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Good day, everyone and welcome to Crane’s First Quarter 2018 Earnings Conference Call. Today’s call is being recorded. At this time, I would now like to turn the call over to the Director of Investor Relations, Mr. Jason Feldman. Please go ahead, sir.
Thank you, operator and good day, everyone. Welcome to our first quarter 2018 earnings release conference call. I’m Jason Feldman, Director of Investor Relations.
On our call this morning, we have Max Mitchell, our President and Chief Executive 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 that 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 and tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section.
Now, let me turn the call over to Max.
Thank you, Jason. Good morning, everyone. After our record-setting 2017 results, we’re off to another solid start this year. You may recall that last year, we delivered record adjusted EPS of $4.53, record adjusted operating margins of 15.2% and record free cash flow of $269 million. This year, we are on track for further adjusted EPS growth of more than 20%. And we are also making substantial progress on our various initiatives, from repositioning and accelerated growth investments to acquisition integration and plans for future capital deployment, all of which will keep us on a strong EPS and free cash flow growth trajectory in the years ahead. We shared that multiyear growth story with all of you at our Investor Day earlier this year. And we remain confident in our ability to execute on that plan.
There have been a few changes in our outlook over the last two months since Investor Day. Specifically, we are incrementally positive on the likelihood of receiving some repeat business from one of Crane Currency’s largest customers last year. That benefit is being partially offset by RV sales at Engineered Materials that are a little softer than we expected. And we are also facing some modest headwinds from higher commodity costs. On balance, however, we have greater confidence in our 2018 outlook. Although it is still early in the year, we are raising our EPS guidance, excluding special items, by $0.10 at the midpoint to a range of $5.45 to $5.65. We are also raising our free cash flow guidance to $240 million to $270 million compared to our prior range of $220 million to $250 million.
I will now briefly review this quarter’s results and then discuss some of the highlights, followed by Rich providing additional financial details. Starting with this year’s results and as outlined in our press release last night, I’m pleased to report that Crane’s first quarter EPS, excluding special items, was a strong $1.31, up 25% compared to earnings in the first quarter of last year.
Record sales of $799 million increased 19% with a 15% benefit from acquisitions and 4% of favorable foreign exchange, partially offset by a slight core sales decline. The core sales decline reflects two key items. First, as you all know, we had an extremely strong result in Payment & Merchandising in the first quarter of last year with 18% core growth, which does create challenging comparisons.
Second, we had softer- than-expected sales to the recreational vehicle market in our Engineered Materials segment this quarter. At this point, we believe that the end retail demand for RVs or sell-through remains solid at mid-single-digit year-over-year growth rates. However, RV dealers and manufacturers are rebalancing inventory and production levels, which appear to have outpaced the strong retail demand. Given our best-in-class lead times and the quick inventory turns in our business, any reduction in production rates has an impact on our volumes within a matter of few weeks. We have taken a number of cost actions to mitigate the impact of the lower volumes. And at this point, we expect this softness to be short-lived, most likely through the second quarter, but with continued robust RV retail sales through at least the end of 2018.
Operating profit, excluding special items, increased 16% from last year to $112 million. Adjusted operating margins declined 30 basis points to 14% as expected, reflecting the impact of the Crane Currency acquisition.
On the Crane Currency topic. Since Investor Day, I personally visited each of the major Crane Currency facilities in Malta, Sweden and the United States. And I left these visits even more enthusiastic about the opportunities ahead of us. I’ve been extremely impressed with the talent at every location. And overall, the integration to date has been smoother than we expected. Crane Currency is embracing our combined culture and our business system with a particular emphasis on developing a rigorous cadence of execution and developing roadmaps for continuous improvement.
I’m also pleased to report that we successfully completed negotiations with one of Crane Currency’s largest customers from last year, resulting in a firm order for delivery over the next few quarters. While this is very good news and we have appropriate commercial terms in place to mitigate our risk, there is still uncertainty about exactly how this will play out over the course of the full year. We do have fairly good line of sight to delivery on a portion of this order. And that portion of the project is now incorporated into our guidance.
