Jason Feldman - Director of IR Max Mitchell - President and CEO Rich Maue - CFO.

Ken Herbert - Canaccord Genuity Robert Barry - Susquehanna Matt Summerville - Alembic Global Advisors Brett Linzey - Vertical Research Partners Nathan Jones - Stifel, Nicolaus & Co Shannon O'Callaghan - UBS Jim Foung - Gabelli & Company.

Welcome to Crane's Fourth Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time I would like to turn the call over to the Director Investor Relations, Mr. Jason Feldman. Sir, please go ahead. .

Thank you, operator and good morning, everyone. Welcome to our fourth quarter 2016 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, 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 the accompanying slide presentation, both of which are available on our website at www.craneco.com, in the investor relations section.

I would also like to invite you to attend our annual Investor Day event on the morning of March 2. Please contact me directly if you would like to reserve a place at the conference. And now let me turn the call over to Max. .

Thank you, Jason. As outlined in our press release last night, I am pleased to report that Crane's fourth quarter EPS, excluding special items, was $1.02. Ahead of the $0.91 to $0.99 we provided last quarter. Sales of $681 million were approximately flat compared to last year, with 2.5% organic growth mostly offset by unfavorable foreign exchange.

Operating margins, excluding special items, of 14.8% declined modestly compared to last year, but were in line with our expectations. On a full-year basis, 2016 EPS, excluding special items, was $4.20 per share, up 3% compared to last year and well above the $3.85 to $4.15 guidance we provided in January, 2016.

And we ended the year with sales of $2.7 billion, reflecting 2% of core growth. While foreign exchange largely offset underlying top line growth, adjusted full-year operating margins of 14.5% improves 20 basis points compared to last year.

I am also particularly proud of delivering full-year free cash flow of $267 million, reflecting outstanding working capital execution across our businesses. We delivered very strong operational results in 2016. The other notable event this quarter was the extension of our asbestos liability estimate.

We last updated this estimate in the fourth quarter of 2011, covering claims expected to be filed through 2021. The new provision, net of tax and insurance, of $125 million or $2.11 per diluted share, extends the horizon of the liability to the generally accepted endpoint of 2059. Rich will provide some additional details in a few minutes.

Turning to our businesses, in our Fluid Handling end-markets project activity remains depressed but market conditions and order rates are relatively stable and there are some early signs of potential improvement. Specifically, MRO activity looks like it will turn positive in 2017 and there are some signs of better activity into U.S.

chemical and refining markets as well as in the Chinese power market. Excluding foreign exchange, fourth quarter 2016 Fluid Handling orders declined in the mid-single-digit range, compared to 2015 and sequential order trends have stabilized as expected. At this point, we believe that our orders are now at trough.

While we expect our markets to remain stable with some possibility of order growth in 2017, we're forecasting a small core sales decline this year given the lower backlog as we enter the year and due to the normal lag between orders and revenue.

While the pace of the recovery is still uncertain, our 2014 and 2015 restructuring and cost actions have properly positioned our cost base for the current environment and we expect 2017 segment margins flat, despite the anticipated core sales decline and further unfavorable foreign exchange impacts.

We continue to invest for growth across Fluid Handling and with substantial focus on new product development, channel management initiatives and improvements in customer-facing processes.

Further, we remain optimistic about the long term prospects for this business, given secular trends supporting future investment, particularly in chemical markets in the United States and power markets globally. We remain committed to our long term margin target of 14% to 19% for this business.

At Payment and Merchandising Technologies we had another really great year and we're very excited about the momentum in this business. Full-year core growth was 8.5%, following 6% core growth in 2015 and we expect further acceleration in core growth during 2017. Adjusted segment margins also improved substantially, with the full year above 18%.

We will provide more details on the underlying growth trends at our Investor Day event in early March, but at Payment we're seeing continued growth in several emerging markets.

We have also been very pleasantly surprised by strengthening demand in the developed markets, driven largely by concerns over rising wage rates and the more intense focus on productivity for retail and banking applications.

We remain a technology leader in this space, with the most advanced cash acceptance and validation solutions for a wide variety of end-market applications.

While we provide cashless and electronic payment solutions as well, there is a lot of cash to be made in cash management over the long term and we will provide some additional insights into the state of cash usage across the world at Investor Day.

The merchandising business is also seeing strong growth with continued customer adoption of our retail self-service equipment, validating our vision of Internet-enabled and fully connected machines with digital media and advertising capabilities and associated data analytics to improve the profitability of our customers.

Last quarter I mentioned a large payment solutions opportunity that we were pursuing. I am pleased to report that we did win this business, along with our OEM partner. A large project for an important retail customer for applications in developed markets.

There is still some uncertainty over the full project scope and timing, but this project is one of the contributors to our forecast for further acceleration of core growth in 2017, for this segment.

