in '13. Revenues were a little bit down in '12. And when I think about the deliveries and what's happening with the OEs, it should have been ups. Is that a function of just the platforms you are on? Or -- and then maybe talk a little bit about how we should think about this business going forward.
Robert E. Tavares
Yes, it's probably more a function of some of our standard product business, which we had a number of products that we were in the redesign activity in 2011 and 2012, actually started reintroducing those into the market into 2012. And we're starting to see good traction with those reintroductions in 2013. So the preponderance of that was actually in our standard products business.
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
So I guess, the implication is business starts growing in '14. Is that a fair assumption?
Robert E. Tavares
That's correct. And then we have very strong growth rates, as C919 and other aircraft start entering production as we have installed long-term contracts signed on those programs.
Clifford Ransom - Ransom Research, Inc.
Cliff Ransom. I am a big believer that it's important to be in the right silos when you're in the defense business, and I happen to think that C4 ISR is a great place to be. However, would you care to handicap whether the sequestration may be across the board or whether you're planning assumptions as to whether they'll have some discrimination in what gets whacked and what doesn't?
Robert E. Tavares
Our assumption -- and I know earlier Rich gave you an assessment of it, how it attacks the overall business, but our assessment is that they will be selective cuts. It's kind of hard to build 10% of an aircraft carrier or 10% of an airplane, probably more appropriate with aircraft carriers. What we are seeing today from the Office of Management and Budget Tech recently came out, I believe it was last week, was that an expectation that we are going to be living in a world of continuing resolution. So we're not expecting to see a budget. We're expecting to see continuing resolution. In continuing resolution, normally one does not have new starts permitted. And so the Office of Management and Budget are saying, "We've got to do this year, we've got to do a special carve-out for new starts on special munitions programs." So we are expecting to see that. We've seen a lot of information out from the Navy and the Army with regards to force projection and how can we project force in the face of budget cuts. So instead deploying aircraft carriers in the Middle East or out in the Pacific, they're saying that's where some of the cuts will come from. Significant amount of savings is going to come from things like ammunition, tracked vehicles. So they're looking to keep the strategic spend in place, and that would be on these advanced technologies.
Richard E. Koch
One more question.
Eric C. Fast
You had put up a slide earlier where you said the headwinds were fuel prices. I was wondering if you can maybe help me understand better the sensitivity of your programs relative to fuel prices.
Robert E. Tavares
Well, in terms of fuel prices, that's more in our commercial market space. And that would be the demand on aircraft rollout, so we see that as a potential headwind. But based on all of the program rollouts that we have right now that are being planned by Airbus Boeing. We don't see that today as being an impact to the business. Obviously, if there are significant changes in oil and gas prices, that could be a potential headwind.
Richard E. Koch
Okay. Thank you, Bob. Jeff?
Thomas J. Craney
Richard E. Koch
Jeff Craney. I apologize. It's my pleasure to introduce Jeff Craney, the President of Engineered Materials.
Thomas J. Craney
My name is Jeff Craney. I'm the President of Engineered Materials. I'm happy to be here with you today to talk about the business.
In 2012, our piece of the business delivered $217 million of revenue and $28 million in operating profit. Our business services multiple markets, and we're aligned with the major players in each of those market segments. Our business model is to sell to RV and transportation OEMs direct, as well as distributors in the Building Materials business.
Keystone, Forest River, Winnebago, Jayco and Bailey's in the U.K. are examples of major RV OEMs we sell to. Utility and Great Dane are customers in the trailer market. And our building material customers include Lowe's, Atlantech and Major Industries. All are major players in their respective markets.
Now our approach to the market is to be a solution provider. We have over 1,500 proprietary formulas designed to meet specific customer needs and enhance the performance of their products and applications. We work closely with customers to understand their applications and dial-in a product that allows them to meet their needs in the most efficient way. Our value proposition is strong, durable products that are lightweight in multiple finishes.
We participate in 3 end markets. Our largest segment is recreational vehicles. Our primary application is exterior sidewalls. And in 2012, that represented 43% of our revenues.
Building materials represented 39% of our revenues in 2012. Our primary application is wall cladding for commercial buildings. We also produce exterior and daylighting panels for industrial buildings.
And our third segment is transportation. This segment was 18% of our 2012 revenues. We supply interior and exterior panels for refrigerated trailers, dry trailers, truck bodies and shipping containers. 90% of our business is in North America.
We have 4 manufacturing facilities in the U.S.: Channahon, Illinois; Jonesboro, Arkansas; Florence, Kentucky; and Goshen, Indiana. We recently closed our facility in the U.K. and are servicing that business from the U.S. In our U.S. facilities, we have a total of 10 manufacturing lines. 8 of those are continuous fiberglass reinforced plastic lines, 2 are continuous open mode lines. We're currently operating at 60% capacity, and we're well positioned for growth across our markets.
2012 was a challenging year for us. Our markets were mixed. We had a significant slowdown in Europe and Asia. We experienced raw material cost pressure, particularly with resins. And we were able to partially offset our raw material cost with productivity. We expect our volumes to be up slightly in 2013, with improvement in our operating profit as a result of productivity and our repositioning efforts.
In 2012, we experienced mixed results in our 3 markets. The RV market grew for us in 2012 as demand was stronger throughout the year. Building products and transportation were flat on a year-over-year basis. Our North American markets were very solid, but we experienced weakness in the European and Asian markets. We invested and focused on improving our downstream fabricating processes, installing enhanced cutting capabilities, allowing us to add value to our customers' finished parts.
We focused on application development to increase our take per unit in existing market segments and continued our efforts to drive productivity and manage our cost. We were successful in introducing products for new applications. We grew our share in the RV sidewall segment, and we delivered very strong 2012 productivity.
By leveraging the Crane Business System to drive waste and variation from our process, we had a very good productivity year. Raw material is approximately 50% of our cost. And we were successful in introducing a number of alternative raw materials that positively impacted our raw material cost. We also developed and introduced process changes that allowed us to extend the useful life of our end-process production materials. All that work has positioned us very, very well for 2013 and beyond.
We do have some growth in our markets in 2013. We expect another strong year in our RV business. We believe segments of our Building Materials business will improve. We're well positioned with 2013 productivity programs, and we'll drive a 250-base-point margin improvement from leverage and the closure of our U.K. facility.
So let's talk about the specific business segments. As mentioned before, our RV business in 2012 was 43% of our revenues. The largest segment of our RV business is sidewalls. Our products are the exterior portion of the RV wall assembly. In addition, you'll find our products used in roof applications, side slideout panels and storage box liners on an RV. Products are used in motorized units, as well as travel trailers and fifth-wheel trailers.
We have 2 unique product types we sell to the RV market. The first is a coilable roll product, sold to the OEM, who cuts it to size and laminates the product to substrate. That laminated panel then becomes the exterior panel of their wall assembly. You find this panel in entry and midlevel towable units.
