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Crane (NYSE:CR)

Q4 2013 Earnings Call

January 28, 2014 10:00 am ET

Executives

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

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

Richard A. Maue - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Max H. Mitchell - President and Chief Operating Officer

Analysts

Matthew W. McConnell - Citigroup Inc, Research Division

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

Brian Konigsberg - Vertical Research Partners, LLC

Kenneth Herbert - Canaccord Genuity, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

James Foung - G. Research, Inc.

Operator

Good day, everyone, and welcome to Crane's Fourth Quarter 2013 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Richard Koch. Please go ahead, sir.

Richard E. Koch

Thank you, operator. Good morning, everyone. Welcome to our Fourth Quarter 2013 Earnings Release Conference Call. I'm Dick Koch, Director of Investor Relations. On our call this morning, we have Eric Fast, our Chief Executive Officer; Max Mitchell, our President and Chief Operating Officer; and Rich Maue, our Chief Financial Officer. We will start off our call with a few prepared remarks, after which we will respond to questions.

Just a reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our Annual Report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the table at the end of our press release, which is available on our website, www.craneco.com, in the Investor Relations section.

I would like to invite you to attend our Annual Investor Day program on February 27 from 8:30 a.m. to noon via the Internet or in person. Please contact me to reserve a place at the conference.

Now let me turn this call over to Eric.

Eric C. Fast

Thank you, Dick. As outlined in our press release last night, excluding special items, Crane's full year earnings per share of $4.18 increased 13% over 2012 and represented the third consecutive year of record performance for the company and in line with our most recent guidance. Our adjusted full year operating margin was 14.5%, a substantial improvement over 13% last year, with improvements generally broad-based and led by our Fluid Handling segment.

Our fourth quarter results capped off a successful year in 2013, with core sales growth of 4.5% and operating profit, excluding special items, increasing 15.8% to $98 million and with margins improving to 14.4%, a 100 basis point increase over 13.4% last year. And I'm pleased to say that every business segment had higher operating profits in the fourth quarter, reflecting continued strong execution. As we commented on in our third quarter conference call, while 2013 has been a difficult sales environment, we drove earnings growth through significant productivity gains, cost savings from the 2012 repositioning and a strong cost-conscious culture. Although we remain cautious, we are expecting a gradual improvement in core sales in 2014 as 80% of our business is tied with the recovering economies in North America and Europe. In addition to the record earnings that we delivered in 2013, we've maintained a balanced capital deployment strategy, raising our quarterly dividend 7% to $0.30 in July and completing the acquisition of MEI, enabling a third large growth platform in our portfolio.

Before I turn the microphone over to Rich and Max, I would like to thank all of you in the investment community for your professionalism and support for the 13 years I have been Chief Executive Officer. During this time, Crane has become a significantly larger and stronger company, with solid financial performance and a sound balance sheet, which will support future growth. I've been working with Max Mitchell, who'll succeed me as Chief Executive Officer, for almost 10 years. He has contributed greatly to the success of Crane Co. during that time, first as Vice President of Operational Excellence, then as Group President of the Fluid Handling segment and more recently, as President and Chief Operating Officer. The Board of Directors has assisted us in preparing for some 2 years for a seamless transition, and the board and I are confident that the company is in good hands.

Rich Maue will now take you through the businesses, provide some additional financial information, and Max will provide comments on 2014 and the future.

Richard A. Maue

Thank you, Eric. I'll turn now to segment comments, which compare the fourth quarter of 2013 to 2012, excluding special items. Aerospace & Electronics sales increased 6% to $187 million compared to $176 million in the fourth quarter of 2012. Segment operating profit increased 14% to $45 million, and operating margins increased 160 basis points to 23.9% from 22.3% in the prior year. Revenues and operating profit increased in both businesses. Sales in the Aerospace Group were $116 million compared to $111 million last year. Commercial OEM sales increased 11%, driven by strong sales to large aircraft manufacturers. Total aftermarket sales increased 4%, with the 12% increase in commercial aftermarket sales more than offsetting lower commercial and military modernization and upgrade sales. The OEM aftermarket mix was 60%-40% in both the fourth quarter of 2012 and '13.