We're unable to provide more specific details because of this customer's confidentiality requirements at this time, but we started shipping at the end of the fourth quarter and we have mobilized our supply chain to support our customer's requirements.

At Aerospace and Electronics, we completed delivery on the Space Fence program during the fourth quarter. We executed incredibly well in this extremely challenging program in 2016, ramping up to the highest volumes ever for our Microwave business and then winding down to normal levels during the fourth quarter.

For the full year, Aerospace and Electronics delivered 8% core sales growth and segment margins for the full year came in above 20%, in line with our guidance at the beginning of the year, despite heavily negative mix and continued elevated levels of engineering expense.

We remain confident in our strong multi-year growth outlook but core sales will decline in 2017 given the roll-off of the Space Fence program and challenging modernization and upgrade comparisons.

Despite lower sales, we expect substantial margin expansion this year, driven by less negative mix and the winding down of development work on several large engineering programs.

Beyond 2017, we're well positioned on the right growth platforms for the future, including the Airbus A320neo, the Boeing 737 Max, the Embraer E2, the Comac C919 and the Lockheed F35.

On last quarter's call, in addition to the payment opportunity, I discussed incurring substantial incremental engineering expense during the third quarter in pursuit of a large commercial aviation opportunity. On this topic, there is good news and bad news.

For those of you with investment horizons shorter than five years, you may be happy to hear that we did not win this business. This program would have required tens of millions in unfunded engineering work over several years before we started to see revenue four to six years from now.

And as you know, at Crane we expense all engineering costs as they are incurred rather than capitalizing. For those of you with longer investment horizons, like ourselves, we're obviously disappointed that we did not win this business. It would have secured us substantial incremental content from one of the highest volume aircraft platforms.

I can't thank my team enough for the dedication and passion they exhibited over the last year in pursuit of this business. While we're in fact disappointed, the message I would like you to take away from this is that we're aggressively pursuing growth at Aerospace and Electronics and throughout the rest of Crane.

We're targeting bigger, bolder projects and we're willing to invest to do so. We spent a few million dollars in pursuit of this opportunity, a very calculated risk.

In this particular case, while we were not awarded the program, the process allowed us to get much closer to a very important customer who now has a more intimate understanding of our full capabilities.

As a result, we believe that our performance in this competition put us in a better position for future opportunities and shareholders should have confidence that at Crane we continue to drive for long term, sustainable value creation and not just the next quarter's numbers. Last quarter I also mentioned two additional large microwave opportunities.

We're still pursuing these projects and we will provide an update when we have a final decision. These projects would be a nice follow on microwave orders to our strong Space Fence execution. Moving to Engineered Materials, we had another very good year with margins again in the 19% range.

Underlying demand remains strong and we expect 2017 to look similar to last year. In summary, 2016 was a year characterized by solid execution in uneven end markets but we're confident that we're well positioned for the current year and well into the future.

For 2017 guidance, we expect EPS in the range of $4.30 to $4.55 per share, reflecting 5% EPS growth at the mid-point, compared to our adjusted 2016 EPS of $4.23. I will now turn the call over to Rich Maue who will take you through the businesses and provide some additional financial information and guidance details. .

Thank you, Max. Overall, we turned in a strong performance in the fourth quarter, beating our internal objectives across all segments. No one disappointed. But before I review our business results in detail, I would like to discuss our fourth quarter asbestos provision.

I encourage all of you to thoroughly read and review the Form 8-K that we filed last night that includes the details of the fourth quarter provision and other related disclosures. As a reminder, we update our asbestos liability estimate as facts and circumstances dictate.

With such updates largely driven by our experience in the tort system, previous updates to our liability estimate were in the fourth quarter of 2011 and in the third quarter of 2007.

By way of background, when we update the liability estimate the full liability adjustment flows through our income statement at that time, net of the expected insurance recovery and associated deferred tax benefit. There is no associated cash flow impact at that time.

In future periods, our asbestos liability on our balance sheet, along with the associated insurance receivable and deferred tax asset accounts are reduced as cash payments are made for both defense and indemnity payments that we make as cases resolve.

The provision incurred in the fourth quarter of 2016, net of insurance and tax, was $125 million or $2.13 per share.

The after-tax net balance sheet liability is now $359 million and it covers costs related to currently pending claims and future claims projected to be filed against the Company through the generally accepted endpoint of such claims in 2059.

By way of comparison, after the 2011 update the after-tax net liability estimate was $434 million, covering then-current pending claims and claims expected to be filed through 2021.

Let me repeat, by way of comparison, after the 2011 update, the after-tax net liability estimate was $434 million covering then-currently pending claims and claims expected to be filed through 2021. The updated liability estimate reflects a number of factors.