There’s also a lot of exciting activity across the rest of Payment & Merchandising Technologies segment. This quarter, I attended the annual National Automatic Merchandising Association, or NAMA, where our merchandising and payment businesses have a strong presence. Demand is still a little soft from our bottler customers, but our full suite of connected solutions is really resonating with the customer base. And we continue to get good traction with our holistic connectivity services value proposition across payment and operator transactions, data management, diagnostics, advertising and security.
At Crane Payment Innovations, by vertical market, we are seeing strength across the retail market, including strong demand for our traditional self-checkout products as well as for retail safes and pay tower solutions. We do expect the large retail project we have previously talked about to wind down over the rest of this year. But we are successfully backfilling with new products and market share gains across the business. Within the retail vertical, we are very encouraged by the level of customer interest in retail automation solutions. And adoption rates continued to improve.
Our gaming business is also doing well with successful product upgrades and bundling solutions. While the overall market is fairly flattish, we are gaining share, outgrowing the market. In financial services, we continue to see improving adoption rates for banking automation and branch transformation initiatives. This strength is broad-based across Southeast Asia, China, India and Europe. And in the vending vertical for our payment business, we are seeing good demand in the UK and elsewhere in Europe with strong growth in our European cashless and connectivity solutions. While most verticals are performing well, transportation has slowed a bit, especially in China. We still expect longer-term growth in that market. But project pushouts and delays have had an impact over the last few quarters.
Moving on to Aerospace & Electronics. We had a really strong first quarter. Overall sales and operating profit were modestly better than we expected and orders were even better. In fact, the last two quarters combined have delivered the strongest orders we have seen consecutively in the last five years. Orders were particularly strong on the OE side of the business, both for our commercial and military businesses. For the last few years, we have talked about our position with the newest aircraft platforms and the benefit we expected. This is reading through, as Brendan Curran described at last month’s Investor Day.
Airline profitability continues to be strong. The commercial aircraft backlog remains at record levels with recent forecasts increasing the demand outlook in excess of 40,000 aircraft deliveries over the next 20 years. And it may take some time, but we expect build rates to increase in line with the projections currently being provided by the OEMs. Orders are also firming up for the business jet aircraft platforms, where Crane has content.
For commercial aftermarket, we are seeing strength as airlines continue to maximize aircraft utilization at record load factors. And in our military business, both OEM and aftermarket, we have experienced strong demand in line with the expanded budget caps and spending. Our position and technology investment in microwave signal processing, power conversion and power conditioning continues to create opportunities for us in areas including airborne-and ground-based radars, electronic warfare, missiles and missile defense, directed energy, communications, space and electrified vehicles.
I also recently attended the Hamburg Aircraft Interiors Expo. While demand for cabin-related products is still sluggish today, I received great feedback on our new line of G3 actuators, which are the most compact, fastest, efficient and quietest seat actuation in the industry. And we expect to gain further share with this solution.
I would be remiss if I didn’t mention Fluid Handling as well. Rich will provide some more details. But overall, the segment is off to a good start in 2018. Markets are recovering slowly. Our teams are making progress on our growth and productivity initiatives and we continue to gain share across our vertical markets.
Overall, it was a strong quarter across our portfolio. Based on what we know today and barring any new economic surprises, we are confident in our revised guidance. We’re executing well and most end markets are trending as expected. Again, our actions today are setting us up for a very attractive multiyear growth story. As a reminder, we expect an average of 6% to 8% underlying EBIT growth for the next several years. On top of that, Crane Currency acquisition, off to a great start. We continue to expect $1 of EPS accretion by 2021. While we will exceed our 15% target for accretion this year, we still feel that $1 per share is the right number by 2021.
Tax reform legislation will contribute $0.50 per year to EPS with that amount fully reading through starting in 2020. This year and next, however, we’re using the benefits from tax reform to accelerate growth investments across our businesses. And these projects are already well underway. As always, we remain disciplined on cost. And the repositioning actions we initiated in December will add $0.35 per share by 2020. Progress to date has been good. Repositioning is progressing without any customer disruption.
All of these items, underlying EBIT growth, Crane Currency, tax reform, growth investments, repositioning, should drive a mid-teens EPS CAGR from 2017 through at least 2021. And on top of all this, we should have significant substantial flexibility for capital deployment over the next several years.