Operating profit in the Aerospace Group increased approximately $3 million compared to the same quarter last year, driven by the higher sales, strong productivity and lower engineering spending. For 2014, the International Air Transport Association is forecasting global passenger air traffic to increase 6%, while cargo traffic will increase slightly. We continue to benefit from increasing OEM build rates across a broad range of platforms, and we remain cautiously optimistic about the aerospace aftermarket, particularly in light of the strong finish in 2013.

The Electronics Group sales were $71 million in the fourth quarter of 2013, $5 million higher than last year. Operating profit margins improved as expected during the fourth quarter, driven by the impact of the higher sales, cost actions taken in the second quarter and strong productivity. Aerospace & Electronics backlog was $361 million at the end of the fourth quarter compared to $378 million in December of 2012. The decline in backlog was largely due to the timing of defense-related orders in our Electronics Group.

As we look into 2014, we expect total segment sales to be slightly higher, with Aerospace sales growing as a result of increasing OEM build rates and Electronics sales declining modestly due to continued defense spending pressures. We expect segment operating profits will increase slightly, with volume-driven profit in Aerospace more than offsetting the impact of the lower sales in Electronics, as well as the higher engineering expense related to new program wins and new product development initiatives in both businesses.

Engineered Materials sales increased $5 million or 12% to $52 million. Sales of our RV-related applications increased 27% versus the prior year as RV OEM build rates continued strong, both with dealers and retail demand continuing through the quarter. Building products-related sales increased 1%, reflecting slowly recovering commercial construction markets, and transportation-related sales decreased 6%.

Operating profit increased to $5.8 million, and operating margins grew 110 basis points to 11.1% compared to 10% in the fourth quarter of 2012. The improvement was due primarily to higher sales and strong productivity. RVIA estimates that 316,000 wholesale unit shipments were built in 2013, a 9.4% increase compared to 2012. For 2014, the RVIA is estimating wholesale shipments of just over 335,000 units, a 6% increase over 2013.

For 2014, we expect Engineered Materials segment to show continued improvement in sales, driven by modest growth in RV-related applications and a gradual improvement in building products shipments over the course of the year. We expect to be able to leverage this growth together with additional productivity initiatives to drive operating profit and margin improvement.

Merchandising Systems sales of $122 million increased $29 million or 30% versus the prior year, driven by $25 million of sales related to the acquisition of MEI and higher sales in Payment Solutions. Vending sales were flat with the prior year. The higher sales in Payment Solutions were driven by strength in our retail, vending, transportation and casino gaming vertical markets. Segment operating profit of $14 million increased $1.9 million, reflecting continued solid performance in Crane's core Payment Solutions business, profits from MEI and strong productivity across the segment, which more than offset the lower Vending Solutions operating profit. Operating margin decreased 11.2% compared to 12.6% in the same quarter of last year, with higher margins in Payment Solutions offsetting -- offset by lower margins in Vending Solutions.

The combination of MEI and our legacy payment systems business brings together 2 leading unattended payment systems providers to create Crane Payment Innovations or CPI. Integration activities at CPI are well underway and on track to deliver $0.20 of accretion in 2014. In 2014, we anticipate segment-level revenue will increase to approximately $750 million, comprised of $575 million from CPI and $180 million from our Vending Solutions business. CPI revenues reflect the addition of MEI, as well as the impact of the divested product line, as required by the European Commission. Operating margin for the segment is expected to increase to approximately 11.4% compared to 10.7% last year. As expected, the impact of intangible amortization and, to a lesser extent, lost profits associated with the divested product lines have an unfavorable impact on segment margin.

In the fourth quarter, Fluid Handling sales increased 2.3% to $320 million, driven by a core sales increase of 2.7%, partially offset by unfavorable foreign exchange of 0.4%. Backlog was $334 million at the end of December compared to $343 million at the end of December of 2012, driven primarily by the timing of nuclear project-based services.

