Crane Company (CR) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Crane Co., Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Feldman, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good day, everyone. Welcome to our fourth quarter 2020 earnings release conference call. I'm Jason Feldman, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer and Rich Maue, our Senior Vice President and Chief Financial Officer. We will start up 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 today 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 tabled at the end of our press release and the accompanying slide presentation, both of which are available on our Web site at www.craneco.com in the Investor Relations section. Please also mark your calendars for our February 25th Investor Day events, as well as our May 26th, Aerospace and Electronics Investor Day. We expect that both will be virtual events and additional logistical information will be forthcoming. Now, let me turn the call over to Max.

Thank you, Jason. Well, what a year. Just advanced warning to our investors listening today, I want to take a little more time today. Rich and I are going to cover a lot of ground, so well take some time to have us through our prepared remarks before we take Q&A, but we've got a lot of great information this year. As outlined in our press release last night, we reported full year adjusted EPS of $3.84 compared to $6.02 in 2019, with the decline reflecting the impact of COVID-19. For the fourth quarter, EPS excluding special items, was $1, compared to $1.58 in the fourth quarter of last year. Fourth quarter adjusted EPS was about $0.06 below what we expected as of early December. At year end, we saw a number of sporadic and isolated disruptions globally, clearly tied to the rising COVID infection rates in all countries that resulted in a number of small shipment delays due to everything from minor absenteeism, shipping constraints, route changes, delayed supply receipts, to delayed customer inspections. This impact was entirely timing related, we believe transients and shifted to the first quarter of 2021. Before I turn to our outlook, there are a few key messages I want to convey about our performance in 2020. While all businesses globally were challenged in this unprecedented environment, we executed extremely well. There are many examples I could highlight but that execution was most evident in our deleverage rates and free cash generation. Excluding the impact of acquisitions with special items, our overall deleverage rate in 2020 was 35%. Maintaining that type of deleverage rate on a modest normal decline in sales could be expected but 2020 was different, because of the magnitude of the sales decline and because of the substantial negative mix we experienced. The rate of sales decline was most significant at our two highest margin businesses, commercial aerospace and crane payment innovations. We were able to accomplish this solid performance in part because of our thoughtful and decisive action on cost reduction measures, but it also reflects years of work operationally to ensure that our footprint is appropriately sized and flexible enough to quickly adapt to sharp changes in demand. You also saw the strength of our execution of free cash flow generation which was extremely strong at 275 million, declining at less than half the rate of adjusted earnings. The free cash performance reflects very effective management of both capital expenditures and working capital but also part of our longer term trend. Over the last five years, we have averaged 100% free cash conversion, a structural and step function increase from the high 70% range we have delivered historically. Again, further evidence of our differentiated execution capabilities. Those differentiated execution capabilities driven by our crane businesses to management approach are then more critical during challenging times, discipline, cadence and execution, remains at the core CVS. This is discipline, cadence and understanding of our businesses that gave us the confidence to provide very detailed and granular financial guidance last April, when most industrial companies declined to provide any type of outlook. I'm pleased to report our April guidance proved to be very accurate and we ultimately delivered $0.22 above our April adjusted EPS midpoint. Our differentiated execution capabilities are paired with a strong balance sheet and portfolio of strong, resilient, durable businesses. This portfolio and balance sheet strength combined with our leadership experience and our confidence in our long term prospects drove two key decisions early on in the pandemic. First, we knew we needed to act quickly on cost reductions, given the 2020 demand outlook, and we delivered $105 million of gross cost savings last year, an impressive figure for our cost base, particularly since we intentionally didn't execute on most actions until May. The second decision was that we would pursue those cost actions while continuing all key strategic growth investments at pre-COVID levels and without any material schedule impact. We're emphatic that we continue the investments that will help drive growth for many years ahead. We were extremely careful and disciplined as we made choices about where to reduce costs. And many cost reductions proposed by our businesses were rejected by Rich and I, because of the impact those actions would have had on our growth prospects. So those are some of the key messages. We delivered solid results last year given the demand environment. We have proven over time that we have differentiated execution capabilities. And we have a strong balance sheet paired with strong and resilient businesses. In addition to all that and most importantly, I'm incredibly proud of the 11,000 Crane associates across the world and how we performed during a difficult and challenging period. I'm also proud of the actions we took to ensure the safety and well being of our associates and where possible to retain and support them through the pandemic. Starting in early March, we quickly adopted new safety protocols and procedures worldwide, in most cases more stringent