The second product we sell is a flat sheet glass panel that we manufacture with a substrate already attached. Sheet glass panel has a high-end finish and gives a unit an automotive-type look. You find this product primarily on motorized units and the higher-end trailer units.
We have a 70% market share in RV sidewalls. We've been very successful in growing our share with very strong customer service, partnering with major OEMs and introducing innovative colors and finishes for sidewall applications.
As I mentioned earlier, the RV market had very strong growth in 2012. The industry produced approximately 13% more units on a year-over-year basis. The majority of the growth was in the towable segment as motorized units held very close to 2011 levels and below historical levels.
Overall size of the units continues to be approximately 8% smaller on average across all models. RVIA's forecasting the 2013 wholesale shipments to be up 4.5% on a year-over-year basis. And we're very optimistic about 2013, but we clearly understand that RV purchases are highly discretionary.
We continue to be focused on being a full-line supplier to the RV industry. Our products are used across all model ranges manufactured. We have excellent long-standing relationships with the major OEMs, and we're focused on developing products to increase our take per unit, delivering new exterior wall designs and replacing traditional wood materials.
Our Building Materials business was 39% of our 2012 revenues, and our Building Materials business plays across multiple market segments.
Our wall panels are used across multiple markets, hospitality, retail, education, health care. We are a durable wall option, easy to clean, low-maintenance. Our traditional wallcoverings are utilized in high-traffic areas in high-abuse applications. And we've introduced our innovative finishes products with a more focus on a design look, allowing us to compete in front applications of buildings. In addition to commercial wall applications, our products are used in commercial sealing applications and light industrial uses for cladding and daylighting panels. Many of these products are engineered for specific applications.
In the Building Materials business, our largest market application is in wall coverings, where we have a 14% market share. Our traditional wall coverings are used in more backroom functional applications like hallways, kitchens, restrooms. Our focus again is to continue to grow our share from traditional wall coverings and tile segments by driving specification efforts with our innovative finishes products. These products have a more decorative finish, giving them a fashion look for the front of the building.
The trend for commercial construction continues to track below historical levels. This chart shows a combination of U.S. institutional and commercial building starts. And as 2012 U.S. construction starts were down compared to 2011, we expect some improvement in '13, approximately 2% on a year-over-year basis. And with the buildings forecasted to be below historical levels in new commercial construction, we continue to focus on remodeling activity as a major source of market opportunity for our wall products.
A major focus for us in 2013 is growing our share and driving specifications. We've introduced new products and industrial buildings with daylighting solutions where natural lighting is required. In addition, we have a broad line of industrial products that have a high street to weight ratio and they meet building and fire codes for cooling tower applications.
Our innovative finishes product line provides an opportunity for us to be more aggressive in pursuing additional opportunities in the front of commercial buildings. We offer a number of standard finishes and made-to-order capability that allows a customer to customize their interior wall finish.
Our Transportation business was 18% of our 2012 revenues. Our products are used on the interior and exterior of trailers, truck bodies and containers. You'll find our products in multiple applications where lightweight and durability are critical. We replaced traditional materials in truck liner panels, translucent roofs, composite floors and walls for truck bodies.
We participate in a $250 million market in the U.S., Canada and Latin America, including dry and refrigerated trailers and delivery truck bodies. The transportation market is a diverse market with many different materials used across the applications. We have a 14% market share.
We've lost some market share in the refrigerated liner market to thermoplastics. Thermoplastics products have lower cost and lighter weight than our traditional products. And we've been working diligently to reengineer our liner products to reduce weight and cost to reposition ourselves in that market.
In the meantime, we focused on increasing our take per unit by bringing new products to the market in side skirt applications and floors and walls for truck body applications.
Refrigerated trailer truck body market is our largest single segment in the transportation market. We anticipate that market to be flat in 2013. Our focus is on being a full-line supplier to the industry. Our products provide lightweight, durable options for door and wall liners, translucent roofs, aerodynamic side skirts and exterior sidewalls. We're also focused on driving specifications with the large refrigerated fleets on our liner products, and we continue our efforts to increase our take per unit with aerodynamic skirts and drive ends and floors and walls in truck bodies.
A major opportunity for us is with refrigerated shipping containers. We've had great success with produce shippers, and we're working to leverage that success across the industry. And in that work, we've been working with major shipping lines to define their requirements and secure their specifications. We have a very, very strong value proposition. Our products reduce the weight in shipping containers by over 400 pounds, which translates into increased payload for the shipper or reduced fuel cost. We have a very durable product that performs well, and it's quick and easy to repair. The specification work is underway, with significant progress being made with the leasing companies and shipping lines.
So with limited market growth in our traditional markets, we continue to focus on increasing our take per unit. In the building products market, we're looking at new niche markets where we can utilize our products and expertise to deliver growth. In RV, we are growing our share by offering customers products that allow them to differentiate themselves in the market. And in transportation, we're increasing our take per unit by adding new products to our offering.
So let me share 3 specific programs with you that we're working on. The first is clean rooms. The clean room market is a segment where our products are used today. Traditionally, we have sold our panels through our distribution base on a job-by-job basis. The opportunity for us is to look at the market from an installed system perspective, offering the customer and the owner a full solution.
The clean room market is organized by classes. They range from class 1 through class 8, with the class 1B having the strictest requirements. We've developed a wall system that meets all the requirements for clean rooms in classes 5 through 8. Our system provides a very cost-effective value proposition that delivers product characteristics to meet classes 5 through 8. Those classes include biotechnology, pharmacy, medical devices and hospitals. The system includes our wall panels, adhesives, seam treatments and a full installation process. And classes 5 through 8 represent a $25 million market opportunity for us. The market is serviced by a group of specialized contractors who have been working closely with us to develop this full system.
The purchase of an RV is highly discretionary, as I mentioned before. The RV OEMs are looking for ways to differentiate themselves and take costs out of their operations. And market trends are to a broader range of colors and exterior finishes. We've developed products that provide an automotive finish that reduces an OEM's paint and decal cost. Our offerings include multicolor stripes, metallic gel coats and full brilliant, full unit colors. Our capability and quality has added to our value proposition and positioned us to incrementally grow our sidewall share.
Fuel costs continue to increase and are a critical part of the fleet's operating cost. Fleets are looking for ways to improve their efficiency and reduce their operating cost. One way to do this is to improve the aerodynamics of their old trucks and trailers. The state of California has legislated by 2017 all trailers operating in the state must have aerodynamic side skirts. We've introduced a lightweight FRP side skirt. Our product is easily installed, durable with low maintenance. And since California is a large portion of the overall market, carriers are outfitting a large portion of their fleets for the fuel savings and ease of operations. The industry estimates 1 million trailers will be impacted by this legislation, and the industry is at approximately 30% compliance. The requirement applies to new and existing trailers.