Rich, let me turn it over to you for some additional financial commentary.
Thanks, Max. Good morning, everyone. We’ll now move to segment comments, which compare the first quarter of 2018 through 2017 excluding special items, as outlined in our press release and slide presentation.
In the first quarter, Fluid Handling sales of $267 million increased 11%, reflecting core sales growth of 3%, a 2.5% benefit from net acquisition and a 6% benefit from favorable foreign exchange. Fluid Handling operating profit increased 19% to $32 million with operating margins of 12.1% that increased 80 basis points compared to last year, reflecting higher volumes and productivity, partially offset by unfavorable mix. Fluid Handling backlog was $281 million at the end of March compared to $262 million at the end of 2017 and $250 million at the end of March of last year.
After adjusting for foreign exchange, the backlog increased 6% on both a sequential and year-over-year basis. Orders, also adjusted for foreign exchange, improved 3% compared to last year and 5% sequentially. As we have discussed in recent quarters and at Investor Day, we believe that end markets bottomed in 2016. In early 2017, we saw a solid sequential improvement in orders. The order rates remained relatively steady throughout last year, basically a new order plateau, better than the trough, but still at depressed levels.
During the last quarter here, we did see a modest further improvement in order rates. We believe that about half of the order growth is from share gains. But markets do look like they are improving from 2017 levels, although fairly slowly. Overall, order activity was slightly better than expected in the first quarter, driven primarily by a pickup in the Middle East and a little bit of outperformance in China.
By end market, we saw solid order improvement across chemical, refining and general industrial markets with power markets still soft. Compared to our original expectations for the quarter, refining was modestly better. MRO orders increased slightly but were outpaced by project orders. However, projects are still typically confined to capacity expansion and debottlenecking activities. Greenfield activity is still limited and primarily in the pharmaceutical sector.
In the Americas, we saw a good order growth driven by projects. MRO activity was fairly flat compared to last year but up sequentially in the first quarter, in line with normal seasonality. Project activity is improving, primarily in the chemical refinery turnaround and pharmaceutical markets. We booked a fairly large pharmaceutical order in the quarter for a new Greenfield facility. And there were a few good- sized chemical projects related to plant expansions and overhauls.
Refinery orders were better than expected but still only up modestly compared to last year. We expect refinery activity to pick up as the year progresses. Europe overall was flattish with solid MRO growth offset by softer project activity. While projects continue to be delayed, we did book an order for a Greenfield Pharma facility with several orders for chemical plant expansions and turnarounds. In China, project activity is improving. And we believe that we are gaining further share, particularly in chemical markets.
Outside of chemical, demand is still sluggish. But overall, China is performing slightly ahead of our expectations. The most notable change over the last two months, however, has been improvement in the Middle East, where order and funnel activity has been stronger than we expected, primarily in the chemical markets.
On the commercial side of the business, growth was solid in both Canadian nonresidential construction and the U.S. municipal markets. We do expect sequential improvement next quarter in both segment sales, volume and margins with further sales and margin improvement in the second half of 2018. And we believe this segment is on track to meet the segment guidance we provided earlier this year. At Payment & Merchandising Technologies, sales of $292 million increased 50% compared to the prior year, driven by 50% growth from acquisitions with a 7% core sales decline approximately offset by favorable foreign exchange.
Sales were consistent with our expectations. Remember that it was an unusually difficult comparison with 18% core growth in the first quarter of last year related to the large retail project. Segment operating profit of $49 million increased 26% from last year with operating margins of 16.8%, down from 20% last year driven by the impact of the Crane Currency acquisition integration.
The margin performance was modestly ahead of our expectations and core margins increased slightly despite the decline in core sales. We do expect sales to increase over the course of this year with segment margins at similar levels for the remainder of 2018. We expect further margin improvement next year as we make progress with the Malta launch, along with other productivity and integration activities.
Aerospace & Electronics sales increased 4% to $170 million. Segment operating margins improved to 20.3%, up 70 basis points from last year, a little ahead of our expectations. Total aftermarket sales increased 2% with similar growth rates on the military and commercial sides of the business with strong sales of spares offset by a decline in modernization and upgrade sales.