With respect to key end markets for our process valves, despite ongoing market uncertainty in Europe, order and quote activity continued to be strong during the quarter. While chemical industry demand in North America remains soft, investments in the Middle East and China continue to move forward. U.S. refineries continue their turnaround and upgrade activities, and demand from power markets in China and Europe is relatively strong, while the Americas and India remain soft. With respect to our commercial valves business, commercial construction and mining activity in Canada continues to be soft. However, our U.K.-based commercial valves business showed solid order momentum in the quarter.

Fluid Handling operating profit increased 12% to $48.2 million, and operating margins increased to 15.1% compared to 13.7% in the same quarter last year. The improvement in operating profit margins reflected effective leverage at a higher volume, improved productivity and the benefits of the European repositioning actions that we took in 2012. We expect low-single-digit sales growth for Fluid Handling in 2014, with anticipated strength in our core process valve business in the second half, reflecting an expected improving economy in North America and Europe. We expect to continue to grow operating profit and margins, driven by leverage on the higher sales and a continued focus on productivity.

Now turning to more detail on our total company results and forecasts. Foreign currency translation had a negligible impact on EPS in the fourth quarter. As a reminder, the operating profit impact on foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact. Our fourth quarter tax rate was 38% on a GAAP basis compared to 34.4% in the fourth quarter of 2012. Excluding the impact of the special items, our fourth quarter tax rate was approximately 33.3%, which compares to 31.4% in the prior year. We expect our 2014 full year tax rate to be 31%, which includes the assumption that legislation will be enacted during 2014 that extends the U.S. Federal Research Tax Credit retroactive to January 1, 2014. Our estimated 2014 tax rate, which is higher than our 2013 tax rate of 29.7% excluding special items, reflects increased earnings in the U.S. and Japan as a result of the acquisition of MEI.

Overall, free cash flow was $138 million in the fourth quarter of 2013 compared to $146 million in the fourth quarter of 2012. In addition, capital spending in the fourth quarter of 2013 was $10.4 million compared to $9.4 million last year. For the full year 2013, free cash flow was $210 million, coming in at the top end of our guidance range, compared to $205 million last year, reflecting improved operating results and strong working capital management. For the year, capital expenditures were $29 million, just slightly below the high end of our most recent guidance range of $25 million to $30 million. We ended the quarter with $271 million in cash, down from $424 million at year-end 2012. The reduction was driven by cash used for the acquisition of MEI. During the quarter, we also issued $550 million of bonds in connection with the acquisition.

As described in our earnings release last night, for 2014, sales are expected to be $3 billion, driven by a core sales increase of 1% to 3% and the impact of the MEI acquisition. Our 2014 earnings guidance is in the range of $4.55 to $4.75 per diluted share, excluding special items. This guidance reflects leverage on the core sales increase, $0.20 of accretion contributed from the MEI acquisition and lower pension expense.

I would note that while our first quarter earnings are generally the lowest of the year, the MEI business brings additional unfavorable seasonality to the quarter. Furthermore, the $0.07 of integration synergies are expected to be largely realized in the second half of 2014. And finally, as a reminder, our first quarter of 2013 included a $0.05 tax benefit associated with the reinstatement of the R&D tax credit. Also in connection with the recent acquisition of MEI, we expect to incur transaction and integration-related costs and inventory step-up amortization charges in the range of $18 million to $21 million in 2014. In addition, we expect modest repositioning actions, reflecting our continued focus on margin expansion. The costs associated with these proactive repositioning actions are expected to be in the range of $10 million to $13 million and will be largely offset by gains from expected sales of certain real estate. Savings associated with these repositioning actions are estimated to be $5 million in 2015 and will increase to $10 million on an annual basis beginning in 2016. Additional information will be provided at our Investor Conference in February.

We expect 2014 free cash flow to be in a range of $225 million to $250 million. While free cash flow will benefit from higher earnings, we have a number of headwinds, including the impact of integration-related costs, higher pension contributions and higher capital expenditures to support a variety of growth initiatives that we will also share with you in February.

Now let me turn the microphone over to Max Mitchell.