So in closing, we're focused on profitable growth. In our markets, we'll leverage our products and our services, our relationships to grow our share. We'll continue to work closely with our customers to deliver new applications that meet their needs in new and existing markets. We'll leverage the Crane Business System to continue to drive productivity in our raw materials and our manufacturing processes. We have a cost-driven culture, and our manufacturing platform is well positioned to leverage future growth.
Richard E. Koch
So we're running a little bit behind, but we'll take a quick question if you got it. Let's try Matt here.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
The guidance incorporates a bigger increase in operating profit than you're guiding to for revenue. So there's obviously something more than just volume leverage in there, and there's some restructuring savings, I understand. But is there anything else, like can you quantify productivity savings? Or is price cost going to be better next year? Anything else to bridge that margin improvement.
Thomas J. Craney
It's a great question. There's really 3 pieces beyond the incremental sales and the productivity work that we're doing: the first being the closure of our plant in the U.K., the second being the advantage we'll get from the pension freeze that we've talked about earlier in our business; and the third is that we had a significant legal cost last year in a case that we successfully defended ourselves against that is not recurring.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
Okay, great. That helps. Then what are your thoughts on that 60% capacity? I mean, how patient are you willing to be with your end markets? And is there a risk that maybe RV never gets back to prior peaks? Or is there any sense of urgency with eliminating some capacity? Or do you want to keep that for the next upturn?
Thomas J. Craney
We are working to be very patient. If you go back 3 years ago and look at where we were, we had 8 facilities. We have 4 now. We're trying to do -- analyze our markets very methodically and ensure that we take out the right capacity and keep the right capacity as we see our markets. The RV business has recovered significantly over the last 3 or 4 years. And we were, at the time, I think, at the bottom. We were at 170,000 units. We'll be at 290,000 units this year. The historical high was 350,000. But if you looked at the historical average, it's more in the 300,000 to 320,000 range. So I think it's very realistic to believe we'll get back to those levels, and we've got a significant commitment in the industry. We want to make sure we're ready for our customers when their business comes back to be able to support that. So we're in a good place. We continue to review all of our capacity. But at this point, I think, we pretty much got -- we are where we're going to be for the short term anyway.
Eric C. Fast
So we are running behind. This is 7% of sales. Let me just say, we love this business. This is a Materials Science business, highly engineered, resin, fiberglass, made in a continuous process. We're the #1 guy, by far, in the industry. You can't name a competitor. We're running in a mid-teens margins. We're 60% capacity. And we've got a growing focus on North America, and we've got emerging North American economy to base on. We got to move on.
Richard E. Koch
So next up is Brad Ellis, who's the President of our Merchandising Systems business.
Bradley L. Ellis
Good morning. I'm Brad Ellis, and I love this business. I'm proud to be a part of Crane for the last 16 years, and it's a pleasure to see many of you again.
Today, I'll provide an overview of our Merchandising Systems, our financial results, 2013 outlook. Then I'll present the vending business. Kurt Gallo, President of Payment Solutions, will follow and present the exciting developments in our payment business.
Just a few years ago, merchandising mainly consisted of vending in North America. Whereas today, the higher margin, higher growth Payment Solutions business and Global Markets are a higher percent of the business. The Merchandising Systems group has had a steady performance in margin improvement since 2009. 2012 was a successful year, with a strong $7 million OP improvement that -- and we exceeded guidance given to you last year. We are fully expecting this improvement trend to continue in 2013 and are optimistic in the growth opportunities in both the vending and payment businesses.
So now let's talk about the vending business. Crane is the clear North American market leader of vending equipment, software and online solutions. We have a portfolio of industry-leading brands and products. We are pleased to serve industry leaders as our customers. It has been a steady journey to capture the full potential of this business, and we're clearly still on that journey. The story of vending is continued margin improvement, while we have invested in technology and innovation to revitalize the industry and position Crane for profitable growth.
2013 can be characterized by a cautious sales outlook, confident that we can deliver the 42% improvement in OP through productivity and a real focus on our growth initiatives.
The North American vending industry has experienced headwinds over the past several years: unemployment, office vacancy, consumer sentiment. Recently, there has been encouraging signs of improvement in these key indicators. However, we have yet to see it reflected in our sales. Also, another large retailer that we all know, Wal-Mart, just recently announced sluggish sales that they contributed to America struggling with higher gas prices, as well as higher payroll taxes, all which will impact people's willingness to put money into a vending machine.
Although a smaller part of our business, the European vending industry has been impacted by difficult economic conditions resulting in the 2012 market decline of 14%. A recovery in Europe is not baked into this guidance.
The 2% sales outlook is factoring in these headwinds, offset by incremental growth initiatives that I'll talk about. The $5 million OP improvement coming on $3 million of sales increase, we are not counting on growth to deliver this OP guidance. It will come from productivity, which we have a proven track record of execution through plant consolidation, application of the Crane Business System, a relentless culture of continuous improvement. We have reduced headcount by 20%, while sales have increased by 15%.
Although there is still plenty of opportunity with people productivity and we'll continue to see the results in this area, the next breakthrough is the material cost savings, which makes up 50% of our total expense. As examples, by applying the well-defined and prescriptive Crane strategic sourcing process, the team improved merchant snack machine PCBA reliability well above 99% levels with a 30% cost reduction; reduced our steel prices by 4% below market, $1.1 million in savings, and went to a supplier that's now performing at 100% delivery performance; achieved 7% on refrigeration, heat exchangers and mitigated supply chain risk.
In addition, value engineering will also contribute to breakthrough results in material productivity. Examples here include reengineering our coffee brewer to improve the drink quality for the consumer; operator serviceability while reducing our cost by 50%; reengineering our evaporator box to improve customer operational efficiency, reduced energy consumption while reducing our cost by 50%; LED lighting, which has helped vending become more environmentally friendly and, at the same time, reducing cost by 14%.
Value engineering will not only drive material cost productivity but through innovative design is improving the consumer vending experience and reducing our customers operational expense.
So now let me talk about the growth initiatives. We have 3 primary growth platforms in vending. First is a combination of cashless online vending and consumer media; second, coffee; and third, emerging market opportunities.
The first growth platform strategy remains the same, positioning the business to capture the $15-billion replacement value of a large aging installed base. Our strategy is to revitalize the industry through innovative solutions of cashless online vending and new machines with a media.
You have heard our vision of a vending industry that allows operators to manage their machines wirelessly, getting real-time data to help them service the machine, telling them exactly what product to put in the machine and automatically notifying them if the machine is out of order.
Although it is still early days and this has taken much longer than I or any of us anticipated, the business is making significant progress in transforming from a supplier and manufacturer of a black box, the vending machine you're used to today, to a solutions provider that is managing a wireless network with reoccurring revenue.
This wireless network, we call Streamware Connect, is the platform that enables new machines advanced with touchscreens, multimedia, nutritional information for the consumer, integrated cashless and all out-of-the-box wireless connectivity. Adoption might be slow, but there is no question that this is the future. It provides real growth opportunity and is our bet in going after the $15-billion opportunity, and we feel good about the bet.
