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Crane Co  (NYSE:CR)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

 

Operator

Greetings and welcome to Crane's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Jason Feldman, Director of Investor Relations. Thank you, sir. You may now begin.

Jason Feldman -- Director of Investor Relations

Thank you, operator, and good day, everyone. Welcome to our third 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 in 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.

Max Mitchell -- President and Chief Executive Officer

Thank you, Jason. Our strong start in the first half of 2018 continued into the third quarter, where we reported record quarterly EPS, excluding special items of $1.62, up 43% compared to last year. Record sales of 856 million increased 23%, including 6% core growth with strength across all three of our global growth platforms. Acquisitions contributed 19 points of sales growth partially offset by 2% of unfavorable foreign exchange. For the full year, we expect to be near the midpoint of our core sales guidance range of 2% to 4%. Operating profit excluding special items increased 31% from last year to 138 million. Operating margins were 16.1%, also a new record for Crane.

Compared to our outlook last quarter, our Aerospace & Electronics business performed better-than-expected. We also saw further strengthening at Crane Currency. In addition our earnings are benefiting modestly from faster than expected reductions in short-term debt using repatriated cash. Other major end markets are performing well with Fluid Handling on track to meet full-year guidance and payment markets showing continued strength. We are effectively managing the current tariff and inflation headwinds and we expect to be able to offset all impacts.

Considering our performance in the third quarter and our outlook for the rest of the year, we are raising the midpoint of our full year adjusted EPS guidance by $0.15 and narrowing to a range of $5.80 to $5.90. We are also raising our free cash flow guidance by 10 million to 260 million to 290 million, even after a 28 million discretionary pension contribution in the quarter. We certainly benefited from generally improving end markets this year. However, our extremely strong financial performance year-to-date also reflects the actions and initiatives that we have been driving at Crane for years, discipline capital deployment and our continued focus on operational excellence is resulting in higher margins, consistency in our execution and results and substantial shareholder value creation. And we are intensely focused on innovation leading to above market growth rates across most of our businesses.

Fluid Handling had a great quarter. End markets continue to steadily improve at a modest pace and we continue to outgrow the market. Over the course of 2018, these markets and our business have tracked very closely to our original expectations. With solid execution, we delivered 14.4% margins in the quarter, and we are well positioned to achieve our original 13% full year margin guidance. And we have room for further margin expansion in the years ahead as volumes recover and as we continue to execute on our previously announced repositioning plans.

Solid performance within Payment & Merchandising Technologies and at Crane Currency, where we now expect a modestly exceed our prior $0.40 accretion guidance for this year. We had the super event last month with our Investor Day in Melbourne, Pennsylvania spending a full day with many of you and highlighting the exciting successes and future opportunities for this segment.

Aerospace & Electronics also had a great quarter, and our full year outlook continues to improve deliveries for the new narrowbody platforms continued to ramp. We were awarded new programs and there's been a lot of activity related to new potential projects.

And lastly the Engineered Materials. RV demand remains soft given a continued channel inventory correction. However, we continue to deliver very solid margins, despite the weak end markets and rise in material cost demonstrating the strength of our overall execution. In summary, I'm very pleased with our operating results so far this year and we are well-positioned to deliver on our updated guidance for 2018.

Rich, let me turn it over to you for some additional financial commentary.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Thanks, Max. Good morning. I'll start with segment comments, which compare the third quarter of 2018 to 2017 excluding special items as outlined in our press release and slide presentation. In the third quarter, our Fluid Handling sales of 279 million, increased 4%, reflecting core sales growth of 7%, partially offset by unfavorable foreign exchange and a small divestiture impact. Fluid Handling operating profit increased 21% to 40 million with operating margins of 14.4%. The 200 basis point year-over-year improvement in margins was driven primarily by volume, productivity and pricing which more than offset the impact of higher material costs.

After adjusting for foreign exchange, the backlog of 298 million increased 3% sequentially and it increased 12% compared to the third quarter of last year. Orders also adjusted for foreign exchange declined approximately 1.5% sequentially, but improved 6% compared to the third quarter of last year. We continue to believe that we will be able to offset any incremental pressure from tariffs or commodity costs and we are still on track to achieve our original guidance of 13% adjusted operating margins in this segment. In addition, we are likely to modestly exceed our 3% core sales growth guidance for the full year.