Max H. Mitchell

Thank you, Rich. I would first like to express my thanks to Eric Fast, who for the past 14 years with Crane, including 13 years as CEO, has led this organization to substantially higher levels of performance. During this time, sales have almost doubled, earnings per share increased 130%, dividends per share tripled and our stock price has risen over 200% versus 26% for the S&P. It's been a privilege to have worked by Eric's side this past 10 years, and along with an outstanding team in place today, I am honored to lead Crane with its strong heritage, rich culture and record of accomplishments spanning 159 years. I wish to also thank our Chairman of the Board, Shell Evans, and the Board of Directors for their continued guidance and support. I look forward to our upcoming Investor Conference on February 27, where, along with our leadership team, we will update you on 2014 guidance and our actions to continue to drive shareholder value.

As Rich just said, our 2014 EPS is expected to be in a range of $4.55 to $4.75, representing an increase of 9% to 14% over 2013 earnings per diluted share of $4.18 before special items. With the acquisition of MEI now behind us after a lengthy regulatory approval process, we are now well into a successful integration plan. The combination of MEI with Crane's existing portfolio of strong businesses will help drive another year of record earnings in 2014. And as Rich mentioned, the expected sales and earnings growth in 2014 will also be driven by increasing commercial OEM build rates, worldwide infrastructure investments that will benefit Fluid Handling, the continued adoption of unattended payment systems and the recovery in nonresidential construction.

As I look to 2015 and '16, we will have tailwinds from further synergies from MEI and expected continuing global economic recovery and incremental savings from the earlier-mentioned repositioning activities. In addition, we are increasing our investments in new product development. With these initiatives, along with a continued focus on productivity and cost reduction, we continue to target earnings per share growth of 10% per year.

We look forward to sharing more about our plans and initiatives at our Investor Day on February 27. Now I'd like to turn it back over to Dick.

Richard E. Koch

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matt McConnell of Citi Research.

Matthew W. McConnell - Citigroup Inc, Research Division

First, congrats again to both Eric and Max.

Max H. Mitchell

Thank you.

Eric C. Fast

Thank you.

Matthew W. McConnell - Citigroup Inc, Research Division

If I could start on Fluid, I think Rich mentioned U.S. chemicals has stayed soft in 4Q. I wonder if that was a reference to orders or to revenue. And are you seeing any more strength in quoting activity there? Is there any contrast?

Max H. Mitchell

You want me to take markets a little bit? So I'll hit chemical as well, Matt, I'll give you just some color on our regions overall. So if I pull back and look at process valves overall by region, Americas, year-over-year and then on a sequential basis, so we've been -- we were a little soft, a little flat in Americas overall, project and funnel activity improving and improving sequentially, so we're seeing some signs of recovery. Where we continue to see strength is China, Europe, Middle East, strong and continued improving trends sequentially. India, Asia-Pacific with Australia has been our weakest on a year-over-year basis. If you look specifically by key end markets, chemical has been, overall, flat year-over-year; Americas, a little soft here but improving sequentially, so we're seeing some slight momentum. China, Europe continues strong; India, Asia-Pac, soft. So that's a common theme as we've had from a regional standpoint. From a refining and a petrochem standpoint, we're up slightly year-over-year. Americas, improving trends has increased projects that we have in the funnel related to refining turnaround work. China, Europe, Middle East, strong. And again, India, Asia-Pac, weak. Power for us has been up year-over-year mid-single digits. America, flat to weak, with, again, signs of recovery. China, Europe, Middle East, strong. And again, India, Asia-Pac, kind of soft. So hopefully, that gives you a little bit of end market color on orders as it relates to the process valves side.

Richard A. Maue

Yes. I would just follow on that, Matt, with some comments that we've made on a couple of previous calls and consistent with some discussions that we've had specific to chemical in the Americas. We do anticipate that still. I think we haven't -- we're not coming off our position that we would see that being a little bit soft, and it echoes a little bit what Max mentioned, and starting to pick up in the latter half of the year. And it's really aimed at sort of where our products fit with severe service applications. So just to kind of go off of Max's point there.

Max H. Mitchell

Just some of the planned investments, we'll see capacity that's being added will translate into some expected volume later when that goes further downstream.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. And then of the low-single-digit revenue increase you're looking for, for fluid, would that be stronger in the back half of the year?