Second platform, we're also optimistic about coffee growth. In 2012, as I mentioned last year, that we were going to be launching a new coffee machine into Europe, which we did. It's an innovative design that provides a really excellent cup of coffee for the consumer. We grew market share by 4 points in the first year and improved our margins on the business by 10 points.
We're also exploring new nontraditional business channels in 2012. Coinstar chose Crane as their strategic partner to develop a high-end coffee kiosk that can be placed next to their Redbox and Coinstar locations. I'm sure you've seen this announced by them. It has been in the press quite a bit over the last several months. We are on schedule for a 2013 launch with this opportunity.
Although still small, emerging markets will provide future growth opportunities in vending. As 2 examples, we achieved $6 million incremental growth last year in the Middle East. Crane was uniquely positioned to win that business by having an integrated solution of snack, coffee, software solutions, payment systems and online connectivity. With our experience, we're able to help new operators learn the business and be successful.
The second example is their aggressive bottler expansion into emerging markets. Although they will first focus their capital investments in bottling plants, coolers, fountain dispensing equipment, gradually and eventually, vending will be a channel that they'll want to go touch the consumer. Crane is positioned well as a preferred global partner.
In summary, we feel good about the strong 2012 improvement. We are confident in our ability to deliver the 2013 OP guidance through productivity. And with our strong share, our investment and new innovative solutions being poised for recovery of this large aging installed base, we believe the vending business is well positioned and can be a real catalyst for future Crane earnings growth.
Richard E. Koch
Questions? Questions on vending? Cliff?
Clifford Ransom - Ransom Research, Inc.
Do you use in your [indiscernible] process the concept of breakthrough projects, breakthrough activities for heavy corporate investment?
Bradley L. Ellis
Clifford Ransom - Ransom Research, Inc.
What can you do when you have a 50% materials cost in your business to get that down?
Bradley L. Ellis
A couple of things. One is as we have worked new product development of completely rethinking about the design, the product, delivering on the value proposition and breakthrough cost reductions, that's on new products; second, with products that we already have, of looking at how can we improve our value proposition and reduce our cost through value engineering.
Richard E. Koch
Kurt? So Kurt is suffering from a cold and made it down. And we're hoping his voice hangs in there.
Well, I hope it will be an enjoyable presentation. So thank you very much. Again, my name is Kurt Gallo. I'm currently the President of the Crane Payment Solutions group. After the acquisition of MEI, I'll be taking on a new role within the new business as the COO, responsible primarily for dropping the integration of the 2 businesses together, as well as the synergy savings that Max talked about a little bit earlier.
So today, what I'd like to do is focus primarily on the Crane business that we have, and I'll talk about the 2012 results, as well as what we're excited about this business and the growth prospects that we see ahead of us.
2012, we finished the year at $174 million in sales. As you can see from this chart, we have a very diverse geographical business, with a lot of our sales coming from the European countries. We cover 5 key distinct vertical segments that Max talked about, and I'll go into more detail with each of these vertical markets in the upcoming slides, talking about both the results in 2012, as well as the specific growth prospects that we see.
As we've outlined, we've made a number of strategic acquisitions over the years, really building Crane's Payment Solutions business from a small niche German player to a global supplier covering over 100 currencies for both our coin and bill profits. Today, our product brands of NRI, Money Controls and Telequip focused primarily around our coin-based solutions, providing validation, dispensing and recycling of coin products. Our CashCode brand of product focuses primarily on bill validation and bill recycling. And once approved, the MEI acquisition will strengthen -- significantly strengthen our bill base products and expand our payment product coverage into the vending market, which, today, is covered by our Currenza product line.
We have a broad range of products for both bill and coin. There continues to be an intense focus across the entire organization on innovation and new product deployment. This focus runs deep across our organization and has active engagement from all of our disciplines. Most importantly, our customers fully embrace and expect this level of innovation and they, too, are critical contributors to the development of our new products. Gaining their engagement early in the cycle and continuing throughout, we have found to be a key a critical step to ensuring the successful product launch, as well as a broad market long-term adoption.
In 2012, our new products account for about $17 million of our total sales. And in 2013, we expect them to account for over $30 million of our sales.
As broad as our product offerings are, the same goes for our customers. Some of these customers are well known, large businesses such as Subway's, McDonald's, NCR, Toshiba. But others are less well-known but are equally as important as they are the key OEMs who provide the supply and base equipment into the key vertical markets that we address.
2012 overall performance was very good. We achieved 3.5% core growth, excluding currency headwinds. This growth include managing through the legislative changes in Germany, which significantly reduced that gaming market. The currency impact, combined with the legislative gaming changes, created a negative $11.5 million headwind that the team needs to overcome. Through all this, the team stayed very focused on the key growth priorities and effectively drove strong productivity gains and cost controls in such a way that we were able to continue to make the key investments in the growth markets and continue to drive this business forward. As a result of these actions, we increased our operating margins by 160 basis points or $2.4 million year-over-year.
Looking ahead to 2013, we're very optimistic about our growth prospects, and we expect to begin to see a more normal return to historical CAGR levels across our different vertical markets. Additionally, we see a very clear path forward to again improving our margins through our productivity gains while still investing for growth. I'll talk more about the specifics in the verticals in the upcoming slides.
But first, as you've seen from all the other business segments, we, too, had a very distinct focus on productivity. We continue to drive year-over-year incremental productivity gains, and this is a full team effort in a continuous process across all of our sites. Through 2012, we've developed over 55 Lean Tool champions, who now help to drive these continuous improvement activities across all of our sites and our functions. With this team's help, we have completed over 180 Kaizens in the past 3 years, and we fully expect this process to accelerate in the years ahead.
The significant productivity increase in 2012 was driven as a result of the synergy savings efforts undertaken when we first acquired Money Controls. The efforts have taken hold in 2012 and, as you can see, are now showing the full year impact of that focus.
As Max has already talked a little bit about each of these vertical markets that we address, I'll expand on them as we go into the next full slides. All 5 of the vertical markets we address are healthy growing markets that provide both market growth, as well as share gain opportunities for our business. As there are no formal industry reports, we've estimated the market to be approximately a $1 billion size marketplace, with growth rates ranging across the verticals from 3% to 10%.
So now let's take a look at some of the different vertical markets that we address. The first one that you see here is a service payment market. The service payment market can best be categorized as a bill pay kiosk, which is used by the consumers to make cash-based payments for services, such services as phone bill payouts, utility payments and the like. This is an especially strong market in the cash-intensive emerging markets where these type of transactions are very common and very high, such markets as Russia, the CIS countries, China, India. And now we're seeing an increasing demand in other Southeast Asian countries, such as Thailand, Malaysia and Indonesia. Crane is very well positioned with a very strong product offering and have seen the growth in this marketplace, and we project going forward that this market will continue to grow at approximately a 10% CAGR.