Total OE sales increased 5% compared to last year, driven by stronger commercial transportation and business jet sales, along with several military engineering projects, partially offset by continued softness for cabin-related products. The OE aftermarket mix was 74% to 26%, comparable to the prior year.
Aerospace & Electronics backlog was $381 million at the end of March compared to $374 million at the end of 2017 and $352 million at the end of March of last year. As is typical for Aerospace & Electronics, we expect margins to improve progressively over the remainder of the years with the second half and the fourth quarter in particular much stronger than the first half levels. Engineered Materials sales decreased 7% to $70 million, driven primarily by a sales decline in the recreational vehicle market. Operating margins declined 90 basis to 70.8% primarily as a result of lower volumes and higher material costs.
Turning now to more detail on our total company results and guidance. Our first quarter tax rate was 18.9%, as expected and compared to 28.1% in the first quarter of 2017. The first quarter tax rate reflects benefits from the recent tax reform bill and our expected mix of earnings. We continue to expect a full year tax rate of 22%, consistent with our original guidance.
In the quarter, free cash flow was $47 million compared to a negative $6 million in the first quarter of last year, due in part to the timing of receivable collections at Crane Currency and asbestos payments. Total debt at the end of the first quarter was approximately $1.4 billion, up from $743 million at the end of 2017, reflecting the acquisition of Crane Currency.
I am pleased to report that subsequent to the end of the quarter, we repatriated nearly $300 million of cash. We used the repatriated cash to repay our $200 million three-year term loan as well as some short-term debt. The ability to repatriate under the new tax law has allowed us to deleverage following the Crane Currency acquisition far more quickly than we originally anticipated. And it will also provide us more flexibility to deploy capital in the future.
As Max mentioned, we are raising our 2018 EPS guidance, excluding special items by $0.10 to a range of $5.45 to $5.65 compared to our prior guidance of $5.35 to $5.55. The increased guidance primarily reflects the Crane Currency contract Max referred to, partially offset by a softer Engineered Materials outlook and some net headwinds from material inflation. We also raised our free cash flow guidance by $20 million to a range of $240 million to $270 million.
Looking at the cadence of quarterly earnings. We do expect a slight increase in EPS sequentially in the second quarter with more substantial increases in the third and fourth quarters. The ramp-up in earnings as the year progresses is likely to be a little more pronounced than normal, given project timing in Fluid Handling and Payment & Merchandising as well as repositioning benefits, Crane Currency accretion and productivity programs, which will the course of the year.
Aerospace & Electronics results will also continue to improve as the year progresses, consistent with that business’ normal seasonality. To reiterate, we only expect a slight sequential increase in EPS in the second quarter.
Operator, we are now ready to take your first question.
Thank you. [Operator Instructions] Our first question comes from the line of Kristine Liwag with Bank of America. Your line is open. Please go ahead.
Good morning, guys.
Good morning.
Max, I was wondering for the Crane Currency increase and outlook that you have for the full year, you alluded that this is only partially incorporated into your outlook. Can you give more details on what’s included in your outlook and also what the opportunity is from this order?
Yeah. What I would say Kristine, is we’re comfortable with including a portion of our arrangement that we have with our client. If you think about the overall earnings guidance increase, maybe just to put it at a broader level or a higher level, we’re expecting somewhere around $0.15 of additional benefit versus our original guidance associated with this opportunity. From that, roughly $0.05 going in the other direction associated with a little bit of softness in Engineered Materials and the higher material input costs. But just to stay with the opportunity and the question that you have, I would think of it as about $0.15 impact to our guidance as we think about the balance of the year.
Okay. And maybe following up on that, is this an order that you’ve already received? And why is it that you’re only factoring in partial of the order? Is it because of timing? Or do you still need to get deposits from your customers, I mean what’s driving the conservatism from your side?