Our Payment & Merchandising Technologies sales of 327 million, increased 74% compared to the prior year, driven by 71% growth from acquisitions and 7% core growth partially offset by 4.5% of unfavorable foreign exchange. Segment operating profit of 61 million, increased 48% with operating margins very strong at 18.7%, but down from last year driven by the impact of the Crane Currency acquisition. The currency business is seeing incremental strength in its core underlying business, as well as continued shipments to a specific large customer. The payment business also continues to see very positive end market conditions across most vertical markets and merchandising systems continues to perform as expected. Overall, we are very pleased with the segment's performance this year, including a full year 2018 margin profile that is likely to be 100 basis points to 150 basis points higher than our original guidance of 16.5%.

Aerospace & Electronics sales increased 10% to 190 million. Segment operating margins improved to 22.5% up 230 basis points from last year and again ahead of our expectations. Total aftermarket sales increased 19% with particularly strong sales of commercial and military spares. Total OE sales increased 7% compared to last year driven primarily by stronger sales for large commercial aircraft and for Microwave projects partially offset by lower funded engineering sales. The fourth quarter is typically the strongest of the year for Aerospace & Electronics, and we do expect a normal seasonal uptick in sales next quarter. We have after two extremely strong quarters for aftermarket sales, we expect margin to decline sequentially in the fourth quarter, but with full year margins well ahead of our original guidance of 21.5%.

Engineered Materials sales decreased 12% to 60 million, driven primarily by a decline in sales to the recreational vehicle market. Operating margins were 14.8%, reflecting lower volumes, but with productivity and price offsetting material cost inflation, another quarter of really solid execution by our team. Consistent with normal seasonality, we expect the decline in sales and margin in the fourth quarter.

Turning now to more detail in our total company results and guidance. Our third quarter adjusted tax rate was 22%, as expected and compared to 29.5% in the third quarter of last year. We expect the tax rate to decline sequentially in the fourth quarter and we now expect a full year tax rate of approximately 21.5%. For the first nine months of 2018 free cash flow was 147 million, approximately 7 million higher than for the same period last year. Free cash flow performance included a third quarter unplanned discretionary pension contribution of approximately 28 million. The timing of this contribution was advantageous because it allowed us to receive a tax deduction at the old 35% statutory federal rates, while all future contributions receive a deduction of the new lower federal tax rate.

Total debt at the end of the third quarter was approximately 1 billion, up from 743 million at the end of last year, reflecting the acquisition of Crane Currency, but more than 350 million lower than the first quarter, reflecting debt paydown using repatriated cash. As Max mentioned, we are raising the midpoint of our 2018 EPS guidance excluding special items by $0.15 and narrowing to a range of $5.80 to $5.90, compared to prior guidance of $5.60 to $5.80. The increased guidance primarily reflects incremental strength at Aerospace & Electronics and Crane Currency along with modestly lower interest expense and a slightly lower than expected tax rate. We also raised our free cash flow guidance by 10 million to a range of 260 million to 290 million, despite the 28 million discretionary pension contribution.

Operator, we are now ready to take our first question.

Questions and Answers:

 

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. Good morning.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Hi, Matt.

Matt Summerville -- D.A. Davidson -- Analyst

First of all, could you provide just a little end market color may be some geographic color in terms of what you're seeing in your Fluid Handling business in terms of kind of in the context of funnel orders backlog that type of stuff please?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Sure, Matt. So from a geographic perspective, overall, I would say very consistent with the trend that we saw coming through the first half year-over-year growth in the process order space across most regions. United States continues to show a consistent growth again with what we saw coming out of the first half I would say modest and steady improvement, particularly in the chemical markets and a good pace of orders with MRO in particular. Asia-Pacific, China, Middle East also are doing fairly well and consistent with what we saw coming out of the first quarter. And in Europe, order levels there remain a little bit better than last year at this time, which is good and particularly for those smaller to midsize projects as we've been talking about. Specific to the end markets in themselves modest improvement in chemical again continuing trends from what we saw in the first half particularly in Asia-Pacific, the Middle East and United States, I would say refining was a little bit lower than the first, the trend that we saw in the first half and power just continues to remain pretty weak.