Our growth in vending comes from a very diverse geographical area, notably across North America, Europe and the Far East. This growth can be attributed primarily to having both a strong product offering, as well as a dedicated sales and service structure.
Looking forward, we would expect the growth to taper back to be a more modest 3% level, again, driven by the growth in the emerging markets, but also by the vending operator's adoption, as you've heard from Brad along cashless payment systems, which absolutely complement the cash-based systems that we already offer today. As a matter of note, both Crane and MEI are key providers of the credit card readers and telemetry sold into this sort of application.
Much of our historical growth in transportation has been driven by our penetration into the parking segment. As you heard Max mention earlier, there are 2 key segments in this market, parking and mass transit. Long term, as we look forward, we would expect to see this overall market continue to grow at about a 7% rate. 2012, however, was a very challenging year for transportation. This is due in large part to the austerity measures that we've seen across the European unions, much of which caused delays in many of the key projects.
Looking ahead, however, we're very optimistic that the growth rates will return and as we're now 1 year into the launch of our new transportation bill recycler, which you see here on the screen, with this product over the past year, we have secured over 8 million hours [ph] of new projects that otherwise we would not have been available to take advantage of. All of these new products are in the mass transit, a fair collection marketplace. These are all multiyear projects that should begin shipping in 2013.
Crane's position in retail really centers around our coin-based solutions, primarily with coin recycling and the self-checkout systems and coin dispense at the cash register. Here, we are the main provider to NCR; Toshiba, which is formerly known as IBM; and Fujitsu self-checkout coin solutions. The retail market in 2012 finished very strong, and we expect it to continue that way much through 2013. This success has been driven by NCR's self-checkout win at the Wal-Mart and our successful deployment of coin dispensers within the Wawa locations. In this segment like others we serve, our customers hinge their decisions on a hope to how well our solutions: one, improve their overall efficiency of their ability to manage cash; and second, provide the optimum and improved shopping experience for their consumers.
There are 2 very distinct segments in gaming, casino and AWP or amusement with prize. The global market reach for these segments are roughly equal, and Crane's sales into each segment are also roughly equal. Within Crane, the casino business comes from a very diverse, highly fragmented geographical customer make up. Much of our efforts and our focus over the past years has been to gain regulatory approval to the top OEMs. This was accomplished in 2012, and we're able to grow the business this past year at 8% to the casino marketplace.
As a very positive trend, as we look ahead, we are seeing activity levels at both the state and operator level truly increase. At the state level, there are more venues being approved such as Massachusetts, Illinois, Ohio. And at the operator level, we're starting to see an increase in the replacement rate and replenishment of their casino floors. Both of these activity levels bode well for future sales.
The AWP market is predominantly a European marketplace. It tends to be more volatile and fragmented as each European country separately regulates their gaming industry. The decline in 2012 was primarily due to the market contraction in Germany due to their legislative changes. And though Germany will be a smaller market than historically, we are seeing very positive momentum in Italy, which with its latest legislative changes, and an increase in technology requirement across most of the countries moving towards a higher-priced bill recycling solutions, both of which will drive new and improved sales growth opportunities for our business.
In conclusion, 2012 was a strong year for the payment team. We achieved core growth in a challenging marketplace and drove strong improvement in operating margins and profit. We've seen our portfolio continue to strengthen and grow through our acquisitions as well as through product innovation. The markets we serve in retail, transportation, gaming and vending are strong markets with attractive long-term growth prospects. We felt that with our existing products, our product innovation road map and our geographical coverage, we are keenly positioned for continued growth. And as a business, we continue to invest in growth in both our people, products, and we look forward to the regulatory approval of the MEI acquisition as this will add a fair growth platform into Crane. Thank you.
Richard E. Koch
You made it.
I know. My voice made it.
Richard E. Koch
Any questions on the core business? Ajay?
And if there's any questions?
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
Kurt, and maybe Max or Eric can chime in. So if you can comment to the notion that you're increasingly moving to a cashless world, fewer bills being used, certainly fewer coins, so how do you think about that trend as you think about the long-term growth outlook for your coins businesses? And then also maybe as you think about integrating MEI, how would you want to position your R&D activities around that cashless market because imagine there's a huge opportunity that could be tapped there?
Okay. So we actually find that the cash supply base, both in U.S., in Europe and in many of the countries around the world, are increasing. And as you saw from Eric's slide earlier, even in the U.S., which is very credit card-centric, 37% of transactions today still account -- still are paid for by cash. Now most of us in this room are not in that demographic. However, when you look around the world and as we do, cash is very much still in play and growing, especially in these emerging markets where we see an increasing wealth growing in countries like India and China, which are very cash-centric. And so it absolutely is playing towards our strength. Relative to our future R&D, as I mentioned earlier, we do have cashless-based solutions available in the vending area. This is one of the key areas where we've seen the opportunity to leverage cashless alongside with our cash-based systems as an incremental growth area. And so we certainly will continue to invest in that area as well.
Bradley L. Ellis
So what are the other -- if you look on a global basis of where this has played out over the last 20 years, is Japan as a marketplace where cashless and closed-loop systems on some vending products and other cashless solutions, in some cases is up to 5 closed system providers. With each one of those systems, there is still a payment system, cash payment system attached to every single one. So while the options continue to increase and cashless continues to grow, I think we look at what's occurred in Japan as an indicator for the future. You tend to see cashless solutions and closed-loop systems developed around transport systems where you have to buy a card for the Metro. That same payment system then begins to get accepted elsewhere. So your Metro card can pay for other services. Again, in some cases, some of the solutions in Japan, you have 5 to 7 different payment systems on one machine, a cash and coin bill validator and coin validator is attached to every single one of those, even still.
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
Maybe if you can provide an update on the German market. We saw the change in regulation in '12. So how should we think about that market? Is that going to be at that much reduced level going forward or...
Yes, so we've -- certainly. So what we've seen is certainly seen a decline from where it had been in early 2011, 2010. We've seen the markets stabilize here over the past 8 months. It looks like the legislative changes that were proposed are most likely going to hold. There's been a number -- if you follow this all, there's been a number of lawsuits taking place in Germany try to fighting. And so this is a story still yet to be fully determined. We do suspect that through this year, 2013, it will stabilize. But we're projecting that over the long term, the law will go into effect over the next 2 to 3 years, and so the market will contract slightly from where it's at today. However, as I mentioned, there's a number of other growth prospects that we're looking at in Italy and some other countries that are changing their legislative laws that are actually beneficial to our product set and game.
Richard E. Koch
So Kurt, thank you very much. We'll let you save your voice and...
Next up, Louis, to talk through fluids.
Richard E. Koch
Our last presentation of the day.
Louis Vernon Pinkham
Good morning. My name is Louis Pinkham, Group President of Crane Fluid Handling. I'm pleased to be here today to share with you the exciting journey that the Fluid Handling group has undertaken and how we are positioned for profitable growth in 2013 and in the future.