The most important of which is the recent stabilization of asbestos claims activity and related settlement costs. For 2017, we expect after-insurance, after-tax cash outflows of approximately $36 million with annual cash outflows stable to gradually declining thereafter.

All that said, due to uncertainties in the tort system as well as uncertainties inherent in the estimation process, future reviews may result in additional adjustments to our asbestos liability estimate. Now moving on to our business results.

With core sales up 2.5%, margins at 14.8%, demand levels trending as expected and delivering free cash flow in the quarter of $137 million, we feel good as we enter 2017.

Unless I otherwise mention, my comments about our business unit performance this morning will be comparing the fourth quarter of 2016 to 2015, excluding special items, as outlined in our press release, slide presentation and the accompanying non-GAAP tables.

After my comments on our segments, I will provide some additional details on our 2017 Outlook. Starting with Fluid Handling. Fourth quarter sales of $240 million declined 7%, reflecting a core sales decline of 4% and a 3.5% impact from unfavorable foreign exchange.

Operating profit in Fluid Handling declined 7% to $28 million and operating margins were 11.6%, flat compared to the prior year despite the decline in sales and consistent with our expectations. And on a full-year basis, margins reach 12%, in line with the guidance we provided at the beginning of the year.

Fluid Handling backlog was $228 million at the end of 2016 compared to $267 million at the end of 2015. After adjusting for foreign exchange, the backlog declined 11% compared to the prior year but only 3% sequentially.

Excluding foreign exchange orders were down slightly at 1% compared to the third quarter of 2016 reflecting our previously expressed stabilization in our primary end markets. Looking to 2017, we expect a modest 2% core sales decline at Fluid Handling, together with an approximate 4% impact from unfavorable foreign exchange.

Notwithstanding the sales decline, we're providing 2017 segment margin guidance of 12%, flat with 2016, reflecting benefits from repositioning actions we took in 2014 and 2015 along with continued strong productivity gains. Moving now to Payment and Merchandising Technologies. Sales of $195 million increased 12% versus the prior year.

Core sales improved an impressive 16%, partially offset by unfavorable foreign exchange of 4%. The core growth in Q4 was driven by both our Payment Innovations and Merchandising Business. Segment operating profit of $38 million increased 29% from last year with operating margins up 260 basis points to 19.7%.

The margin improvement was driven by MEI integration synergies along with the higher volumes and productivity benefits at both the Payment and Merchandising Business. In 2017, we see more of the same.

We expect approximately 11% core sales growth, partially offset by 5% of unfavorable foreign currency translation and a 1% negative impact from the completion of a transition services agreement related to the MEI acquisition. This core growth performance follows 6% in 2015 and 8.5% last year.

Our 11% core growth forecast is our best estimate today and we believe it is a balanced view. We're confident in the underlying demand trends for this business across both Payment and Merchandising. But this is short-cycle business with limited visibility.

Even the large project that Max referred to has a fair amount of uncertainty related to full scope and delivery expectations from our customer. And we expect margins in this segment to increase to 20.5%, up 230 basis points from 18.2% in the full year of 2016, driven primarily by volume and productivity.

This expected improvement follows an approximate 750 basis point improvement in the Payment and Merchandising Technology segment since 2013. Aerospace and Electronic sales declined 2% to $187 million, driven by weak business jet activity, soft defense power markets and tough comparisons from military modernization and upgrade programs.

Segment operating margins were 21% and, while down from a particularly strong margin quarter last year, was in fact as expected, driven primarily by negative mix and the lower volumes. On a full-year basis, margins at just over 20% were consistent with the guidance that we provided at the beginning of the year.

OE and Aftermarket sales declined 2% each and the OE to Aftermarket mix was 71% to 29%, comparable to last year. Aerospace and Electronics backlog was $353 million at the end of 2016 compared to $436 million at the end of 2015, reflecting completion of Space Fence shipments during 2016 along with timing of certain other orders.

In 2017, we expect an approximate 5% decline in core sales at Aerospace and Electronics primarily reflecting the completion of the Space Fence program along with some difficult comparisons for modernization and upgrade programs. However, we do expect a 5% increase in operating profit and a 210 basis point improvement in operating margins to 22.2%.

The primary drivers of the margin improvement are improved mix post Space Fence and lower engineering expense as large development programs wind down. Engineered Material sales increased 6% to $60 million and operating margins improved 60 basis points to 17.4% driven by higher volumes and productivity.

We expect similar performance for this business in 2017, with core sales up 1% and segment margins consistent with 2016 at 19%. Turning now to more detail on our guidance for 2017. As Max mentioned, we're introducing 2017 EPS guidance of $4.30 to $4.55, up 5% at the midpoint compared to 2016 adjusted EPS.

