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Crane Co. (NYSE:CR)

Q4 FY07 Earnings Call

January 29, 2007, 10:00 AM ET

Executives

Richard E. Koch - Director, IR

Eric C. Fast - President and CEO, and Acting CFO

Analysts

Deane Dray - Goldman Sachs

Scott Graham - Bear Stearns

Ronald Epstein - Merrill Lynch

Wendy Caplan - Wachovia Securities

Matt Summerville - Key Banc

Shannon O'Callaghan - Lehman Bros.

Operator

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

Richard E. Koch - Director, Investor Relations

Thank you operator. Good morning everyone. Welcome to Crane's Fourth Quarter 2007 Earnings Release Conference Call. I'm Dick Koch, Director of Investor Relations.

On our call this morning, we have Eric Fast, our President and CEO. We will start-off our call with a few prepared remarks, after which we will respond to questions. Just as a reminder, the comments we make on this call may include some forward-looking statements. We would refer you to the cautionary language at the bottom of our earnings release and also in our Annual Report, 10-K and subsequent filings pertaining to forward-looking statements.

Also during the call we will be using some non-GAAP numbers which are reconciled to the comparable GAAP numbers in the table at the end of the press release and in additional tables, which are available on our website at www.craneco.com in the Investor Relations section, right in the website login area for the conference call.

Before turning the microphone to Eric, I would like to invite you to attend Crane's Annual Investor Day Conference on February 21. Please call my office to sign up or e-mail me at rkoch@craneco.com. Now let me turn the call over to Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Thank you Dick. Last night we reported fourth quarter 2007 net income of $45.2 million or $0.74 per share. Excluding special items, net income was $47.3 million or $0.70 per diluted share compared to $38 million or $0.61 in the fourth quarter of 2006, representing a 26% increase in earnings per share.

Let me now highlight several key items for the fourth quarter. Looking at operating results, excluding special items, we effectively leveraged our 15% sales increase into a 21% operating profit increase and our operating margin increased 50 basis points over the fourth quarter of last year. This is in spite of our continued heavy investment in products for the Boeing 787 program.

Fluid Handling had record sales and operating profits. Sales increased 18% in the quarter to a record $300 million. Operating profit increased 68% excluding the gain on the foundry restructuring. Operating margin reached 12.7%, which is a strong progress towards our goal of 15% margins for this segment.

Restructuring of our foundry operations is an important step toward our margin goal. Merchandising Systems’ operating profit increased $8 million with strong improvements in both Vending and Payment solutions. Free cash flow of $186 million was better than we expected and came in near the upper end of the range of our guidance. We have provided for taxes if we decide to repatriate cash for acquisitions in the United States.

We generated $70 million in cash from the timely sales of a plant in Ipswich, England and our IMC joint venture and ended the year with $283 million in cash, a key asset in this uncertain economic time.

Turning now to specific segment comments. Aerospace and Electronics, Aerospace Group sales of $106 million increased $8 million or 8% from the $98 million in the prior-year period. OEM and aftermarket sales were higher than last year with OEM sales growing 30% and aftermarket sales growing 2%. The OEM aftermarket mix was 59%, 41% compared with last year's fourth quarter mix of 57%, 43%.

Operating earnings in Aerospace declined by $9 million reflecting in part the $10 million increase in engineering expense reflecting the heavy investments in new programs and technology. Absent the heavy investment in new programs for future growth, operating margins were at or long-term goal of 20%. I point this out so that you understand that the balance of the business in Aerospace is performing well and in line with our long-term expectation.

Our engineering spending all of which is expense is a key investment in Aerospace's future. As we described on our earnings call this year, in 2007 we are spending heavily on three major landing solutions program. The Boeing 787 with our next-generation break-through technology, the Airbus A400M and to a lesser extent the Joint Strike Fighter. This spending also includes the A320 landing gear indication and control unit and our new wireless technology in Smart Stem, which we believe has considerable potential.