Richard A. Maue

Yes, you would see it being more of a gradual improvement when you look at each of those pieces. Chemical, as we just said, sort of improving as you look toward the second half of the year. When we look at sort of the exposures that we have on the commercial side, we see the improving end markets in North America helping pull through the balance of the year as well. So more of a gradual improvement.

Matthew W. McConnell - Citigroup Inc, Research Division

Okay, great. And then if I could touch on the free cash flow guidance, you're modeling about a $30 million year-over-year increase at the midpoint. I thought MEI was doing about $85 million of EBITDA on a stand-alone basis, so are there any other important offsets to be aware of, either CapEx or working capital or...

Richard A. Maue

Yes, the largest piece there would be the incremental interest expense associated with the issuance of the bonds. So when you reflect that or put the impact of the interest against that, it comes back down to this -- what we've been going out with was about $55 million to $60 million of free cash flow after that, after the impact of interest. The other headwinds that I mentioned on the call relate to pension, which is going to be an increase next year, as well as just the integration cost associated with getting the synergies that we expect to get over the next couple of years and a lot of those costs happening and cash costs happening in 2014. I would also, and I did mention in the prepared remarks, Matt, that there's going to be a decent amount of incremental CapEx that we expect to see this year, and we have a lot of exciting things that we're going to share with you all on Investor Day specific to those initiatives.

Matthew W. McConnell - Citigroup Inc, Research Division

Which businesses would see the bulk of that CapEx investment?

Richard A. Maue

Sure. So again, we'll provide more details at Investor Day, but it's going to be largely around -- when we look at our Aerospace Group, in particular, with a lot of the new program wins that we've recently had and others that we're hopeful to achieve, there'll be a bulk of that reading through in our Aerospace Group. And the second largest would be in our Fluid Handling Group with a variety of different new product development introductions and opportunities that we're going after.

Operator

Our next question comes from the line of Matt Summerville of KeyBanc.

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

Can you just give a little more granularity in terms of the repositioning actions you're taking, which business units that's going to impact?

Richard A. Maue

Matt, we'd rather provide a little bit more color in that regard on Investor Day in terms of the actions that we're taking there. We'd like to stay a little bit more broad at this point and would ask that you hang on until Investor Day where we'll provide the details.

Eric C. Fast

We need to talk to our own people, too.

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

Sure. Understood. Can you give a little more granularity in terms of your expectations within Aerospace & Electronics just from a product mix standpoint when you think about the OE versus aftermarket dimension 2014 versus 2013? And then the civilian versus military dimension as well, how we should be thinking about that?

Richard A. Maue

Yes, so we've had some nice -- we had a nice performance overall in commercial OEM throughout '13, as you know, and there was a bit of a struggle with respect to aftermarket, in particular, in the earlier part of '13. And as we sort of cascaded through the balance -- or the half second of the year, we started to see some uptick in commercial aftermarket. We are cautiously optimistic that we'll continue to see a nice trend in commercial aftermarket. I would pause a little bit in that our fourth quarter was exceptional, and I'd be careful about creating a run rate off of our Q4 performance. But overall, we would continue to see the commercial OEM side continue to grow at a nice rate, with some incremental growth as well coming from aftermarket. On the defense side, we're going to continue to see headwinds here from our point of view. Now we had a notable headwind in 2013, if you recall, from the C-130 MNU program. So that was in our Aerospace Group, where we had a massive $10 million – well, massive. We had a $10 million project that we satisfied largely last year, and we had that headwind this year. But to just broadly characterize, continued, I think, trends in commercial OEM, a little bit of step-up in aftermarket and continued, I would call it, modest headwinds in military.

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

And then just one more question on Merchandising Systems or specifically, the payment business. I think, Rich, you indicated that you expect a little more seasonality in that business than -- relative to what we're used to. Can you just provide a little more detail in terms of MEI, how much of their revenue you typically see in first half versus second half, so we can kind of think about modeling that appropriately?

Richard A. Maue

Yes, we tend to be -- we wanted to -- our policy here is not to provide quarterly guidance. I wanted to just provide some incremental insight into the fact that our first quarter is going to have a natural headwind associated with the seasonality of MEI. It's a little bit more aggressive than the seasonality that we see in the first quarter, I would say. And we'll provide -- as we move through the year, you'll start to see it read through.