Our guidance assumes total 2017 sales of approximately $2.7 billion, down 2% compared to 2016. The sales outlook includes an approximate 3% negative impact from foreign exchange, 0.5 percentage point impact from divestitures and core growth in a range of flat to up to 2%.

Operating margins are forecast to improve to 15.7%, up 120 basis points compared to adjusted operating margins in 2016. The operating margin improvement includes a slight increase in corporate expense to $58 million in 2017, due to timing, with total corporate expense at approximately 2% of sales.

For your reference, we have included a page in our materials posted on our website this morning where we provide a business segment view of both sales and operating margins. Unfavorable foreign exchange, including both translation and transactional impacts, is expected to reduce operating profit by approximately $13 million or $0.15 per share.

In addition in 2017, we expect to revert to a more normal tax rate of approximately 31% with diluted shares of 60 million. The higher tax rate and share count contribute to a $0.10 EPS headwind in 2017. Our free cash flow in 2016 was extremely strong and above our expectations at $267 million.

While we're very proud of this performance, particularly with respect to working capital, a portion of the strength in the fourth quarter was timing related. For 2017, we expect free cash flow in a range of $220 million to $250 million, down 12% at the midpoint compared to 2016.

While lower than what we delivered last year, taking our 2016 and 2017 results in aggregate, demonstrates a substantial improvement in cash generation relative to net income over those periods. Overall, we're pleased with our 2016 performance and we're planning for an even better year in 2017.

We hope to see all of you at our March 2nd Investor Day in New York City where we look forward to providing an informative discussion of our businesses and an update on current market conditions. Operator, we're now ready to take questions. .

[Operator Instructions]. Our first question comes from the line of Ken Herbert with Canaccord. Your line is open. Please go ahead. .

I just wanted to dig a little bit into the Payment and Merchandising Technology segment.

I mean you started out '16 I think you are guiding to about 5% core growth and 16.5 or so margins and you clearly delivered a much better number than that and you highlighted some of the items in terms of mix and volume and synergies but can you provide any more detail on maybe what happened over the course of the year that led to the significant upside and anything that may have been unexpected or were you getting better drop through that might help us think about 2017 for the segment?.

Yes, I think just overall we saw a solid performance and growth across both segments from a core growth perspective.

In terms of the margin performance across both it is a combination of the synergies that we expected to see coupled with the growth that was incremental to what we thought at the beginning of the year in the payment space and continued strong productivity and making further progress in our merchandising segment as it relates to our initiatives to drive digitally connected machines and therefore sell through opportunities for our operators.

As we think about 2017, in particular in our payment space, we see the trends in that segment or that portion of the segment being a continued positive momentum in particular in the retail and developed market space as we leverage productivity initiatives on behalf of retailers and the banking sector. .

Okay but there was nothing that particularly stuck out as a surprise across 2016 in that particular segment?.

I think we just saw general strength across the segment and across multiple channels. It was just good performance, Ken. .

The only other thing I would add is we did start to shift in the fourth quarter so we did see some fourth quarter the uptick from the large projects -- from the large projects we saw little upside there, Ken..

And then if I could on the free cash flow guide, can you quantify what was pulled into the fourth quarter from 2017 and specifically opportunities maybe on working capital in 2017 where we could perhaps see some upside?.

Yes I think I -- the way I would start off here is it is tough to look and I wouldn't recommend looking at a one or two year in isolation in terms of analyzing free cash flow. I understand your question. We have record performance here in 2017 both for an absolute dollars perspective and a metric perspective.

In 2016 we delivered 120% of cash flow conversion even excluding asbestos and when you include the asbestos payments 106%. So clearly a record performance and I am very proud of the teams in terms of how they manage working capital across all segments. 2017 at the midpoint frankly is another very good performance.

Still a step change improvement when you look at midpoint guidance number compared to the last several years. 2017 is 102% free cash flow conversion excluding asbestos and 90% free cash flow conversion when you include asbestos. If you again look at safe the last several years even on the 2017 midpoint, it is a step change function improvement.

So again 2016 had a standout performance. Some of which will not repeat. We had an outstanding fourth quarter in terms of working capital management. And I look at it compared to what I expected it was a notable improvement and it was across most businesses.

I wouldn't say we did anything that jeopardizes our 2016 performance, but it is the sustained level of working capital improvement that I would see continuing into 2017 as we think about the guidance midpoint number that we provided. .

Our next question comes from the line of Robert Barry with Susquehanna. Your line is open. Please go ahead..

So maybe just a follow-up on the earlier question about payment. I guess I am trying to parse to what extent is this business on a new growth trajectory versus a three to five you outlined a year or so ago versus the [indiscernible] python effect here in 2016 and 2017 with some of these large projects. .