Yeah. I want to be careful in terms of how – speaking about this particular customer order. As we described, this is a very large customer order that has some uncertainty in it. So yes, we have the full order. Even having said that, it is uncertain in terms of the exact timing and release of that order. We have some tighter terms and conditions related to that order. What we’ve included in our guidance is what we feel firm about at this time. There is some potential upside in the balance of the year. We’re not prepared to kind of call that out quite yet. I’d like to see a little more maturity in this – to this quarter. And we’ll give you an update on next quarter’s results as well. But if things progress, there certainly would be some additional potential upside.
That’s helpful color. Thank you very much.
Thanks Kristine.
Thank you.
Thank you. And our next question comes from the line of Matt Summerville with D.A. Davidson. Your line is open, please go ahead.
Thanks. Two follow-ups on Crane Currency; first, removing the noise from this one customer, can you talk about organically what you’re actually seeing in the business from a volume standpoint perhaps maybe relative to what you originally expected? That being the first question. The second question, Max, you mentioned know that you’ve been around to see all the major operations at Crane Currency. You seem to come away incrementally more upbeat. Can you talk about why you feel that way? Is it ultimately the dollar you’re looking at in terms of accretion? Is that looking increasingly conservative? Where are you more optimistic going forward?
Well, on the ability to execute, I can tell you that I was very impressed with the teams at every location from their knowledge, engineering expertise, the technology, operational excellence. And I think that this team is going to really develop at a whole new level with our combined guidance together. So I was very encouraged, embracing versus resisting, some acquisitions are more difficult culturally. I think I’m very, very pleased with the cultural fit between both companies, the leadership – the executive leadership, the Malta startup, very, very impressive, 1 of 2 lines already up printing. I was just very, very encouraged generally. And in addition, from a project funnel sales execution, what we’re tracking, what we’re working, very much in tune with our expectations for the year. Rich, do you have any?
Yeah.
Just on the core growth, I don’t know, I’m not sure exactly that we have that off the top of Richard.
Yes. Well, just in terms of the way the business is performing, yes, as expected in the quarter. It’s not – and just sort of come full circle on the dollar as well. I think we’re encouraged by what we’re seeing. But whether – the dollar is what we’re still comfortable with quite frankly on that. But in the quarter itself, the underlying business outside of this customer, we feel like things are moving as we expected and as we planned.
And then just in terms of the overall heightened level of growth investments that you’re making this year, can you talk about how the sequencing of those investments, the pace of those investment sort of rolls out through the year? Is that part of the dynamic impacting sort of this first half, second half weighting? I want to make sure we understand kind of again that first half, second half weighting that specifically, Rich, you made the point of mentioning twice towards the end of your comment.
Yeah. That’s about reinvestments, more about when we see the repositioning benefits entirely read through and just the profile of orders and sales in the businesses that I mentioned, Aerospace & Electronics, Payment & Merchandising and even fluid for that matter. So it’s just more of nothing here back end-weighted really outside the norm, just more of moving through the different initiatives that we had discussed at Investor Day and how it all rolls out. The reinvestments themselves, I would say that they actually, if anything, pick up a little bit more as the year progresses versus the first quarter. So when pursuing those kinds of initiatives, there’s a ton of planning and we’re making great progress. But a lot of the spend starts to happen frankly a little bit later. So hopefully, that answers your question.
Yes. Thanks guys.
Sure.
Thank you. And our next question comes from the line of Nathan Jones with Stifel. Your line is open, please go ahead.
Good morning everyone.
Good morning, Nathan.
Good morning, Nathan.
I’m going to go to Fluid Handling. You guys had been pretty clear last year that your order rates had stepped up a little bit but had plateaued out. And you are certainly sounding a little bit more bullish on the market there. And I think probably the most bullish you sounded was in the Middle East. Can you talk a little bit about what kind of projects there are there? Do they feel like these are a more sustainable level of increased projects? Or are they kind of one-offs that have just come to the market?