Operator

Our next question comes from the line of Brian Konigsberg of Vertical Research.

Brian Konigsberg - Vertical Research Partners, LLC

Just want to just touch on the guidance first. So just 1% to 3% organic growth for the year kind of strikes me as conservative just given the fact we're looking at fairly easy comps. I mean, you were negative organically for the first 3 quarters of 2013. You had a solid Q4. Fluid seems to be okay. Aerospace, OE and aftermarket should be doing fairly well. The defense piece, you said, is a modest headwind, which, to me, is actually a pleasant upside or surprise. The Engineered Materials business on commercial construction should be growing decently. I just don't understand why we're only talking about 1% to 3% growth. Maybe if you could just parse that apart a little bit more, just give us a better understanding of why it's not better than what you're -- than what you've guided to.

Richard A. Maue

Sure. So when you peel it back and you go by each of those elements, I would start off by saying that we had flat growth through the first 9 months. We saw some core growth here in -- a decent amount of core growth here in the fourth quarter but off of a comp that was, perhaps, just a little bit favorable. As we think about next year, we do expect to see a decent amount of growth coming out of our Aerospace Group but being offset largely by defense. So that puts headwinds against a growth rate that you'd expect to otherwise see from that segment. Engineered Materials had a wonderful year in 2013, with core growth in the 7%, 8% range coming off of, again, a comp that was difficult or positive, I guess, from a year-over-year perspective in '13. And we just don't see a continuing expectation of that kind of growth again in 2014. Vending, we see as largely being flat to slightly up, so we're not going to see a lot of traction through our Vending business in 2014. Payments, we feel pretty good about. We're going to have to paint a picture for you at Investor Day that talks about sort of the underlying growth that we would expect to see in those end markets, and it's not going to be terribly inconsistent with what we saw in 2013. Fluid Handling, we had some challenges this year with respect to our commercial valve business, in particular. I'd point to Crane's supply out in Canada and some of our North American valves -- commercial valve businesses in the states, as well as some headwinds that we saw in the U.K. So in those areas, we do hope to see some incremental growth, which is going to pull us into that, call it, 2% range or 1% to 3% range. So we look at it by business in a pretty detailed way, Brian, and the roll-up that we have would be fairly supportive of the comments I just made.

Brian Konigsberg - Vertical Research Partners, LLC

Seems a bit conservative, but okay. And just on the Vending, I'm just surprised that you're saying flat after you just had the severe downdrafts in capital spendings that you highlighted from your customers in Q2 and Q3. I mean, I think the previous couple quarters, you said you anticipated that spending to return. I mean, has that not materialized or...

Richard A. Maue

Yes, I think on the last quarter, we had said that we didn't expect a step change, that we would -- that we felt like we were at bottom at that point. We actually did have some nice traction here in the fourth quarter, but it's too early to tell, frankly, and it's a very short-cycle business. And we're being a little bit cautious with respect to 2014 given what we saw and experienced in '13.

Brian Konigsberg - Vertical Research Partners, LLC

And then just on aerospace aftermarket, I'm actually just surprised that you're saying Q4 was so, I guess, extraordinary and don't kind of, I guess, straight line or carry that strength over into 2014. I mean, you really were one of the last in the aerospace kind of components supply chain that's really seen the improvement in aftermarket. Q4 did seem to come through. I just don't understand why that strength wouldn't continue just given everything we're hearing. I mean, just general macro commentary on aerospace from some of the big suppliers, it doesn't seem to be consistent with what you're suggesting.

Richard A. Maue

Yes, I mean, perhaps. I mean so the sequential improvement that we saw in commercial aftermarket through the year, we were up 3% from Q1 to Q2, we were up 4% from Q2 to Q3, and then we jumped up 10%. So perhaps, I'm a little cautious to take that sort of a run rate into 2014. That's the basis of my comment. We do expect to see some improvement from '13 to '14.

Brian Konigsberg - Vertical Research Partners, LLC

Okay. And just lastly, how much is pension contributing to the earnings -- to the midpoint of '14 guidance versus '13 results?