I wouldn't call it [indiscernible] it's just consistent, solid demand leading through. .

What I would add to that is even excluding this wonderful opportunity that we're satisfying for our customer the underlying growth excluding that opportunity is in the mid-to single-digit range for 2017 were going to layout a lot of detail at investor day coming up.

Some of the growth drivers and excitement that we see by region, country a market and some of the solutions. I think you will be pleased with some of the update we give you at investor day. .

So you're calling for 11 in the segment it sounds like roughly half of that is being contributed by the vending growth. I think that's what you mean by retail self-service and the other half of it--.

When we talk about retail we're talking about stores where as you go into any store.

Okay. The self-checkout, right. So then maybe just let me rephrase.

Kind of the vending upgrade program, how much is that contributing or the program that you mentioned that was not named, how long of a duration is it? How much is a contributing to the 11?.

I think you're asking more about the payment versus merchandising overall. Merchandising as you think about venting it is not just any kind of one-time order it is transformation taking place in terms of our new solution that is reading through and driving sales uplift for our customers.

Media enabled, big data possibilities again we're going to take this at investor day in deeper and driving a renewed emphasis on the business model value. On payment we continue to invest in new solutions on a lower basis whether that is gaming, transportation, retail, we're seeing strength in a number of areas.

So it is a much broader sustained picture. .

I would add even in 2016 we had wonderful core growth performance in the segmented 8.5% from a core perspective.

When looking at the split between those who businesses we're seeing just as much if not more on the core growth side in 2016 on the merchandising systems side then we did even in payment even with the fourth quarter benefit that we saw on initial shipments of this new program.

So we're seeing, the point is we're seeing it across both and we will provide more of that detail as we think about 2017 at investor day.

Okay. I mean maybe just one last one and I will let it go. Just to clarify earlier you said the underlying was mid-single.

The difference between whatever you were referring to is mid-single in the 11 is that a temporary benefit or do you really think there is a multi-year high single low double digit kind of core growth for this segment?.

As we look at it my comment might've been more towards the CPI portion of the business. The payment business. So we see that as being in the mid-single call at four to 6% range as we think going forward on that more sustained business excluding this opportunity. .

Okay. Maybe just a quick one on fluid. I think you mentioned seeing more MRO potentially in 2017. Are you factoring any of that into the Outlook and maybe just a little bit more specificity on where it is, is it downstream refinery or where is the MRO? Thank you..

From a MRO perspective overall in the process valve portion of our business, you know we see MRO as being generally stable with a little bit of upside.

We're seeing it a bit stronger in the Asia Pac region were seeing it stronger in China and you know mainly around chemical and power is where I.2 for those particular areas in the MRO portion of the business. We see Europe being sort of bouncing along the bottom. Not as clear from and MRO perspective.

And in the U.S., we expect to continue to see a similar trajectory that we have been communicating on from a and MRO point of view. .

Our next question comes from the line of Matt Summerville with Alembic Global Advisors. Your line is open. Please go ahead..

A question on the [Technical Difficulty] if you look at the backlog there, it's down a little over 100 million if I have my numbers right.

You would have seen I believe in the second quarter or third quarter of 2015 you mentioned [indiscernible] I was wondering if you could help sort of parse that $100 million decline and I guess what sort of confidence do you have that we’re bottoming that business or maybe are not. If you could just talk through that that would be helpful. .

Sure. So on a year-over-year basis backlog is down roughly I think 19% or so sequentially the decline was about 6%. The majority of the decline was related to Space Fence and the remainder primarily related to timing of commercial OE orders. Our large OE order customers don't always place their orders on a consistent timeline.

The variability of volatility we have seen during the current year is not uncommon. So hopefully that helps you.

But we feel good as we think about 2017 with the backlog that we have and in the final in order opportunities that we see both in commercial OEM and historic aerospace business but as well and are defense electronics business where we do have some commercial OE opportunities particularly on the space site. .

And then just two quick wins ones on fluid handling.

Can you talk about whether or not are you seeing any change in the pricing environment in that business heading into 2017 versus how you were thinking about it heading into 2016 and what are you seeing overall in terms of raw material input costs that probably question primarily relegated to fluid but probably also pertains to engineering materials as well.

Thank you..

I would say no major change in terms of pricing power or discipline where competitors are it is still the same. I think we feel confident about how our backlog is priced, not improving and not worsening and similar for material, we watch closely on input costs right now.

We’re driving productivity actions but managing well -- no significant inflection point at this point. .

I would say in terms of the 2017 plan those elements reflected in our guidance. .

Our next question comes from the line of Brett Linzey with Vertical Research Partners. Your line is open. Please go ahead. .

I want to come back to payments and merchandising, you mentioned electronics big day and a lot of high-value offerings now within that segment. I'm just trying to understand what the structural margin entitlement is there.