Our engineering spending in the fourth quarter of '07 was $22 million compared to $15 million in the first quarter, $17 million in the second quarter and $19 million in the third quarter. The total engineering spend in 2007 was $73 million compared with $43 million in 2006. I expect this spending to remain high through the first half of 2008 and then to start to decline later in the year. As you may know, Boeing recently announced they were delaying the first flight of the 787 from the end of the first quarter to the end of the second quarter this year.

Electronics Group sales of $55 million increased $7 million or 15%, due to higher sales in Microwave and Electronic Manufacturing Solutions. The Electronics Group operating profit increased from the fourth quarter of '06, driven largely by the improved sales volume in Electronics Manufacturing Solutions. Engineered Materials. In the fourth quarter Engineered Materials sales increased $5.5 million reflecting the sales of the composite panel business we acquired from Owens Corning in August. This business is performing in accordance with our expectations. Sales from Noble Composites, which we acquired in 2006 was the same as for the prior year period.

Demand for High Gloss FRP, which both of these acquisitions make continues to remain solid. Our expansion of Noble Composites is on track and should be complete near the end of the first quarter of 2008. Our High Gloss FRP sales remained solid, we saw 16% decline in sales to our traditional recreational vehicle customers in line with the continued softness in the RV industry. We experienced a 31% decline in our sales to transportation related customers, consistent with reduced trail or build rates and a 2% decline in our building products customers.

Operating profit declined 26% as a result of lower core business sales and higher raw material costs, which are largely related to crude oil and natural gas prices. We have announced price increases to our customers to reflect these higher costs. Merchandising Systems. We had a very good fourth quarter; sales increased 17% with improvements in virtually all business lines. Vending machine sales in Europe were strong and we saw higher demand for coin and bill validation products. Operating profit increased 8 million reflecting very effective leverage of the higher sales in the absence of integration expenses for the Dixie-Narco and Automatic Products acquisitions in the fourth quarter of 2006.

Improved performance from the four acquisitions we made in 2006 contributed significantly to the operating profit increase. In 2008, Merchandising Systems is introducing a number of important new products, including its Grant [ph] payment system for the vending channel and a new glass front BevMax 3, both of which are designed to improve the profitability for the rude operator. We're pleased with the progress we have made in strengthening relationships with the major bottlers and look forward to supplying them with high-quality products in 2008.

Fluid Handling, which represents about 43% of Crane's total sales turned in a record quarter with sales increasing 18%, operating profit growing 68%, with a margin of 12.7% excluding the gain on the foundry restructuring. Operating profit was notably higher across most business units in the segment as a result of higher sales. We are continuing to see broad-based demand from the chemical and pharmaceutical industries. Energy, which includes electric power and oil and gas and non-residential construction, which resulted in core sales growth of 11%.

Raw material escalation issues are affecting the entire industry and we are being disciplined on pricing and in fact have selectively raised prices. The restructuring of our foundry operations is a key initiative in our path to 15% operating margins in Fluid Handling. We have sold our manufacturing facility in Ipswich, England and we will lease it back, back for up to two years as we transfer the Melbourne foundry operations to China. We have also closed our bronze foundry in Brantford, Ontario and moved that production to China. These are important steps to increase our low cost country sourcing and improved margins. We expect to realize the benefits with these actions in 2009.

Capital spending was $14 million in the fourth quarter of 2007 compared to $5 million in the fourth quarter of 2006, primarily as a result of our investments in the Noble Composites expansion. Turning now to taxes. The fourth quarter reported GAAP tax rate of 32.2% was lower than our previous guidance of 39% for a variety of reasons, but the single largest contributor was lower than expected taxes in Canada and Germany. Excluding the special items identified in our schedule of non-GAAP financial measures, the fourth quarter tax rate was 24%. Again this is non-GAAP excluding the special items in the fourth quarter… fourth quarter tax rate was 24%. Our guidance for the quarter excluding the asbestos was a tax rate of 31%.

The difference equates to approximately $0.07 per share. Tax tables have been posted on our website to provide additional detail on our tax rate for the fourth quarter and full-year 2007. The fourth quarter included the accrual of a deferred tax liability of $10.4 million related to the future repatriation of approximately $194 million of overseas cash. This accrual was made in accordance with accounting rules, which require us to record the tax cost of repatriating foreign earnings unless we intend to indefinitely reinvest such earnings overseas.