With the inclusion of Crane Barksdale and Environmental sales of $94 million, which were formerly in the control segment, Fluid Handling had 2012 sales of nearly $1.3 billion, adding $174 million of operating profit to Crane Co.
Crane Fluid Handling's core competency is the design, manufacture and marketing of valves, pumps and instrumentation where engineering solutions matter in critical performance applications. We have strong brands with global channels to effectively service our customers worldwide. With approximately 50% of our sales servicing the aftermarket, we are well prepared to manage the cyclicality of project business. With 2/3 of our sales outside the United States and 14% in emerging markets, we are well balanced globally and are capitalizing on emerging market growth rates. Our products sell into attractive growing end markets including chemical, oil and gas, power, building services, industrial and industrial markets.
The Fluid Handling group is comprised of the Crane Valve Group, Crane Supply, Crane Pumps & Systems and Crane Barksdale/Environmental. With sales of $889 million, the Crane Valve Group globally manufacturers critical on/off process valves for demanding applications focused on chemical, pharmaceutical, energy and nuclear power verticals; and valves, couplings and components for industrial building services and utility markets. Crane Supply is a $224 million Canadian distributor of pipes, valves and fittings for the nonresidential construction, industrial and mining markets.
Crane Pumps & Systems is a $83 million North American manufacturer of water and wastewater pumps. And Crane Barksdale and Environmental, with combined sales of $94 million, manufactures valves, instrumentation and systems solutions for demanding applications in oil and gas and general industrial. Clearly, Crane Fluid Handling has achieved solid sales growth coming out of the economic downturn with continuous improvement in OP margin, driven by effective deployment of the Crane business system and repositioning actions.
Focusing specifically on 2012 performance, Crane Fluid Handling saw a 5% revenue increase driven by share gains even with the challenging headwinds coming from the European market slowdown. Some of the highlights of 2012 were our successful growth in emerging markets, in particular in our ChemPharma and Energy business; project wins in Asia Pacific regions such as the $6 million award for BASF at the Chongqing plant; the $5 million Ying Li Xur [ph] acetic acid plant; and the $4 million Jacobs [ph] project for Abonec [ph] in Singapore.
Crane Supply leveraged their new Toronto distribution center to provide market-leading service levels to local contractors, driving significant market outgrowth. Our 2011 acquisition of WTA gained synergy traction through sales opportunities outside of its home market of Europe, leveraging our global sales force and bundling with other fluid handling products. Our new global line ball valve offering drove more than 5 -- 7 points, excuse me, 7 points of share gain year-over-year and allowed the business to better offer a portfolio of line products for the highly corrosive chemical applications. And Crane Nuclear, 1 additional valve content on the AP1000 units at new nuclear power plant sites in China and the United States. All in all, a strong growth year for Crane Fluid Handling.
The Fluid Handling group has a diversified and balanced geographic coverage, with 35% of our sales from the United States; 21%, Canada; 25% in Europe and 19% in Rest of World. We have significant presence in the Middle East and Asian markets, which are focused growth regions for Crane and Fluid Handling. With nearly 100 total locations around the world, we have a broad base of manufacturing, distribution, sales and service sites to support our customers' local needs. In addition, we have a flexible and robust low-cost manufacturing and supply chain base to ensure our ability to remain competitive.
In 2012, with the slowdown in the European markets, we continued the transformation of the Fluid Handling business with the repositioning actions outlined in the third quarter of 2012 and completed by the end of last year, driving a total Fluid Handling annual profit improvement of $10 million. Our Krombach business reduced headcount, incorporated process improvements for increased throughput and efficiency, as well as transfers of specific manufacturing operations to Crane facilities in low-cost countries.
We closed our German Resistoflex facility, consolidating production into our facility in Marion, North Carolina, and Suzhou, China, while adding additional capability to our service center in The Netherlands to serve the European market. This business model change provides our European customers the lead times they require with less Crane infrastructure costs overall.
The Crane Fluid Handling journey resulted in 2012 sales of $1.29 billion or 5% growth from 2011. This was made up of 7% core growth and just over 2% of unfavorable foreign exchange. Operating profits of $174 million or 13.5% is an increase of 13% or 8% versus 2011 while leveraging sales at 22%.
For 2013 guidance, Crane Fluid Handling is projecting sales up 2% to $1.32 billion and operating profit up 9% to $190 million or 14.4% of sales, which equates to a 62% leverage rate. While we expect markets to be flat in 2013, overall due to market uncertainty, we have targeted share gains through new product growth and marketing penetration initiatives while continuing to drive year-over-year productivity gains.
From a market perspective, our total served end market increased to nearly $18 billion with market growth and the addition of the Barksdale and Environmental businesses. Our weighted market growth projections for 2013 are relatively flat with continued uncertainty in Europe and a conservative view on a potential global economic slowdown impacting our end markets. However, we are positioned, especially in our European business, and we continue to invest in emerging markets that provide a foundation for earnings growth with volume. Project and growth activity are levels to sustain our revenue projections with our end-market focus continuing to drive improved results in both MRO conversion and project pursuit, while our coordinated global sales effort continues to have success in bundling the full range of Crane products.
From a market-served perspective, as a percent of Fluid Handling sales, markets are fairly equally weighted between chemical, pharmaceutical, energy, building services and general industrial. The following slides are a quick overview of our market projections for each of these important market segments for the Fluid Handling group.
With a global served market opportunity of $3.8 billion in the chemical pharmaceutical sector, we believe the markets grew in 2012 year-over-year by 5% to 7% in mature markets and 7% to 9% in emerging markets, with Fluid Handling sales outpacing these rates. Our MRO orders saw some deceleration in the second half of 2012 and project orders slightly increased in Q4 after a third quarter decline. However, year-over-year, growth was still positive. Our project funnel remains steady both in number of projects and in project value, which supports our perspective of flat growth in 2013. We have, however, seen a slight uptick in the earlier identification and strategy development stages for new projects that are typically a year or more in advance of a potential order.
Market drivers, moving forward, remain favorable, although we are a bit concerned over continued economic stability in the Eurozone in the shorter term. U.S. chemical capacity utilization has remained above 75%, which bodes well for continued CapEx investment. And longer-term-world output trends support positive end markets. The lower long-term cost of gas in the U.S. due to the shale gas supply has increased the competitiveness of U.S. domestic petrochemical manufacturers, and we are positively positioned to serve this demand. Looking forward, we project an overall 3-year market growth of approximately 2% to 4% globally.
From a business unit standpoint, we look to accelerate growth by continuing our investments in developing markets and leveraging our global sales force in bundled project and MRO opportunities, as well as new product development initiatives to enhance safety and reduce fugitive emissions. Fluid Handling is gaining share in this important market, and we are positioned for strong outgrowth in the future. And in the chemical and pharmaceutical markets, here are some of the powerful brands and products we have serving our global customer base.