Obviously the integration of MEI and that's a nice [indiscernible] wins but you're assuming 40% plus incrementals in the guidance this year.

I mean is that a good go forward assumption to reflect the inherent profitability you're seeing in those business?.

Yes. You're talking about the incremental on the sales leverage. And that business, just a reminder.

We spent significantly from an engineering perspective in this business even more so than we do in aerospace and that contributes to fairly strong or very strong ship profit margins which are sort of before the gross Park and it helps us leverage down in a pretty strong way. Our overall segment is 17 to 20%.

We're all ready at that high end of the range. As we think about going forward and depending on what adjacent markets we might enter into we're holding for that 17 to 20% with the leverage on go forward still thinking about 2018 and 2019 we would expected to be at the higher end of our historic 25% communicated leverage rate. .

Okay. That helps. And then shifting to fluid handling. It looks like you are taking an appropriately look conservative view on the top line given the backlog.

Just in terms of holding the margins for 2017 versus 2016, are you assuming some normal decrements all and restructuring bridges that gap or is your more optimistic view on MRO in the positive mix there embedded in your outlook?.

Yes. I think when we talk about leverage, we combined a little bit. So there is a normal volume leverage impact down or up and then you have all of our initiatives around productivity and other cost-saving measures that we might be taking from year to year.

So as we think about the leverage rates in that business and maintaining a 12% notwithstanding the decline it is a combination.

And so that really powerful or strong favorable the leverage rate I would call it given the decline that we're projecting is a result largely of productivity initiatives that are offsetting what is normally -- I'm sorry a much higher the leverage rate on sales. It is all about productivity.

It is about cost measures and being careful on what we add as we think about 2017. .

And then in terms of the growth outlook for fluid are you able to unbundle what you are assuming for MRO versus projects for the year? At least directionally?.

You know at this point, we're seeing a few elements that are a bit of green shoots but at this point I would go with our historic 2016 mix of MRO and projects. .

Our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead..

I just want to make it so everybody on the phone is very clear here.

This is asbestos liability adjustment in any way change your expectation of the after-tax cash outlay for crane?.

So you know overall in terms of what that outlay would be we see it as stably declining over time. I think what is important here is this is a positive development is the take away overall on this update.

Given the stability that we have seen in recent periods the downward trend and identity values on our liability see this as removing a fair amount of uncertainty. I wouldn't say all uncertainty but it removes quite a bit so from an overall liability perspective being able to go to 2059. On a cash flow perspective is it's a zero impact today.

Extending that all the way out to 2059 to provide some additional context I think this is perhaps where you are headed as well and this is why I repeated it on the call. Back in the third quarter of 2007 we had an after-tax charge of $250 million which covered us for just over 10 years.

In 2011 we booked a smaller number $157 million which covered us 10 years. And this year we booked a charge of $125 million which is covering at this.43 years.

So I think that is a really positive thing that folks need to understand but from a cash flow perspective that should have a natural for all of you in terms of what that means and in the near term we're looking at this as stable to declining thereafter.

They give are asking the question because for those that are tracking this long term we have never produced or manufactured that we could go on about the abuses of the justice system and legal system for those individuals that are really sick and injured and those to get pulled into asbestos litigation.

We been fighting it and part of that fighting has been defense costs that have driven these trends down. We feel very good about what we have done strategically over the years and we think that this latest true up on the charges is a positive indicator of the hard work that we have done. .

The next question for me is on the balance sheet. You know you're talking about $235 million at the midpoint of free cash flow about $36 million after-tax for asbestos. The MPI integration should be largely in place by now. You've got very little on the balance sheet. We would say Crane is currently under levered.

Can you talk about the appetite, the pipeline or M&A and your propensity to try and take some our share repurchase in 2017?.

Sure let me start. I think what is important and I understand your point on a straight up review of our leverage rate. I would just remind everybody that there are certain other elements that the rating agencies look at. They look at pension. They look at leases. They look at the asbestos liability and where we sit today is probably close to 2.9 times.

So towards the high end of by Moody's acceptable leverage rate of about three which is a very important metric for us. We're committed to maintaining our investment-grade. That is an element just to keep in mind as it relates to at least domestically here what is a constraint for us. Having said that our appetite is that we're ravenous, we're hunting.

We have knife and fork in hand. I don't want to get food poisoning. We're not going to be gluttons. I am amazed and quite honestly at some of the stupid pricing I continue to see out there. Our pipeline is very full. The pipeline is very active. And I continue to be stunned at some of the valuations that are out there.

We're going to continue to remain disciplined. But we're very active here. We're going to remain disciplined. .

Out of the market in the short term?.

You know, I think out is a strong word, again, discipline. .