Yeah. I would say we’re correcting that, we do feel a little bit better now than previously we have little bit of a modest uptick, and the Middle East being a primary area that we’re seeing increased activity. Overall for Crane, it’s not a large impact. But we wanted to provide that additional color to you all. It’s primarily in chemical, I would say, in terms of the nature of where those additional investments are coming. And it just gives us an increasing comfort. Frankly, in the Middle East, we also benefit in our commercial – the commercial side of our business from our business over in the UK. So it’s a good indicator just for us overall from an end-market perspective. The other things just to point to would be outside of the Middle East would be the Americas certainly felt a little bit stronger, everything outside of power, I would say. And so just overall, the tone feels – and what we’re seeing in funnels and order rates just feels a little bit just modestly incrementally better than we expected. I wouldn’t – at this point, we sort of feel like the levels that we’re at now feels pretty good. And when you look at comps for the balance of the year, we still feel pretty good about our core growth guidance that we have at the segment.
Just a little added color on the – just to add to what Rich said specifically to Middle East just to give you a flavor. So fertilizer and some gasfield development in particular, just to give you a sense, Nathan.
And then it sounds like you’re looking for maybe some improved turnarounds in refining in the U.S. and maybe some improved projects there. I think that’s probably a little bigger market for you than the U.S. Are you expecting that to continue to improve through the year? Or do you feel like this is reset up to a slightly higher level of orders that’s plateauing again in 2018, the same way it did in 2017? Or do you feel like that the trajectory is on the increase?
Yes, it was a nice bump for us from the rate we were running at in the second half of last year into this year in the Americas. I don’t – I wouldn’t say that we’re expecting to see that continue to happen as we move through the balance of the year just yet. It feels pretty good. But we’re not prepared to say that we’ve seen any kind of meaningful trend that would suggest that we should feel really good about that kind of an improvement happening in the balance of this year.
Okay. Just a quick one on aerospace, you talked about firming orders here, things going as good as they have in the last five years. But you talked about cabin products being soft. Why would cabin products be soft when most of the other parts of the business are growing well?
It has to do with the shift from stronger single aisle versus…
Yes, just the build rates in 777 and some of the larger aircraft, where we have more content in that particular area. I think the message there was more along the lines of it just remains – it remains a bit sluggish for us, not necessarily incrementally worse than we otherwise would have thought. We just didn’t see the strength come through like we did in the rest of the business.
Gotcha. Less business class in narrowbody.
Correct.
Okay, thank you.
Thanks, Nathan.
Thank you. And our next question comes from the line of Ken Herbert with Canaccord. Your line is open. Please go ahead.
Hi, good morning, everybody.
Good morning.
Max, I just wanted to follow up on the comment with Rich. It sounds like you’re fairly quickly deleveraging again and you’ve taken advantage of the opportunity to repatriate some cash and put it to the balance sheet. But even with obviously the most recent acquisition, you’re relatively low from a leverage standpoint. Can you just maybe reset now expectations and maybe what you’re seeing from an M&A standpoint and how we should think about priorities there or a potential allocation from a growth relative to return to shareholder perspective?
Well, we’ll continue to prioritize our internal growth investments than we prioritize the inorganic. I can tell you that there is activity in each of our major segments right now, nothing imminent. But we are working our funnel. We’re working opportunities. We stay focused in our three major platforms of Fluid Handling, A&E and Payment & Merchandising Technologies. There is some activity in each of those segments.
I would just add, Ken, that in terms of capacity and where we ended the year last year, as you know, we file a rating agency model in the way of debt-to-EBITDA. And when you put everything all together, at the end of last year, you’re north of 3, 3.5. Roughly 3.5 I believe is where we ended the year last year. So even with repatriating and doing – which was fantastic, kudos to my team frankly on being able to do what we did here. But we did delever. And if you look at where we otherwise expect it to be, I would say almost 0.5 turn better, which is fantastic, at this point in the year versus what we otherwise would have thought. I would expect us to get down to that 2.9 to 3 level by the end of this year with greater confidence for sure. And then of course, to the extent that we have opportunities in M&A and you get the benefit of an EBITDA that you’d be acquiring, we have some nice opportunities as we close out or even from here through the end of the year to look at opportunities.
Okay, thanks. And just to follow- up on that, obviously now that you’ve got Crane Currency, are you – is there a set of level within each of the core 3 platforms you’d like to see? Or would you be able to – are you prioritizing any market more than others as you potentially look at inorganic opportunities?