Matt Summerville -- D.A. Davidson -- Analyst

And then it's my follow up question. Can you give us a feel where your core incremental margins would have been in the Payment & Merchandising Technologies segment? And then maybe talk about the context of how you are able to achieve pretty sizable sequential margin improvement in that business with a relatively small change in revenue? Thank you.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah. Overall, I would say, that the -- our performance in that business to your point has been proceeding very well. We had -- I think it was 16.5% or so margins in the first quarter, or 16.8%, and now we jumped up here to 18.7% in the quarter. So solid performance in that segment. I would say, our payment space is doing a little bit better and then in Crane Currency really being the most meaningful impact in the quarter from a margin perspective.

Matt Summerville -- D.A. Davidson -- Analyst

Got it. Thank you.

Richard Maue -- Vice President, Finance and Chief Financial Officer

You're welcome.

Operator

Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Max Mitchell -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Jones -- Stifel Nicolaus -- Analyst

Good morning everyone.

Max Mitchell -- President and Chief Executive Officer

Good morning.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Good morning.

Nathan Jones -- Stifel Nicolaus -- Analyst

So if I could start on the Fluid Handling margins here 14.4% X the new pension accounting stuff is the best since 2014. I think you guys had said you would need a fairly significantly lower level of revenue to get back to kind of prior peak margins in that business. Can you maybe talk a little bit about what kind of level of revenue you would need to get to that kind of level? What kind of incremental margins we should expect in that business going forward?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Sure, Nathan. So, yeah, we're pleased with the performance in the quarter for sure the teams across the segment performing extremely well. On the face of the commodity pressure as you all know another material input cost pressures just an exceptional performance year-to-date. As we think about this business going forward and margin potential I think is really what your question is. We see 30 points to 35 points of just normal core leverage. But then on top of that the benefits of the repositioning that will sort of lay on top of that as we think about 2019. And so that leverage profile probably gets to as high as 45% or something like that as we think about next year. I would say that we're sticking with the pace of -- what level of revenues need to be at for us to achieve our call it mid-teen margin target. We're not going to necessarily come off that just yet, but certainly we're making excellent progress and momentum in the face of some pretty significant headwinds around input costs and such.

Nathan Jones -- Stifel Nicolaus -- Analyst

Just on that price cost issue clearly investors are concerned about that here. And I think you guys have made a couple of comments that would tend to have us believe that you're not seeing much of a price cost issue. But maybe if you could just put a finer point on it across the portfolio where you are with price cost covering tariffs and all of that kind of stuff just to be clear about it?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Sure. So, I think our prior comments were more of along the line of that, it's been well understood and our teams are all over it and we're covering and mitigating the impacts and not seeing a significant impact. And I think as you can see from our results year-to-date particularly in the third quarter here as well, overall margin profile at 16%, little over 16% OP. Fluid Handling, which is where most of our exposure is at 14.4% in the quarter really dealing well with the inflation that we're seeing from material cost perspective as well as tariffs. So if I peel that back a little bit, about 60% of the overall inflation excluding tariffs is really within our Fluid Handling business. And again with a 14.4% margin profile here in the third quarter we're dealing with that fairly well. It's things like pig iron, a little bit of steel, aluminum, copper and areas like that from a material cost perspective.

On the tariff, from a tariff point of view, from a full year perspective, I'll just give you some quick color as well. Probably 80% of what's impacting us from a tariff point of view is also within Fluid Handling, OK. And the total tariff impact as we see for 2018 is just south of $4 million in total. So I think on the tariff side, I would say, it's not been a significant factor overall for us in 2018, and certainly much lesser in scope, or in relevance than just overall material cost pressure, but clearly being able to deal with that in a pretty meaningful way. Across the rest of the business, it's modest increases in material costs. If we're thinking about Payment & Merchandising Technologies, Aerospace & Electronics, the next biggest would be Engineered Materials, which is where we see the impact from the higher oil prices.