Okay. If I could sneak one more in on the fluid handling business. You talked about some chemical and refining activity in the U.S.

Are you seeing that more on the new projects in terms of some of these projects that we've been waiting to see move forward or are you seeing any increased MRI activity?.

I will give you a little bit more. There is no major inflection and what we're seeing. Flat orders as we move forward. Is just too early to call. We’re saying were a trough but it is too early to see where the strength is going to come. How fast how much.

Quite honestly America's MRO we have expected more than we have seen a we think some of that is timing. Projects, over the last five months it is minor increments in terms of trend. Europe is in our flat. Projects continue to fall off of bid. .

We're really seeing some increased activity minor but increased activity in Asia and that includes our project final a bit of an uptick. Those are just early signs. But in the big course America, Europe, Americas some strength in refining that we're actually seeing.

Chemical, we continue to look at the past just plant in the golf course it is moved to the right and some of the data I have seen 9.5 9.5 billion pounds coming online. 18, 19, shifted to the right. It is still plans. All indicators should be solid for us. It is not a matter of when. I'm sorry, it's not a matter of if it is a matter of when.

How much how fast. This was a business from 2014 at 1.26 billion delivered 197 million in OP and this year regarding to 112. I'm not suggesting were going to be able to get back to peak levels within fluid handling. In that period folks invested to grow it when that volume comes back were going to leverage.

Get back to that peak, that's 85 million of OP. Just to frame up some of the potential that we think in fluid handling. Sorry a long-winded answer. Hopefully that gives you a little more color of 2017, that's how we think about 2018 and beyond. .

Nathan, just a follow-up on the prior questions on capital deployment as Max mentioned higher valuations still very much in the game. It is a priority for us relative to other capital deployment initiatives.

Our next question comes from Shannon O'Callaghan with UBS. Your line is open. Please go ahead..

Rich maybe to pick up on that one acquisitions that sounded pretty strong relative to dividends and buyback.

Can you fill out that thought a little bit?.

Yes. I think it almost speaks for itself but in terms of where we're focusing our time understanding where the market is pricing today in terms of risk and environment and taking those two things into consideration coupled with the fact that where our cash reside today and where our metric is from a rating agency perspective.

To the extent that something happens from a tax law change point of view it gives us a little more flexibility but at this point given those elements the priority and our effort is around M&A as opposed to share buyback at least in the next six months or so. .

Okay. And then Max I understand is too early to call in some of the fluid stuff and not making it into the guidance.

If things were to get better, if fluid were to turn out to be positive for you in 2017, one of the areas you think of the most propensity to be able to turn early if things were to get better?.

In terms of end markets?.

End markets or projects that you saw deferred that you know are there that could be acted on sooner or anything in your more optimistic scenario you think -- end market geography or market that might happen sooner. .

Yes, I don't want to sound overly bullish so don't take this the wrong way. It is still depressed and unstable the power we think will come back. Slightly. I think chemical will still take some time. I would say the same, refining in the U.S., power more globally. .

Okay.

And just last one you guys, in terms of the timing of when you guys do the asbestos update was there something in the general environment out there in terms of what is going on with us best that makes now the right time to do this update or was it very Crane specific to your own experience?.

Is very specific in fact circumstances for sure. We look at as you might imagine a number of different things when we're reviewing this liability. You know we don't do it alone as well. We have a number of external experts that help us with this look at this across the industry.

I would say the difference this time compared to 2011 is just really around the underlying trends in identity and defense costs along with changes in the torque system that stabilize to a degree that we're able to be on the 10 year period and wind down as well.

It is a number of factors but it really gets to the stability and what we have seen over the recent years. .

The other thing I would point to that as of December 31 we're at the lower end of what is left in terms of reported as a liability. I think it is about five years remaining. You know is a confluence of factors in I would say those are the most significant. .

Our next question comes from the line of [indiscernible] with Bank of America Merrill Lynch. Your line is open. Please go ahead..

When we look at the manufacturing footprint of Crane I think it's about 51% of your square footage is outside the U.S. and then at the same time about 40% of sales are outside the U.S.

And understand it may be too early to understand the fact of border adjusted tax but on a high level can you provide us a 30,000 foot view of how we should think about the flow of trade and then also on a net basis, would a border adjustment tax be positive or negative for you?.

Are you speaking specifically to Mexico?.

General, Mexico and also maybe a follow on to that.

Shifting your manufacturing to low-cost countries has been a significant driver to producing your cost structure, should something like this come into effect what are the available avenues for you're going forward?.

Let me answer it generally but to your point. We have manufacturing in many developed countries U.S., Europe as well as Eastern Europe low-cost countries China. I am proud of our global footprint I am proud of our global positioning. I would not say that we have moved on manufacturing to low-cost countries.