Breaking out energy at 24% of total Fluid Handling sales, we see increasing penetration in the East Asia power markets and continued strong position in North America with increased MRO, even with the full -- with the low in the U.S. new power plant construction. With a global served market of $4.9 billion, we saw markets increase by approximately 1% to 2% in developed regions and 9% to 11% in emerging markets.
Looking forward, we project overall market growth of approximately 2% to 4% on a global basis, with U.S. downstream oil investment and U.S. power likely to remain at the same levels as 2012. While new U.S. power projects are all gas-fired facilities due to environmental regulations and low-cost shale gas, demand for coal-fired plants remains robust on a global basis, and we are well positioned to service both. In refining, we see continued production expansion in existing North American plants with lower-cost shale oil feedstock and shale gas cost-saving drivers. There will be continuing future energy investment in developing markets, driving solid long-term macro trends in these regions.
Similar to our chemical market, growth drivers for Crane are application-focused bundled global sales and accelerated emerging market investments. The oil and shale gas developments will play a key role in the U.S. energy market, driving growth in the future, which Crane Fluid Handling is well positioned to serve. And again, a sample of the outstanding brands and products we have servicing our global customer base within energy, along with the addition of the strong Barksdale and Dynalco brands in this market.
Let me take a moment to just talk about our Barksdale products, which are valves, instrumentation and instrumentation products such as pressure, temperature flow and level switches and transducers for the upstream oil and gas, general industrial and transportation end-user markets. Barksdale's products have a leading position in control applications for onshore blowout preventers, industrial hydraulic power units as well as truck and bus suspension.
Dynalco, part of the Barksdale business, produces deep [ph] centers and instrumentation for gas compressors in the upstream and downstream oil and gas and other rotary applications. Both the Barksdale and Dynalco products are a natural fit within the Fluid Handling business.
In our building services end market, which makes up 22% of Crane's Fluid Handling sales, our exposure is mainly in Canada, the U.K. and the Middle East regions. Crane Supply makes up the bulk of the Canadian sales. The significant market outgrowth -- excuse me, the significant market growth seen in Canada in 2012 was from construction starts that began in 2010 and '11.
Looking forward, we project overall market growth of approximately 3% to 4% on a global basis, although the U.K. and Europe economies are still expected to struggle in 2013. Both Canada and Middle East data show increasing commercial investment starts, which are helping to offset the declines in the U.K. institutional starts from lower government spending. The CanaData statistics above show a solid 2013 and '14.
There continues to be an acceleration in projects for the next 4 years period driven by the Kingdom of Saudi Arabia, Kuwait and Abu Dhabi, responding to the pressing social needs in housing, education and health. We are well positioned in these regions with the opening of our new distribution center in Dubai at the end of last year, which is allowing us to achieve lower lead times and better support local growth. Business drivers in this market remain new product development in variable flow systems and Middle East investment in distribution and sales. New product development and customer affinity has positioned Crane well for the growth we expect in the Middle East. And again, some of the important brands and products that we have servicing our U.K., Canada and the Middle East customers in the building service markets.
Our utilities end market makes up 9% of total Fluid Handling sales and is heavily driven by our U.K.-based building services and utilities business and Crane Pumps & Systems business in the United States. Our Viking Johnson brand of water couplings sell globally and is driven by repair, replacement and new installation work for water and wastewater applications. The U.K. market was down 15% year-over-year in 2012, driven by the U.K. government AMP5 water investment program delays compounded by a flat gas market.
However, looking forward, we expect overall market growth in utilities to expand to 1% to 2% globally. The updated AMP5 and AMP6 U.K. water investment programs are planned for flat to decreasing future levels. However, aging mains in both water and gas in the U.K. and other developed countries are a fact, and delaying continued repair and investment is not an option. Planned U.K. smart meter introductions will accelerate gas regulator sales when conversions begin later in 2013, and the program will last through 2020. Business drivers for Fluid Handling include increased sales resources in growing Middle East markets and a breakthrough in lead times supply of product.
In the end, Fluid Handling is growing market share with increased sales focus and strong customer metrics in these markets. And our industry-leading brands, products and customers that service the utility market.
And finally, 22% of our sales serve the general industrial sector and are largely North American weighted. We saw the market in North America increase approximately 3% in 2012. Crane sales increased in the segment in 2012 as we enhanced channel management and competitor conversions to drive out growth.
Looking forward, we expect overall market growth globally for the general industrial segment to expand to 2% to 3% per year. Industrial production leading indicators are mixed globally. Though they appear stable in the U.S., they are flat to decreasing in the Eurozone with increasing concern around the European markets. We are driving MRO expansion with end-user focus and channel expansion while offering superior customizable products. Crane will win by providing market-leading service and custom solutions to exceed our customers' expectations.
Leveraging the Crane business system, Fluid Handling continues to capitalize on market growth, emerging market penetration, new product development and price realization to drive profitable growth. I would like to share a few examples of the most recent areas where Crane Business System deployment has enabled us for success within the Fluid Handling group.
Our project management tracking system allows us to early align our global organization around project opportunities so that we can effectively influence the specification, offer the complete Crane portfolio and develop a clear strategy to provide the right solution to win. Using this process, we have seen an increasing percentage of projects where we are able to bundle multiple Fluid Handling products, and our overall win rate has improved.
Crane Business System tools were employed at our nuclear business where we leveraged voice of the customer to better understand needs and positioned our business model to provide a process-driven quality delivery system where we agree with the consumer upfront on a performance-based value set around the defined scope of work. The resulting significant market share gains with existing and new customers highlights the impacts of these improvements. At Crane Nuclear services, our people are our product.
In 2012, we were able to achieve 36% core product sales growth in our Ontario region by driving share gains at over twice the market growth rates. The 2 key components of this were the prior year's investment in a new Toronto distribution center that included inside pipe storage and the addition of pipe valve and fitting value-add processes on site. In addition, our strategic relationship classification process improvement prioritizes our sales teams on specific value proposition for targeted customers. Utilization of CBS tools enables Crane Supply to provide best-in-class lead times and delivery, which is the foundation of our value proposition in this important building services market.
We stated earlier that we drove a 19% increase in China orders during 2012 in Fluid Handling. This was accomplished by leveraging our multinational relationships and further developing our relationships with local companies. Crane's value for a multinational customer like BASF is that we had AML-approved status from our German base, strong technical preference based on experience with Crane and support globally to best manage multiple EPCs.
And for a local company like Ying Li Xur [ph], they valued Crane's local China support, our depth of application knowledge and valve expertise to best align our portfolio to meet their requirements. Our global project management process keeps Crane stakeholders' engaged in our successful pursuit of all available products that Crane can supply on a project.
Turning to the Middle East, we have seen across multiple Crane product brands and end markets the customer demands for shorter lead times to support their local needs. Crane has now established a service center in Dubai to start -- complete Crane and Hattersley valves from our building services -- for our building services market and late-stage assembly and test for a highly configurable Duo-Chek and Saunders diaphragm valves for the oil and gas and chemical markets. Leveraging infrastructure across multiple businesses, this local product availability enhances our increasing sales presence in the growing region to grow our MRO and project business.