So, I think the step back material overall 60% is really -- it's really in Fluid Handling, when you think about the overall exposure we're dealing with it well. On tariffs, current year roughly just a little but less than 4 million in total and most of that also being in Fluid. And I would say, if you're thinking about 2019 now, when you think about the role-over impact of less than 4 million in '18 on tariffs, we're probably going to see someplace between 10 million and 12 million in total without any mitigating actions against it. So, obviously we're not going to let that happen. So hopefully that helps you understand the overall picture on materials and inflation.

Nathan Jones -- Stifel Nicolaus -- Analyst

It does. Thanks. And then just on Payment & Merchandising. Did you guys take up the guidance number at all for that large customer Crane Currency revenue? And then, another question we get from investors is that Payment & Merchandising is going to face a tough comp next year, if you fail to replace that contract, or that contract doesn't have some more in it in 2019? Do you guys have any visibility to potentially shipping to that customer again in 2019? Are there any other large projects out there that could fill the whole, or should we really be expecting probably revenues to be down in that segment in 2019?

Max Mitchell -- President and Chief Executive Officer

Yeah, Nathan. This is Max. Let me try to hit a couple of points and ask again if we miss anything. The first thing I'd paint is, as we said on Investor Day, that we have a clear vision with the self-help, with the accretion from Crane Currency of $1 with a tax benefit, with core growth of achieving $7.50 to $8 a share EPS by 2021. And we still feel very confident on that path. So, I would start by answering the question, painting that picture of that longer-term vision of what we clearly have line of sight toward. Now, we back into the impact on 2019 after an exceptional year in 2018. We are about ready to visit all of our businesses for 2019 plan starting next week. And so we're really going to be spending time dialing in that earnings growth expectation for next year.

Right now, the customer impact that you speak to continues positively. We continue to have positive negotiations on 2019. There is some uncertainty, still as we move forward, we feel very good about 2018. There is not a strong significant contribution to the increase in earnings, it's baked in. We have clear line of sight to that. There's not a whole lot of risk in that number. There are expectations that it continues into '19, as well as expectations that -- that it will continue. So we've got our work cut out for us. I think, if it were to go away immediately, then clearly on a year-over-year basis we would have some challenges in terms of year-over-year growth. However, we still have clear expectations in line of sight, the dollar EPS to accretion by 2021, nothing changes in our longer-term view. There's some cyclicality next year that or some timing that we need to tighten up and look forward to communicating and much more detail both on the next call, as well as on Investor Day. Rich, do you have anything else that you'd point out on Nathan's question?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah. Nathan, the only thing I would add is, and I think Max covered it in terms of the current year, a little bit couple of pennies or so worth of the increase related to our progress with that customer. And if you're worried about the downside risk, because maybe perhaps some of what your question is getting out is what happens in '18 given our guidance and to the extent that things were to moving in a difficult direction, we're not worried with the guidance range at all in that regard.

Nathan Jones -- Stifel Nicolaus -- Analyst

I think that helps. Thanks very much.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Thanks, Nathan.

Operator

Our next question comes from the line of Brett Linzey with Vertical Research Partners. Please proceed with your question.

Brett Linzey -- Vertical Research Partners -- Analyst

Hi. Good morning all.