No, not prioritizing any one of – beyond those three, but certainly prioritizing those three. It’s going to be around actionability.
Yes, okay. And then just finally back on Fluid Handling one follow up there, appreciate all the detail you’ve given. You did mention in the prepared remarks that the mix was a bit of a headwind. And I just wanted to follow up if that was more project versus sort of MRO slower growth there or if that was related to any particular region or ready more cover on the mix headwind and the impact in the quarter would be helpful.
Yes. We continue to see some nice relative core growth in our commercial business. Our business up in Canada was really – really delivered a solid quarter frankly. And that was one – that was part of the mix issue. And then it’s just one- off project versus MRO across the rest of the business I would say – but primarily, Ken, I would say it’s the business mix with our commercial business being quite strong in the quarter.
Okay, thank you very much.
Thanks Ken.
Thank you. And our next question comes from the line of Robert Barry with Susquehanna. Your line is open. Please go ahead.
Good morning, Rob.
Hi, everyone, good morning.
Morning.
Just wanted to start with a change in the free cash flow outlook. It seems like maybe even less than half of that is explained by the earnings guidance change. Is there something also happening with working capital? Or are financing costs lower?
Yes, just you nailed it right there, Rob. About half of it is coming from the guidance change. And then working capital, we’re just seeing some good progress in the rest of the – in the couple of the other segments. But we felt comfortable enough, just given what we see in the outlook we have, to raise it by $20 million. But it’s really those two components.
Got it, got it. And then I just wanted to make sure everyone’s expectations were clear on lumpiness in the currency business. I know when you bought that, you talked about the absence of this order that you’ve now won actually, causing a big step down this year. Does that mean that, that step-down gets just pushed out one year? Is that how we should be thinking about the revenue cadence?
I think that’s fair. That’s a fair way to characterize it.
Yes for everything that we know right now, that would be the way – that’s the way to look at it, Rob.
Got it. And then you mentioned that things were going ahead of schedule. I think, Max, you even said there was a line printing in Malta. I’m just curious how far ahead of schedule you’d say that is. Because I thought that was going to kind of kick in more in early 2019. And I’m just curious, too, if there’s kind of a similar expedited progress on shifting some of the legacy production at Crane Currency out of other parts of the footprint.
I would say that it’s on schedule. There’s still a lot of work to be done through the course of 2018 at the facility but on schedule progress. The second part of the question, Rob, what was it again?
Yeah. I thought there was this kind of dual dynamic of ramping up reduction in Malta but maybe curtailing it elsewhere. And so I was curious if it was ahead of schedule in Malta, is it also ahead of schedule, curtailing elsewhere?
We have some arrangements with outside suppliers as well that we’re actually insourcing. So some of that volume comes from insourcing of outside suppliers.
Okay. I mean, we can follow up offline if you want. I guess the bottom-line of my question is, I’m wondering if the -- is the fact that it’s pacing ahead in that kind of near- or mid-term positive from kind of all-in cost perspective or if it’s relatively neutral.
Yeah. I would just – I would say it’s relatively neutral, Rob. And I think the color that we’re trying to provide is that it’s an important element of our overall path to the earnings growth profile to that dollar. And we wanted to communicate that things are moving basically on plan. The comments that we made at Investor Day about us being – it’s mainly a 2019 benefit, that’s when we’re not expecting to see any material inefficiencies. So we’re still going to continue to see inefficiencies, notwithstanding the fact that I got one line up and running, whether we have accomplished what we have so far. So we’re still going to see that kind of a headwind this year and it’s tracking. So I wouldn’t say that our comments were geared towards telling you that things are way ahead of schedule and we expect incremental accretion because of that stuff.
Got it, got it. Okay, that’s helpful. Thank you.
You’re welcome.
Thank you. And our next question comes from the line of Walter Liptak with Seaport Global. Your line is open, please go ahead.
Hi. Thanks. good morning guys.
Good morning.
I wanted to ask you about Fluid Handling as well and the mid-single-digit growth that you’re getting. And I wonder, was the volume pretty consistent during the quarter? And also pricing, how are you feeling about the pricing of product? Can you get price yet?