Our significant overseas cash balance at year-end and the current lack of foreign acquisition candidates made it difficult to envision reinvesting all this cash overseas. Given all these unusual tax items in our 2007 financials, we felt it was important to state in our earnings release that we anticipate that 2008 annual tax rate to approximate 31% with some variability quarter-to-quarter. This compares to the rate of 29% in 2007 excluding special items and the difference represents a headwind of approximately $0.10 per share.

We are introducing earnings guidance for the full-year 2008 of $3.45 to $3.60, an 8% to 13% increase compared with the $3.19 per diluted share, which excludes the impact of special items and benefited from the lower tax rate that we expected in 2008. For 2008, we are expecting improved operating results from each of our five segments in spite of what we see as a difficult economic environment here in the US.

We expect continued strong results in Fluid Handling from solid global demand. We expect our long cycle aerospace and electronics businesses will continue to have strong demand and will benefit in the last half of 2008 as engineering investment slows from delivery of the 787 and A400 program. Both Merchandising Systems and Engineered Materials industry leading position, strong growth initiatives and disciplined cost control should allow them to improve profit.

We expect free cash flow; cash flow from operating activities less capital expenditures in 2008 will be approximately $170 million. Cash flow in 2007 was favorably impacted by collections of $31.5 million in escrow funds from the Equitas settlement. Capital expenditures in 2008 are estimated at $50 million. EBITDA is estimated to be $411 million to $425 million.

Now, back to you Dick.

Richard E. Koch - Director, Investor Relations

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

Question and Answer

Operator

Thank you, sir. [Operator Instructions] We will go first to Deane Dray of Goldman Sachs.

Deane Dray - Goldman Sachs

Thank you, good morning. For the Engineered Materials business, could you give us some insight into the margin decline? You mentioned raw materials and also volume declines. How much of each it was weighing on that margin decline year-over-year?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I don't have that broken out, Dean. I would say that as we look to 2008, looking forward here, we are looking for to gain market share, particularly in the RV market, as I have said, we're looking to… for some price increases to offset the material cost that we have had here and then also importantly we look to finish the Noble expansion by the end of the first quarter.

Deane Dray - Goldman Sachs

How much of a price increase are you looking for in that business and if you were entering a stage of economic decline especially in the US, how realistic is it to expect a price increase to go through?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Well, again I think we have a demonstrated record of providing by far the best product in the market place. We stood behind our product, which our competitors haven't and we've got almost perfect on time delivery. So I think our customers respect both our product and love our service. We have a pretty sharp material cost increase this year and we are currently engaged in those discussions. I think for competitive reasons I would rather not comment on exactly how much.

Deane Dray - Goldman Sachs

Sure and that will being Fluid Handling, give us some more color regarding the foundry restructuring, what was the cost and if you're thinking about a payback, will that benefit might be and over what timeframe. I think you said it was 2009, your position, that could be quantified?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

The foundry restructuring included both the Ipswich malleable foundry and the Brantford bronze. Included in that net gain is about $9 million of potential severance cost that we will have to take it, that reduced the amount of that gain. We obviously going to have some ongoing cost here this year as we transition both to the [inaudible] and as we consolidate parts of Ipswich, the non-foundry parts of Ipswich with Hitchin and those where included in our… those are ongoing costs included in our plan for next year. I think this is … we haven't highlighted the details of what the benefits are in 2009, but it's important, I think we will try lay that out for you in our Investor Conference in February.

Deane Dray - Goldman Sachs

And over in Aerospace win, talk about the 787 delays. Just quantify for us or you just give the sense of what drives the additional cost, are you carrying higher engineering expense longer than what you were expecting or is there any product rework? What is the nature of the cost?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

We are employing a lot more engineers than we had planned and we need to employ them to make sure that we meet the scheduled deadlines, which I expect us to… there are some changes that we are getting from Boeing and GE as we work through this that ultimately we would expect to get reimbursed from. I think that the schedule delay has allowed us to go about our work in a more orderly fashion, but I don't think it changes the overall dollar impact.