Max Mitchell -- President and Chief Executive Officer

Hi, Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

I just want to stick -- yeah, just want to stick with the payments business and other real strong quarter of backlog growth. Could you just talk about the parts of the business driving that uplift? And then maybe more specifically you guys highlighted the paypod solution opportunity at the recent Investor Day. I think you mentioned in the other sales pipeline there is 30 million or so, just six weeks of the launch. Any update or color you can provide about maybe broader themes and then any specific opportunities?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Paypod continues, not a significant update since the meeting we had in Malvern, Brett. We have -- the funnel continues to grow. We have some sales that have already been executed on. We have learnings that are taking place in the field right now, success stories that we're leveraging dedicated sales force that is taking the roadshow to end customers and OEMs providers. So all solid and consistent with what we communicated there. In terms of end market color, from a sales standpoint within the quarter we really had strength across-the-board except for retail which is really the year-over-year impact from the large customer impact last year. But still generally positive forward-looking trends, paypod being one of them. On the order front, I would say that strength really coming through in financial services gaining and wending retail and transport being a little weaker in the quarter from an order standpoint.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. And then maybe on the other side on merchandising, you noted in the slide that it contributed to core growth in the quarter and that appears to be an inflection versus previous trends and what's been a pretty stubborn market. What were the contributors there, and are you starting to maybe finally see a turn in capital investment from some of the cold beverage players, or is it digital connectivity up selling? Any color will be good.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah. I think, it was as expected from our point of view, you do have some lumpiness that's embedded within that business. It did contribute to the overall core growth profile a bit, which we're pleased to see. We had a couple of quarters preceding this one that were very difficult or more difficult. So seeing that kind of pullback here in the third quarter something that we did forecast and expect internally here. Full line operator, business doing a little bit better I would say and -- but overall, I would look at it as more of a timing item and to think of the businesses, this 3% sort of type growth trajectory as we think about moving forward.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. And then maybe -- Go ahead.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah. I was just saying, we are pleased with what we've been able to do in the quarter, the teams there are also performed very well.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. And maybe just one more just on Crane Currency. 20 million of cost synergies was the original target. By the year -- by year-end here, what's going to be the ultimate realization for the cost synergy there?

Richard Maue -- Vice President, Finance and Chief Financial Officer

So, just to be clear there. So, if we think about the numbers that you just mentioned through 2021, what we had forecasted was savings from the transition from our Sweden facility to the multi-facility of 20 million of --

Max Mitchell -- President and Chief Executive Officer

It's 20 million to 25 million.

Richard Maue -- Vice President, Finance and Chief Financial Officer

I think it's 20 million of net income. And then on top of that, an additional I want to say 15 million of productivity across all locations, again through that whole time period. So, we haven't parsed out necessarily the components by year Brett, but we feel like we are on track to hitting those targets and then something that we spent quite a bit of time on as we manage that business through the integration and as we think about 2019 in particular when the multi-transition will be largely -- will be complete frankly by the end of the first quarter of 2019.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. Thanks guys.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch. Please proceed with your question.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Good morning guys.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Good morning, Kristine.

Max Mitchell -- President and Chief Executive Officer

Good morning.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Max, can you provide more color on the repositioning at Fluid? Is this more footprint optimization, or is this preparation for growth that's coming? We just like to have more information on that.

Max Mitchell -- President and Chief Executive Officer

What do we communicate publically already?

Richard Maue -- Vice President, Finance and Chief Financial Officer

So, yeah, I mean, if I can -- I mean, this was -- so this was nothing new right, Kristine, this is something that we announced back in the fourth quarter of 2017. I think that's what you're referring to. We haven't announced anything new today, or in the current year. So in terms of the progress around that it's about footprint optimization largely within our process valve business and moving according to plan, yeah.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. And that 13% operating margin outlook on Fluid, is this before or after special items?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Before special items, and in terms of savings, if that's maybe part of your question on repositioning, there is a modest amount that's included in the second half around that, that was part of the reason for the success that we've had in the second -- that we expect to see in the full second half of 2018.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. And I really appreciated the market color that you provided by end markets and fluid. And if I recall your full year outlook for revenue growth in that segment, you expected to be driven by market share wins. Can you provide more details on the competitive environment and is that market share win progressing as you expected?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yes, Kristine. We have launch of new products that continued to do well. The same story I hate to sound like a broken record, but TOV being an example with emission solutions part of our solution in the space is really focusing on enhanced emission, low-level emission requirements that we're winning with and winning with our customer base, even seeing some of the upside in China is playing through with domestic manufacturers, which is a newer trend for us. Historically, we've always positioned -- had a strong position with the global players, but we haven't seen because of the stringent pollution controls and changing environment in China, that higher value-added solutions are needed much like we have from an emission standpoint. In terms of some of the share that we're taking also in our pharma-related businesses when NeXtGen(ph)Biologics, which we've seen some great success there where we're capturing some share some of the momentum we've seen in the quarter both on MRO as well as some expansion, which has been interesting to see around the MDI chain both here in the US, as well as Europe, pesticides, fertilizers some of the end drivers of the demand that we've seen with our solutions as well. Hope that gives you a little bit more color.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

That's great. Thank you.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Thanks, Kristine.