Richard A. Maue

So overall pension, so we are seeing some tailwinds coming through from the discount rates as most other companies are also going to see. And we also took some of our own internal actions to address some of our internal pension plans, not unlike what we did last year domestically. Overall, I would estimate the number to be around -- right around $10 million.

Operator

Our next question comes from the line of Ken Herbert of Canaccord.

Kenneth Herbert - Canaccord Genuity, Research Division

Just first, sounds like, specifically within Fluid Handling and, perhaps, across the organization, China was good in the fourth quarter. What kind of growth are you assuming in China maybe into '14? And it seems like it's been a mixed bag so far from a number of companies with maybe you doing better relative to some other of your peers out there. Anything in particular you saw in the quarter, and how do we extrapolate or think about that heading into '14?

Max H. Mitchell

Well, Ken, just -- so China has been strong all year, and we certainly see some continued project strength that would indicate that it should continue into '14. In terms of specific growth assumptions, I'm not sure we have that detail right now, but we can help paint a picture in February on the Investor Conference as well.

Eric C. Fast

It's not just Fluid Handling, right? We've got all the work [ph] that's going on, on the 919. Electronics [ph] has had some success there. So composites on -- some composites.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay. So fairly broad-based, it sounds like.

Eric C. Fast

Yes.

Kenneth Herbert - Canaccord Genuity, Research Division

And if I could, just I know obviously, you had a fairly protracted regulatory process regarding MEI. Now that you've had that for a short period of time now, anything changed relative to some of your initial expectations, anything surprised you either positive or negatively with the asset and as you've started the integration process?

Richard A. Maue

The 2 cultures are coming together very, very well. I think we've been surprised that there's been minimal surprises, so things have been planned well. The assumptions that we had before we could share data are pretty much on track, and I think it's going very smoothly.

Max H. Mitchell

Yes, I would say -- I would just echo that in terms of what we would expect to see out of end markets and our planning for '14, it felt -- it all felt consistent with what we expected pre-close.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay, great. And then just finally, on the commercial aftermarket, just one additional question there. It sounds like, Rich, some of the sort of structural headwinds, perhaps, you saw through '13, maybe, I guess, based on the tone of your comments, things are certainly looking better, but you still, perhaps, see some impact maybe from inventory levels or surplus material, in particular, as relevant in '14. Or do you see those mitigating now based on what you saw in the fourth quarter and the strength we saw?

Richard A. Maue

I would say mitigating is probably a good word. It's still going to be -- there's still going to be the – sort of the business model, that's changed with the airlines being more careful in terms of how they source in cooling and things of that nature. So I think that's always going to be in the backdrop. But from an inventory stocking level perspective, in terms of what we communicated earlier in the year, I think a lot of that's behind us.

Operator

Your next question comes from the line of Ron Epstein of Bank of America.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

A lot of, I guess, sort of the detailed questions have been asked already, so I'm going to kind of go up to the 300,000-foot level. So first one for Eric. When -- as you're kind of stepping into your new role in life and you think about where Crane got to over the last 13 years, I remember when we sat down, I guess it was almost 10 years ago, and talked about Crane, is the company where you expected it to be kind of now, at this point? You know what I mean?

Eric C. Fast

I don't know. Look, I think we just have a much more mature, sophisticated company. We've got a Crane Business System that's -- we've honed over the years that is tried and proven that gives us a lot more consistent results. I think the portfolio of businesses is so substantially different than what it was that -- in terms of where we are in process valves, where we are in Aerospace, where we are in payment systems. Engineered Materials was a tiny little business then, and now it's the leader in -- the #1 guy in the business. So I think the portfolio is in a whole different place. I think the Crane Business System has been -- is proven out. You see this in the consistent execution of the results in a difficult revenue year like 2013. And I think even more importantly, the growth opportunities here and the amount of activity, I mean, I can't think of in my 13 years as CEO when I've ever seen so many new product initiatives and growth activities going on throughout the company. And to me, this augurs well for the future. So I feel good about it. We've worked -- the board and I have worked on succession planning, and the team's in place where I feel good about going, so we're good to go here.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Great. And Max, it's made us a nice segue to the question, for my next question for you. When we think about the portfolio that you have, that you're bidding, how do we think about it from maybe a longer-term perspective on organic growth, right? By investing back in the portfolio, in the new products and some of the stuff, I think, you're probably going to talk about at the Investor Day, how do we think about Crane Co. today going forward kind of x future acquisitions? What can this portfolio grow at?