Deane Dray - Goldman Sachs

Got it. And last question Eric and I missed very intro remarks and maybe you addressed this but just the timing for the CFO replacement and with all the puts and takes going on the tax side is this a particularly sensitive area or should we view these tax changes versus expectations is more routine?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

This is all routine. Our tax guys have been here for 20 years. We have been audited by the IRS through 2005; we are rock solid on the taxes, [inaudible].

Deane Dray - Goldman Sachs

And the expectation on the replacement?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

On the CFO, I hope to have it by this spring.

Deane Dray - Goldman Sachs

Great. Thank you, Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Certainly.

Operator

And we will take our next question from Scott Graham of Bear Stearns.

Scott Graham - Bear Stearns

Good morning Eric. Good morning, a couple of questions for you. The Aerospace after-market sales were only up nominally, could you explain why and then also tell me if my calculation is correct that the Aerospace margin was only about 12%?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Well, we don't breakout margins between Aerospace and Electronics; the whole segment margin was 11 point something. I don't break out the detail; in between you can probably calculate it with the data given here. It was an 11.0% for the whole segment.

Scott Graham - Bear Stearns

Right, I'm aware of that. You used to break those margins out but if we just assume a little bit better margin in Electronics maybe we can get to maybe 14% Aerospace, actually, no. It goes the other way, about 12% margin.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

If you take out the engineering spend in Aerospace, in the Aerospace group, the way I said it, was we are running at 20%. Now, we've got a good healthy business that is going to go through… we are investing substantially in this brake control technology as well as the Smart Stem, I think it is going to give us the leading technology, brake control technology for the next decade. So, and I expect as we go into 2009 that it is going to be largely behind us. So, there is nothing wrong with our core business

Scott Graham - Bear Stearns

All right. Well I guess… I'm not suggesting that there is something wrong with the core businesses. It seems that the mix had an extraordinarily negative impact on the business.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Mix… that is why I highlighted the OEM aftermarket, because OEM is so strong here that it is… the mix does put some pressure on margin.

Scott Graham - Bear Stearns

Right, so if we move into 2008, it would seem to me as if that is not going to go away anytime quickly. You are assuming sort of at the midpoint of your guidance about a 50 basis point improvement in the operating margin. I'm wondering if you can put some color around that Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

You are asking a question on the segment or the company?

Scott Graham - Bear Stearns

On the company. Aerospace is the most profitable business by far at least until this quarter as a company. So, I am wondering what is it with the OEM is growing faster than the aftermarket right now, a trend that probably continues into 2008. Yet you are assuming on a total company basis that the margins going to rise, you know roughly 50 basis points at the midpoint. So, kind of how do you get there, where you're assuming, operating improvements for all four businesses. And it looks like Aerospace might already be starting a little bit in the hole.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

As I said, first up we will give that in three weeks at our Investor Conference sales and margins by the segment. We will lay this out for you in relation of the overall guidance that we give. Secondly, as I said in my script, we do… we currently expect each and every one of our segments to have an increase in operating profit next year.

So, that being said we are planning on as I said a higher level of engineering spend in the first half of the year from Aerospace, which is going to impact our growth during that period and then it will start to trail off in the second half. As I said, we are largely behind this as we go into 2009. We will try to flush all that out for you in three weeks at our Investor Conference.

Scott Graham - Bear Stearns

That will be helpful. My last question is on… what was the Dixie-Narco acquisition contribution this quarter? Can you kind of what --.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Okay, here is what I would say. Dixie-Narco made money in the fourth quarter. We now… the way we are running this business, Dixie is fully integrated in the North American Vending. We have got an integrated sales channels here in North America. We have got integrated sales channels in Europe. We are actually going to start making other products down on Dixie's automated foaming line. So, going forward we have got a fully integrated North American Vending business, which Dixie is part of it. And I'm going to refer to… if we're going to get to profitability, I'm going to talk about North American Vending, because it is going to be increasingly difficult to point just exactly what would… what was Dixie in the original acquisition. But I can tell you in the fourth quarter we made money.