Operator

Our next question comes the line of Ken Herbert with Canaccord Genuity. Please proceed with your question.

Ken Herbert -- Canaccord Genuity -- Analyst

Hi, good morning.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Hi, Ken.

Ken Herbert -- Canaccord Genuity -- Analyst

I wanted Max or Rich, can you provide any more detail on the up '19 aftermarket growth within Aerospace & Electronics in the third quarter? And maybe how that parses out military versus commercial, or within commercial was some of the different product lines there maybe a little color on some of the trends you're seeing?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Sure, Ken. So, well, I mean, we had another solid quarter here on aftermarket as you saw and the nature of your question. IP spares was a big component 777, 767, 787 even some of the narrowbody as well. But we also did see continued strength in military. If I was to say what percentage the majority of the increase was around commercial spares on the year-over-year basis, but we also did see growth as I mentioned in military programs like the A400M, the KC-135, the C-130. So it's a little bit broad again following the same experience we had in the second quarter, I would say. As we think about aftermarket going forward we're a little bit more cautious two quarters here in a row with pretty substantial growth in aftermarket is exciting, but it's also causes you to pause a little bit in terms of what we expect as we think about the balance of the year, and as we think about 2019. So hopefully that gives you some perspective on where we're seeing it.

Ken Herbert -- Canaccord Genuity -- Analyst

No, that's helpful. And I guess caution on aftermarket and when I think about mix in the fourth quarter is that what's behind your sequential down margin sort of guidance for the fourth quarter and the segment?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah. It's a modest down tick, but yeah, that would be the driver to not -- we're not forecasting the same exact strength that we saw here on the --

Max Mitchell -- President and Chief Executive Officer

And it's not -- and Ken, this is Max. It's not a concern over the end market, but keep in mind for investors that we see all aftermarket orders. It's just a matter of timing. We have a difficult time to predict exactly the short cycle aftermarket sales and it can be a surprise. I think we are presently surprised and the upside, the last two quarters, we've gone that back to more historic norm levels for our forecasting for the fourth quarter.

Ken Herbert -- Canaccord Genuity -- Analyst

Okay. Okay, that's helpful. Because you do obviously, typically see a nice seasonal release on the top line, or on the bottom line, but it really nice top line bump in the fourth quarter and it sounds like I know comps were very easy or easier this quarter, but it sounds like that top line outlook into the fourth quarter is holding up.

Richard Maue -- Vice President, Finance and Chief Financial Officer

That's correct.

Ken Herbert -- Canaccord Genuity -- Analyst

Okay. And then just finally, as you think about the incremental margins there and the aftermarket again with an Aerospace & Electronics, how is activity been on the military side? And I know it can be lumpy, but are you seeing any change in your customers in terms of greater sense of urgency? Now that we have sort of the fiscal '19 budget in place and clearly fiscal '18 money still to be spent. Have you sensed an infection there and maybe greater urgency or greater desire to spend when you talk about KC-130 and some of these older platforms from a readiness standpoint and is that something that could sort of carry into 2019?

Richard Maue -- Vice President, Finance and Chief Financial Officer

There's a longer-term trend that we're clearly seeing around electrification. And with our Power Solutions and power conversion solutions, it's something that now this is going out even beyond the five-year horizon. So -- but there's a lot of activity around electrification and directed energy. And so there's some things that we bring in terms of our power conversion knowledge and expertise that we clearly have seen an uptick in development in R&D, as we're looking forward which is exciting and where we're continuing to invest in terms of maintaining our technology differentiation. In terms of some of our other solutions that are applied in both commercial and military applications, I would just say that it's certainly has been strong overall, although not the same level of -- if I may answer your question properly about any inflection point or trend on that side of the business as much as this is just general strength.

Ken Herbert -- Canaccord Genuity -- Analyst

Great. Thank you very much.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Okay, Ken. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Walter Liptak from Seaport Global Securities. Please proceed with your question.

Walter Liptak -- Seaport Global Securities -- Analyst

Hi, thanks. Good morning guys.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Good morning.