Max H. Mitchell

So Ron, we continue to develop and execute on strategies that clearly understand we start with market growth and looking at the initiatives that will outgrow the end markets that we're in. And so we have internal targets to clearly outgrow the market. So that's how we challenge ourselves, we view strategy and prioritize our initiatives. As I think about organic growth opportunities as we move forward, depending on where you are with GDP on a global basis, if you say 3%, we're targeting 4.5%, 5%. This is what we push ourselves, challenge ourselves for, and this is what we'll continue to focus on as we move forward.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

So I mean, is it realistic to characterize kind of the goal, right, and I'm not saying guidance, not anything like that, just a goal that if global GDP is x, that Crane can do something like 1.5 times x?

Max H. Mitchell

So I think at the February investor conference, when we go through the portfolio and where we are today from Aerospace in terms of long-term trends, what content we've won, we'll lay this out for you in terms of what that reality looks like. Fluid Handling, the process valve space, we love the end markets. We love our brands and the value that we bring. There's certainly some end markets that are challenged more than others. So even if GDP is 3%, we're going to be seeing some growth rates that are less than that. So I hope we bring some additional clarity and color at the Investor Day.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, great. And then maybe one last question for you, Max. In kind of the new role, what do you see as your maybe 1 or 2 single biggest challenges in front of you?

Max H. Mitchell

As the leader of the business and as Eric mentioned, the team has continued; we've always been good. We continue to get better and better and better. And I think I'd be remiss to not mention the people, and it's all about the people driving customer satisfaction and valuing important customer relationships. And we will continue to grow and develop our own talent on a global basis, and that is what we -- in my mind, always first and foremost.

Operator

[Operator Instructions] Our next question comes from the line of Jim Foung of Gabelli & Company.

James Foung - G. Research, Inc.

I guess my question is that now that you ended 2013, you once talked about having a lot of excess capacity at the firm and that you can leverage that capacity. Could you just kind of update us in terms of where you are in terms of your capacity utilization and then what we could expect in 2014, 2015?

Richard A. Maue

So in terms of -- so we haven't come off our approach here with respect to leveraging. We look to leverage $0.25 on the $1 of every incremental sales dollar that we contribute. So we're not coming off that. From a capacity perspective, we're at that 55%, 60% level. So that enables some of that leverage to read through for us. So not too much coming off our prior conversations and communications so.

James Foung - G. Research, Inc.

So you really haven't – yes, so you haven't really utilized any more capacity since the beginning of the year, so you expect 2014 to be a step-up for you in that direction?

Eric C. Fast

So we had 0% core growth last year, Jim, so we've been running at this 60%, 65%, 55%, 65% capacity. That's 5 days a week, 2 shifts, 2 full shifts. And we think with an improving global economy and all the growth initiatives that we've got, we can start to get some core sales. And we're confident and have demonstrated always that we can leverage that core sales $0.25 on the $1. And we think this is the kind of environment we're going into, and with our margins at, what, 14.5%, that creates a constant positive pressure on margins. And we think that with the Central Bank's help in Europe and in the United States, that we're going to see that kind of environment and we can leverage it.

James Foung - G. Research, Inc.

Okay, very good. And then just one question on your Vending business. When do you expect that market to turn around and to improve?

Richard A. Maue

Well, we see -- as I mentioned a little bit earlier, we see it being a little bit of a slower transition as we move through '14. One of our initiatives is going to be around continuing to push cashless, continuing to grow in Europe, as well as in emerging markets. So not necessarily coming off much in the way of Vending from that point of view. We could look to achieve some synergy with respect to how we integrate with Payment Solutions as well, and always, we have an internal target here to get back to the 10% operating profit level as we move forward.

Operator

And I'm showing no further questions in queue. I'd like to turn the conference back over to management for any closing remarks.

Richard E. Koch

Thank you very much for joining us today and for your continued interest in Crane. Thank you and goodbye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

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