Scott Graham - Bear Stearns

That is fine. I do understand that, I was just asking for the revenue contribution. Not a problem.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

We don't break it out.

Scott Graham - Bear Stearns

Okay, thanks.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Thank you.

Operator

And we will take our next question from Ron Epstein with Merrill Lynch.

Ronald Epstein - Merrill Lynch

Hi good morning guys.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Hi Ron.

Ronald Epstein - Merrill Lynch

When we think about '08 and your R&D spend, how should we think about that, particularly in the Aerospace business?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I think we will probably try to lay this out little bit more detailed, but all we said at this point, you know it ran at $22 million in the fourth quarter, we expect to continue to run heavy, to the first slide and start to taper off and then accelerate in terms of how it declines in the fourth quarter and then into '09.

Ronald Epstein - Merrill Lynch

Okay, and then when we think about the... I guess the outlook for commercial construction is maybe a little murky. What impact do you think that could have on the Vending business?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I'm not... I think the bigger... I'm not really worried about commercial construction on the Vending business. I think we need to be sensitive that food prices have gone up a lot here. So, it's very difficult for the operators to pass along those prices. There's a lag time that they need. They oftentimes need to get permission from the site. It takes about 45 minutes of machine to change their prices. So, we've to be very sensitive to those additional cost that the operator is going to have. That being said, we just... we've a very strong leading market position here. We got a lot of new products and I think there is a... we got... we're expecting solid success from the Bevmax 3 to vend all the new bottle shapes for Coke and Pepsi.

Ronald Epstein - Merrill Lynch

Okay, okay and then just one... I guess one last question. On the M&A front, with what we've seen in terms of valuations pulled back, particularly on the commercial Aerospace side of the house, do you think there is going to be some opportunities there for you to build out that business?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I don't know from... I don't know for CM and Aerospace, but I'd expect that we've a much better friendly field to play than we have had in the past, we're seeing more supply. Not yet clear to me that the valuations have come down. I think people are still trying to figure out where they are going to sell here and you're going to see some broken processes, but with our cash position I'd hope we could find some opportunities and be more aggressive this year.

Ronald Epstein - Merrill Lynch

Okay great. Thanks Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Thank you.

Operator

And we will take our next question from Wendy Caplan of Wachovia.

Wendy Caplan - Wachovia Securities

Thanks. Good morning Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Good morning Wendy.

Wendy Caplan - Wachovia Securities

Your confident comments about margin expansion in each segment in '08, despite the expectation of a challenging environment. Is it fair to assume that your view reflects Crane Co.’s controlled activities in which you are in control and that you are not really counting on much from the economy in '08?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I'm not counting on much from the economy. We think the US economy is going to be difficult.

Wendy Caplan - Wachovia Securities

Right, right. And that gets me to kind of your read geographically in Fluid Handling. Can you comment on demand internationally versus domestically. What pricing looks like in those markets for you and what if any changes you've seen in the competitive environment?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

We continue to see... in Fluid Handling, we continue to see solid demand in the Middle East Asia, Eastern Europe. I'd even say in Western Europe, solid MRO business. The US is the only place that we’ve kind of seeing it off here is in ethanol, which is well publicized, and at the end of the day is not that big a deal. So, I would describe that US is [inaudible], but again the real benefit is from the global demand if they build these big chemical process plants and refineries overseas.

Wendy Caplan - Wachovia Securities

And pricing for those products?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Well, the projects were always pretty price competitive. But again I don't see a… we haven't seen a change in that environment. Let me say it that way.

Wendy Caplan - Wachovia Securities

Okay. That's fair. All right. Thank you very much. I appreciate the answers.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Sure. Thank you.

Operator

And we will take our next question from Matt Summerville with Key Banc.