Yeah. Good questions. As we look at the order profile that occurred through the quarter itself and some of this could be seasonal, but we did see a pickup as you look from January through March. So it felt good. But we typically would see that. But it was nice to see the pickup that we did. So we were -- the profile was momentum, I guess, is the way to think about it. From a price perspective, things are tracking according to plan. We had pricing put in our plans for this year from a guidance and plan perspective. And if anything, we’ve only -- we’re only doing a little bit better, I would say, as we’re offsetting much of any material cost headwinds that we’re experiencing.
Okay, okay. I guess along those lines then, are there any other segments? Because in the guidance, you called out that there’s some price/mix issues that were a little bit worse than you thought when you initially did the guidance. Where else are you seeing sort of these price cost/mix problems?
Not really in any of the other businesses, we’re doing very well. I think the comment that we made about our underlying payment business, the margin profile there is actually better – a little bit better than we expected, improved over last year, notwithstanding a slight core sales decline. So payment, very solid. Engineered Materials would be the only other one, right, with a little bit higher resin costs and some pressure. But nothing surprising, I guess, I would say as it relates to that relationship between price and materials. Beyond that, Aerospace & Electronics, really performing very well, as Max mentioned in his prepared remarks. So mix headwinds in Fluid Handling and some higher notable resin increases in Engineered Materials but all as expected.
Okay. Wit that said, the price cost, is there like one more quarter where we get a hit from this? Or is this a problem that you think persists throughout the year? Like if we’re going to factor it into our models, should it be a second quarter thing or throughout the year?
No. So just to reiterate, so in Fluid Handling, it was more mix and the business mix that we’re seeing. But in Engineered Materials, we do expect to see the profile of demand improve in the second half of the year. Material cost at this point, I wouldn’t say I would make any real significant changes to Q2 as it relates to any kind of price materials exposures.
Okay. All right, great. Thank you.
That helps?
Okay. Yeah. Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Damian Karas with UBS. Your line is open, please go ahead.
Hi, good morning everyone.
Good morning, David.
Good morning.
So, since last quarter, we did see the U.S. budget pass with a pretty large defense increase. Wondering how much would you expect this to boost the company’s defense exposure? And is it too early at this point to start seeing resulting orders increase on this front?
I think, it’s – yeah, it’s definitely too early, and I think the longer-term funnel opportunities that we see surfacing are encouraging. But some of this is even well beyond 2018 quite honestly. I think it’s a general – as you should think about where we’re playing and what we’re seeing generally very positive. I think what I’m very pleased with as well is the technology development that our teams have been on over many, many years that are providing opportunities, not only with the increased budget – related to the increased budget but just with core defense opportunities that we have been chasing and winning quite honestly.
Okay. Makes sense. And Engineered Materials, obviously a smaller segment, but you have had a nice run here in RVs the last few years. And perhaps this first down quarter comes later than some had expected. But just curious, what gives you confidence that retail demand should remain strong through the balance of the year here as you get past this short-term channel correction?
There’s quite a few well-tracked research indices and industry publications that would indicate that 2018 is going to continue to be very, very solid here. So that’s the best estimates that we have from the market and from our own team.
Okay, great. Thanks guys. And congrats on the improving outlook here for the year.
Thanks, Damian.
Thank you.
Thank you. And I’m showing no further questions at this time. And I would like to turn the conference back over to President and CEO, Max Mitchell for any closing remarks.
Super. Thank you so much, operator. As we discussed at Investor Day for many years, Crane has continued to evolve into a global, diversified, integrated operating company and a technology-driven enterprise with a very strong position in target niche markets. I remain excited about our current positive outlook and the opportunities that we have ahead of us. Crane’s path reminds me of the words of a recently deceased science-fiction writer, Ursula Le Guin, who once wrote, “It is good to have an end to journey toward, but it is the journey that matters in the end.” I’m proud of our journey and the progress that we’ve made. And I’m looking forward to our team continuing to deliver shareholder value as we move further on our journey in the years ahead. Thank you for your interest in Crane and have a great day.
Ladies and gentlemen, thank you for participating in today’s conference. this does conclude the program and you may all disconnect. Everyone, have a great day.