We still have a significant number of locations here in the U.S. And Germany, UK and so forth which are high-cost regions. We have no plans to move. We're effectively business system were very, very efficient and lean in that service and value. As we look at the taxes overall I think it is still too early.

I think we're flexible enough and diverse enough I don't see it as high risk. I think we’re going to be able to act when something occurs was specifically Mexico the largest facility we have is part of payment that produces the bill validator's to get shipped globally. We will address at the time I see it as lower risk in terms of impact.

Today we all ready shipped to the school the locations direct. We would address the tax at the time like everyone else if it were to come and be able to address it. So I think we all just wait and see. There's uncertainties we're all seeing but I think crane is well-positioned to address it. I don't see it as a high risk. .

Just broadly speaking I think a manufacturing footprint as it stands today is very well thought out in terms of more developed in your fracturing opportunities being supported by lower-cost suppliers that we own today. So that spans across many the fluid handling segment.

As it relates to Mexico just to reiterate what Max said complete uncertainty at this time. That's within that particular -- we have one primary manufacturing facility across all the manufacturing facilities that we have a will and even in that relative to that one which is we have several manufacturing facilities in our payment business.

Again one of which is in Mexico that served the global population. So to reiterate we do not see it as being a significant that significant factor at this time but there is a lot to be played out here in terms that what is being proposed which is quite confusing at this point. .

Maybe a follow want to that the manufacturing in Mexico. So is that feeding demand that’s slated for the U.S.

or is that feeding demand for outside the U.S.?.

Both.

Our next question comes from the line of Jim Foung with Gabelli & Company. Your line is open. Please go ahead..

I just talk about the [indiscernible] talk about other opportunities particularly with the customers you work closely within this project. .

We're looking at other opportunities another solutions. We talked before about is not just about new programs it's about technology insertions. Sometimes displacing incumbents and we continue to take a number of opportunities there. From an A&E standpoint from the defense standpoint we continue to watch the present direction on defense spending.

We see that as a potential opportunity for us as we move forward and we're tracking a large microwave programs we talked about a going to layout in some detail here on investor day of [indiscernible] growth profile moving forward. We want a little more insight here in March. .

Okay and then regarding the two large microwave opportunities.

When you think you might hear a decision on those?.

We hope within the next few months. .

Okay. That would be pretty positive. And then just back on this payment opportunity.

Is that a one-year opportunity or multiple years? Is it fair to say half of the year is 100% growth from this project opportunity for 2017?.

I think I mentioned in my prepared remarks that there is a him uncertainty regarding that. We would expect, 11% what I had mentioned is for the payment space the underlying growth is still or not mid-single-digit range. Make sure the people understand the base business is growing outside of the opportunity that we see here with that one opportunity.

It is a very good possibility that we do see some of this shift in 2018, but at this point in this early in the year we're not ready to commit to that. .

[Operator Instructions]. Our next question comes from the line of [indiscernible]. Your line is open. Please go ahead..

I wanted to follow-up on the earlier question regarding the impact of the Trump administration and obviously he has also made some pretty high profile comments on the aerospace sector about the F-35 program and Air Force One and he supports some of your customers to come out pretty vocally and discuss the impact of that on the industry and margins and so forth.

I know it's a big picture question and probably impossible to answer definitively right now but can you give us your early read and perspective on how the shift there could impact folks like yourselves up the supply chain?.

Well Ryan [ph] it and continues to be a major emphasis for our customers and for us which is providing win-win. It didn't take President Trump to drive our major customers to get ongoing significant cost reduction discussions going. Are talk about the F 35 specifically our weather you talk about a commercial aircraft customers.

It has been and continues to be high level of focus. We continue to offer a number of solutions and cost reductions and we're managing it as we have in the past. Are quite honestly, I think we will wait and see how things continue to play out. But believe me the customer base continues to push very, very hard on cost savings.

We come forward with win/win solutions to provide as much as we can. .

The other thing I would is that speaking specifically to F-35 we reiterated in the past we're not reliant on anyone or to. The F-18 would be an alternate program for example because of ongoing negotiations. We do participate in both of those program so by way of example we're very diversified across platforms that we participate. .

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to Max Mitchell for any closing remarks. .

Thank you operator. I look forward to seeing many of you at our March 2nd, Investor Day event. We expect it to be an informative session, we will discuss in detail how our differentiated solution position us for success.

Recently I came across the quote from the late great John Glenn who said, as I hurdle through space one thought kept crossing my mind every part of this rocket was supplied by the lowest bidder.

At Crane we avoid [ph] being the lowest bidder and still win by providing our customers with highly engineered and technology differentiated solutions that they require. It's not just about price it's about value that we bring to them. Thank you for your interest today in Crane and have a great day. Bye now.

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may now all disconnect. Everyone have a great day..