Crane Fluid Handling continues to accelerate growth through new product development. We have a robust pipeline of new product development projects to provide innovative solutions for our customers. For example, the Xomox global lined ball valve were designed to meet the chemical industry's more demanding safety and fugitive emissions requirements, utilizing a unique and patented stem seal on a one-piece ball and stem, providing increased safety and superior sealing to the atmosphere. The Saunders S360 targets to the pharmaceutical market providing a lighter, shorter profile actuator that the customer can more easily install. These are recent examples of our successful MPD programs, and there are more to come in 2013 and beyond.
Crane Fluid Handling is well positioned for profitable growth. Due to our focus on vertical markets with niche applications where we have strong end-user and EPC relationships to drive our presence on specifications based on our clear product value propositions and ability to bundle a total solution. Our continued investment in new product development to resolve customer application challenges help us to differentiate ourselves in the marketplace. Through our significant installed base and internal data mining processes, we are focused on the profitable aftermarket. In addition, the significant investments made in emerging markets and global reach of our business model will continue to position us well for the emerging market growth.
Lastly, our continued efforts to drive productivity to leverage best value supply chain and to lead in price realization will help Crane Fluid Handling to continue to drive margin expansion. I am confident in our current -- in our present position and look forward to the future opportunities and performance Fluid Handling will deliver. And we continue to accelerate our investment for growth by providing engineered solutions for our customers' critical performance applications.
I think you could see from this chart that our strategy is working. We have transformed the group over time and have achieved sustainable results. We are well positioned to leverage our portfolio of businesses to profitably outgrow in the markets we serve. Thank you.
Richard E. Koch
So we're running up against -- on time, and we want to open up for questions across the board, too. Any specific questions for Louis on Fluid Handling? Ajay?
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
So Louis, maybe just on the ChemPharma market, and by the way, lots of good color by end markets. But ChemPharma seems like a couple trends, if you can call them trends. First, you have low natural gas prices kind of helping drive investment here in the U.S. But then just based on the comments coming out of some chemical companies, it seems like CapEx is going down this year. Dow Chemical talked about closing 20 facilities. So how should we think about ChemPharma market for you this year, the MRO mix versus projects and then what are the implications for margins?
Louis Vernon Pinkham
Yes. I think the devil's a bit in the details here, especially in the chemical markets. If you look at the Dow, you look at Wacker, which is another major customer of ours, slow down in polysilicon demand in that space, and we are seeing a slowdown. But yet we're seeing growth, as we talked about, in petrochemical space because of the lower cost of natural gas in the United States. When you step back and you look at the way we look at the business globally, we have a global project tracker process, so that we're able to see, and with our strong position in the chemical market, we're able to see majority of projects that are going on. We would tell you that would suggest flat growth in projects for 2013. And so hence, the guidance that we're giving at this point is a flat market, and our growth will come from continued market outgrow, so share penetration.
Is there another question? Matt?
You're mostly finished the capacity ships that you did out of Europe in 2012. But could you give an update on kind of where your capacity is now, mature markets versus developing, and whether there's more kind of progression to come? Are you going to continue migrating capacity this year, next year? Or is your footprint about where it should be?
Louis Vernon Pinkham
Yes, great question. So we are confident in the actions that we took in 2012. And as Eric outlined earlier, we have no specific plans for any further changes in our product delivery system or our manufacturing base. Now do we always look and evaluate best positioning for our supply? Absolutely. But for 2013, we have no expectations. Our capacity is as we expect we need it to be, which will support the expectation of our sales and profitability in 2013.
Richard E. Koch
Okay. Thank you, Louis. So I'm going to close this out and thank each and every one of you for attending today. I'd like to thank the presenters. You heard from our team, you heard from the businesses and the opportunities we have under Eric's leadership for the past 12 years, we've continued to execute on the same strategy and execution. We target highly engineered solutions, niche applications where we can be the market leader. Driving that level of customer into a seat that allows high rates of return and free cash flow, and we've deployed that free cash flow and we'll continue to.
We like our end markets. We like our businesses. We like the long-term trends in the businesses that we're in. We have a good balance geographically. We have a good balance in long and short cycle. We have a consistent approach with our Crane Business System that drives not only a relentless approach of productivity, but hopefully you've heard today as well specifics around our continued investment for growth, which all leads to our guidance for 2013 of revenue of $2.63 billion and moving OP from $335 million to $375 million or 14.3%, and our guidance of $4.10 to $4.30, driving an earnings per share growth of 11% to 16% on a year-over-year basis. And we look forward to the successful regulatory approval of MEI and we are well planned and positioned to integrate moving forward.
So thank you, all, for your time today. And I know we're running up against the clock, but we want to take some more questions at this point.
Richard E. Koch
I would be disappointed if you didn't have any question.
This is Dean Dray. Oh no, I'm sorry. This is [indiscernible]. Sorry, Dean. It's only because I love you. Eric, when you look back over those last 12 years, are there any 1 or 2 things, big things, 35,000 foot things that you wish you hadn't done? And are there any that you say I've learned I should have double down on those? I'm just trying to get a sense of what that learnings were over the last decade and how they'd be applied in the future?
Eric C. Fast
I have no idea. This is all been a journey about constant learning, right? I can't begin to tell you about all the mistakes I made. And I just think that both starting with Shell, this core value of integrity and honest business dealings and putting my whole mind on the business, this has been a fantastic culture. And all that we've done is try to live and adhere to that culture. And I think the rest of it is about materially improving the business everyday and having a consistent strategy. And frankly, we listen, we learn, we adjust, we change and I think we've got it right. I think you're starting to see it in the quality of the portfolio. Thank you.
Richard E. Koch
Ajay? We're going to charge you, Ajay, for all these questions.
Ajay Kejriwal - FBR Capital Markets & Co., Research Division
Just, yes, one last question before I let you -- so Eric, on the portfolio of topic, obviously, you've done a lot of divestitures. The portfolio is a lot slimmer now. You did a couple of acquisitions, MEI. Maybe just big picture thoughts on are there businesses that do not fit that you could be divesting over a period of time? And then when you think about Fluid and Aero, are there acquisition opportunities to expand those 2 platforms?
Eric C. Fast
So there are acquisition opportunities in Fluid and Aero, and they're both still consolidating industries and we would look to participate in that. With respect to divestitures, as I said, I think on the fourth quarter call, we got no present plans on divestitures. And as you see, we've done one heck of a lot of trimming to the portfolio already. So we generally feel the portfolio is in good shape, and we like gas [ph] business and NGL [ph] materials.
Richard E. Koch
Let's call it a day. Thank you, all. Thank you very much.
Eric C. Fast
Thank you for your interest in Crane.
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