Matt Summerville - Key Banc

Good morning. Back to one of the Scott’s questions, Eric. Why was the after-market business in Aerospace only up 2%?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I don't really have a detailed explanation to why it was only up 2%. Frankly. [inaudible]

Matt Summerville - Key Banc

Okay. And then as far as the things you're doing with the… on the foundries in the Fluid Handling business. When do you anticipate the level of expenses that you've talked about continuing into 2008. When does that all go away and then can you quantify the cost savings you anticipate from these moves, kind of put that into the context of bridging from almost 13% of margins to 15. I guess how big of a component is this plays around the restructuring?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Well, first off, I expect… the move of these two foundries is going to take us this year. We're finishing now to build our [inaudible] in China this spring and we will be starting to transfer our manufacturing there and that will take most of the year. The same way with the Melbourne third party sources in China. So I expect we will incur those expenses in 2008 and by far the best bulk of a move be finished in 2008. So we should have pretty clear sailing as we move into 2009. And for the Investor Conference, I'll highlight what the number… will have math’s spell it out a little bit more clearly. It's a piece of getting the improvement to 15%. But it is just one of the legs in the stool.

Matt Summerville - Key Banc

Okay. Let's see and then just as far as the development costs in Aerospace, you were 22 million on a quarterly run rate in the fourth quarter. Is that the type of run rate we should be thinking about through the first half of the year. Is there another leg up from that 22 million?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I'm just not going to comment, Matt, you know what I have already said here.

Matt Summerville - Key Banc

Okay.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

It is a pretty fluid situation.

Matt Summerville - Key Banc

All right. That's all I have.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Okay.

Operator

[Operator Instructions] We'll go next to Scott Graham with Bear Stearns.

Scott Graham - Bear Stearns

Eric, I am sorry, forgot to ask one of my questions at merchandising which it used to be a very interesting business for you guys going forward. If you were to look at some of the underlying trends here. Maybe you can share with us. What are you hearing out here as far as the vending, routing of not those beverage guys but more the snack side of the core business. Are you hearing any improvements in that market? And are you doing things like taking some of your coin mix retro fitting them with maybe some more speed these days, retro fitting them on to the install base out there to help these operators make more money?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

What we're seeing, Scott, is I can't say we are seeing the improvement in the overall market environment. Definitely, we've not seen that. What I'm seeing is a recognition by the largest and most sophisticated operators that we're bringing a full solution to that channel to revitalize it through our software, through our new machines, through our payment systems the Recycler that at all of which increases the revenue per machine gives some cash accountability. So I am seeing the larger operators move towards that, which means that we are taking share on the part of the… taking market share at the most sophisticated level. We are seeing the large operators when they win a new site mandates from our sale large retailer that they are winning that on the basis because they're going to put in new machines.

And we are the market leader with the new machines that are vending. We also as we've talked about have an important initiative where were taking our new payment systems [inaudible] and the Recycler and again packaging those with our vending machines out of our North American operations, that's an important initiative and our experience is that Recycler which gives both coin and bill change when you put in a five or 10 which is the first of the industry, increases the revenues per machine at a minimum of 15%.

So, I like what I'm seeing in terms of our market share gains. The concern is that the overall market environment and the food cost these days.

Scott Graham - Bear Stearns

And if… you wouldn’t mind maybe commenting on the second part of that question with the retrofit. Obviously there is a huge installed base out there with on the inability by most snack machines and even powder machines to put in a $5 bill and get anything other than a whole bunch of quarters out.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

We are just really ramp… starting to ramp up production here in January and February and March, introducing it into the market. We do think that there is a large retrofit opportunity with that product. We also think that there is a large replacement opportunity with the traditional stack vending machines that were used up, that were used without the glass front. As you Scott, those old stack machines can’t vent the 18 different bottle sizes the Coke and Pepsi had now that for their different drinks, but the glass front can. And we're very pleased with the quality of Bevmax 3 and our experience in the field there.

Scott Graham - Bear Stearns

And your experience in the field includes conversations with the likes of Coke and Pepsi and the bottlers who are primary customers there. They are excited about the increased revenue opportunities.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

I think what I said, we've worked very hard this year to earn their trust and to create this partnership based on… we feel confident that we've earned that, and that we've got a good long-term partnership going here.

Scott Graham - Bear Stearns

Last question on this Eric. With the addition of Dixie-Narco it is probably pretty likely that historical operating margins of this business probably not been seen because of the Coke and Pepsi captured their marketplace. I guess we you look at the rest of the businesses, is there anything out there right now in this business that suggest other than in Dixie-Narco that these businesses margins can kind of get back up to that sort of EP [ph] level that we felt six, seven years ago?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

First off, our payment businesses operates well above that, as you know?