Walter Liptak -- Seaport Global Securities -- Analyst

I'm going to ask one on Engineered Materials. I know it's small, but no one has asked one of those yet. I wonder, if you could just maybe separate out the business. And if anything doing better there and then the inventory correction seems to be something that's dragged down for a couple of quarters. I wonder if we're nearing the end or if this is something that stretches out into 2019?

Richard Maue -- Vice President, Finance and Chief Financial Officer

So we're going to be visiting with our business unit, Walt, and asking those same questions and looking into the facts in detail. Right now, if I looked at it, at this point in time, we still see market data which says that end retail sales or mid-single digit read-through. And that's going to continue into '19, that's the case in this inventory correction it's going to reach a bottom, we would expect it in the fourth quarter, and it could indicate flat to up sales in '19. I think that's the big question and will have more detail for you on exactly how we're go to see that play out in our guidance in January and the February Investor Day. On that is not a lot more insight that we have, it has gone on longer than anticipated, longer than expected. It's that end retail sell-through that we're all watching very carefully to try to project and anticipate.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay. All right. It sounds good. And if I get switch over to Fluid Handling, and I wonder, if you could talk about the business in terms of long cycle versus the book/ship business? And what you think if anything on pricing after a long cycle versus the book/ship any changes?

Richard Maue -- Vice President, Finance and Chief Financial Officer

So, yeah, so as we talk about Fluid Handling and think about the long cycle portion of the business, that's the process side. That's where we really saw a lot of the backlog growth over the last few quarters as we've been pointing out and then here in the third and what we expect in the fourth quarter would be some read through of some of that backlog growth as we had previously communicated and what we demonstrated here in the third quarter. So similar trends, as I mentioned earlier on the long cycle portion, we would expect the same thing that we saw in the first three quarters that I outlined earlier on the geographic and end market outlooks.

For the shorter cycle businesses, things are looking fairly good there as well. We're pleased with the performance that we've seen in our Crane Supply business in Canada, our distribution business up in Canada, as well as what we're seeing in the UK, and the Middle East from our building services short cycle -- shorter cycle business supplying non-residential construction type end markets in that space. So and then we have a water business as you know, it's a smaller business, but excellent -- an excellent business with fantastic margins and growing. So that's the municipal end market channel that we serve as well as some industrial and building end markets. So, overall I would say that both the short and long cycle are performing as expected and well -- and there's not one section of that portfolio that we would -- of the portfolio that I would say we're overly concerned with.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay. Is the pricing improving on the long cycle business?

Richard Maue -- Vice President, Finance and Chief Financial Officer

Yeah, sorry. On pricing -- yes, we need to, in order to offset some of the headwinds on material costs and we're doing a very good job there, but from a new product development perspective and the things that we're bringing to market, it's commanding an increased price as well. And so I would say overall continuing trend from what we started to see at the beginning of the year.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, great. Thank you.

Richard Maue -- Vice President, Finance and Chief Financial Officer

Thanks, Walter.

Operator

There are no further questions in the queue. I'd like to turn the call back over to Mr. Max Mitchell for closing comments.

Max Mitchell -- President and Chief Executive Officer

Thank you, operator. Thank you all for your time today and look forward to providing our next update in late January, when we will report the fourth quarter results and provide 2019 earnings guidance. We will also be hosting our annual Investor Day event in New York City on February 28th next year. We remain confident in our outlook, confident in our disciplined capital allocation, confident in our continuous operational improvement and confident in our growth and innovation investments. As the late great Aretha Franklin once said, always be confident what you're doing. If you're not going to be confident you may as well not be doing it. We remain confident that we will continue to create value for shareholders as we execute now and in the years ahead. We look forward to our next call and guidance for 2019. Thank you all. Thanks for your interest in Crane and have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Duration: 41 minutes

Call participants:

Jason Feldman -- Director of Investor Relations

Max Mitchell -- President and Chief Executive Officer

Richard Maue -- Vice President, Finance and Chief Financial Officer

Matt Summerville -- D.A. Davidson -- Analyst

Nathan Jones -- Stifel Nicolaus -- Analyst

Brett Linzey -- Vertical Research Partners -- Analyst

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

Walter Liptak -- Seaport Global Securities -- Analyst

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