Scott Graham - Bear Stearns

Yes

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

So the challenge is to move vending up… we're going to talk about this at the Investor Conference, but we are concerned about regulation changes in Eastern Europe and some of the international markets for the payment systems that could reduce those sales, particularly in the second half, but we expect strong growth on the vending side.

So there is in margin mix issue coming in here in 2007, but overall we feel strongly that long-term we're going to get very attractive margins in our core vending business.

Scott Graham - Bear Stearns

That’s fine, thanks Eric.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Thank you.

Operator

And we will take our next question from Ran Gatting [ph] at David Green [ph]

Unidentified Analyst

Hi, Eric how are you?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Hi Ran.

Unidentified Analyst

I just wanted to get your sense for, how you felt about the taken some of the shares in the… obviously the balance sheet is rock solid and has a tremendous amount of fire power behind it, it sounds like you are more into do some deals, but I just, where the valuation is, where your outlook is for the businesses and the opportunities. I just, I guess some little loss for lack of… with the asbestos sort of contained, I just wonder about what were your thoughts are… about share repurchase?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

As you our policy is not announce anything ahead of time, we talk about it at each quarter end whether we bought it or not. So I'm not really going to comment. I would say that if you look at our behavior over the last couple of years, we look to keep kind of outstanding shares at a pretty static level but not going to make any announcement at this point.

Unidentified Analyst

Okay, as a sort of long-term shareholder I would ask you to strongly consider that you make capital allocation decisions in the first half of ’08.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Okay, thank you.

Unidentified Analyst

Okay, thanks.

Operator

And we will go next to Shannon O'Callaghan of Lehman Brothers.

Shannon O'Callaghan - Lehman Brothers

Good morning guys.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Good morning.

Shannon O'Callaghan - Lehman Brothers

Eric, just on the fourth quarter, apologize If I've missed this, I think, I am little late, but in terms of the margin declines in some of the businesses. I mean, any of that, take you by surprise, I mean, can you give a perspective on sort of when you got to know about that and if it was sort of in line in with what you were thinking a lot worse and why?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

The Engineered Materials sales were… quarter was softer than what we expected a little bit otherwise I think the margins were generally pretty much in line with what we expected. You will would note that we gave guidance at the end of the third quarter that operating profits would be up 20%, they were up 21% so I felt good about our strong fundamental performance in spite of all this investment spending in engineering and we got a full half point margin and the 21% increase in operating profit. So, other than a little bit more softness in Engineered Materials, I would…came in as we thought.

Shannon O'Callaghan - Lehman Brothers

And I mean on Fluid Handling, was that significantly better in you thought or?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

No, it is on target.

Shannon O'Callaghan - Lehman Brothers

Okay, and then in terms of… I know you are going to go through more at the meeting but are there any other moving parts to know about in '08 in terms of… you mentioned the tax, I mean, any other line items and miscellaneous or other sort of things outside the businesses that shift?

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Not really. I think we would try to say some. Look at, there were some… so many special items in ‘07 that I just… we really went to great minds to do the non-GAAP tables in the back, we even laid out the EBITDA guidance, an EBITDA for ‘07 so that we could get every all of us on the same page in terms of how we are talking about the numbers so, and there is two more tax tables that we put on the website this morning, again if you got questions call Dick on it.

Shannon O'Callaghan - Lehman Brothers

Okay, thanks a lot.

Eric C. Fast - President and Chief Executive Officer, and Acting Chief Financial Officer

Okay.

Operator

And a gentleman we have no other questions at this time I will turn the call back over to Mr. Koch for any additional or closing remarks.

Richard E. Koch - Director, Investor Relations

Thank you very much for joining us today, we appreciate your continued interest in the company. Thank you, bye.

Operator

And that does concludes today's conference call. Thank you for your participation, you may disconnect at this time.

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Source: Crane Co. Q4 2007 Earnings Call Transcript
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