than and in advance of government mandates. We also quickly adopted a new emergency pandemic exception pay program, providing two weeks of additional pay time off to all associates globally that were directly or indirectly impacted by the pandemic, above and beyond normal vacation and sick pay. The BEP program provided substantial flexibility for our associates, which could be used to cover pay time off for associates diagnosed with COVID-19 or required to quarantine for those who had to stay at home to care for children due to the school or daycare closure and to ensure continuity of pay and benefits where Crane manufacturing facilities or offices are required to close because of local health regulations. As the year progressed, we took difficult measures to adjust our cost base to lower demand levels, including a substantial reduction in force, in businesses to align our workforce size with expected demand levels. However, every possible effort was made to protect our associates as much as possible during this challenging period. For example, none of our businesses mandated unpaid furloughs in the United States. We do not implement any salary reductions except for corporate officers and the Board of Directors. We maintained all benefits including our 401(k) match in the United States and we continued with our annual merit salary increase process. Further, in recognition of the extraordinary efforts shown by our associates around the world and because of the financial impact of COVID-19 was beyond our associates’ control, all associates normally eligible to receive an annual bonus received a minimum payoff at 50% of their target even though most schemes calculated at zero. We follow this approach because we believe it was fair and appropriate way to thank and recognize our associates for their extraordinary efforts in these trying times and to build lasting goodwill and morale, which we believe will assist with associate retention in the years ahead. Overall, I'm extremely pleased with how Crane performed last year, given the challenges we faced. Looking ahead to 2021, we currently expect EPS growth of 30% with a range of 4.90 to 5.10. This outlook reflects order rates that accelerated throughout the fourth quarter across most of our businesses and visibility to recovery in most of our major end markets. That optimism is tempered somewhat in the near term by COVID infection rates that remained stubbornly high in many regions, additional lockdowns in several key European markets and the potential for some additional near term restrictions and disruptions. If those concerns prove unwarranted, there would be upside to our sales forecasts and incremental sales should leverage at high rates given our current cost structure. However, what seems apparent to us is that we are seeing the beginning of the end of the pandemic. The remaining uncertainty may impact the timing of a full recovery of certain end markets. But we believe that we have past the inflection point or trough. We expect substantial and sustained improvement throughout 2021 and beyond. Specifically, market strengthened towards the end of 2020 and order rates accelerated sequentially through the fourth quarter. Orders were higher in December than in any other month of 2020 with broad based core year-over-year growth of 11% led by Crane Currency, our defense electronics business and engineering materials. December orders also improved substantially at Crane Payment Innovations and at our Process Valve business. At Fluid Handling, we expect an inflection to positive core growth by midyear, possibly in the second quarter with accelerating growth after that point. We have a very strong process business well positioned with the right solutions for some of the harshest and most hazardous environments, which is where we expect to see the greatest market growth over the next several years, particularly in chemical, pharmaceutical and general industrial markets. In addition to the long runway of market- riven growth, this segment has a robust pipeline of new product development programs. Those new programs will help Fluid Handling accelerate above market growth rates as well as improve the margin profile of the business. And we look forward to sharing more about this at next month's Investor Day event. Payment & Merchandising Technologies, I'm positive on our 2021 growth and margin prospects. On the payments side of the business, we have a more complete offering than ever before. That offering starts with our long history of providing best-in-class critical components and technology for bill and coin validation we have added to that capability over the years. And today, it is combined with a growing range of complete system solutions, a comprehensive connectivity and cashless offering, and with the recent Cummins Allison acquisition, a strong service network to provide greater capabilities to our customers and high margin recurring revenue stream for the segment as well as new service growth opportunities well underway. And the currency demand for cash remains extremely high, both in the US and abroad. This has been one of the businesses that has actually benefited from COVID. We expect another very strong year at our International business, along with sustained high levels of demand domestically, confirmed by the Federal Reserve's currency order a few months ago for its fiscal 2021. That print order reflected an increase of 1.7 billion to 3.8 billion notes or a 31% to 66% increase, with particular strength in the demand for $100 notes, where we have the greatest content. We continue to win and increase our content in this business given the strength of our security offering, which is unparalleled. And from a margin perspective, the segment will be back into our long term target margin range of 18% to 22% this year, even though a full recovery at our high margin Crane Payment Innovations business will not occur until at least 2022. Turning to Aerospace & Electronics. We have an enviable set of solutions, differentiated technology in alignment with strong secular trends. While commercial aerospace was our end market that was impacted most severely by COVID. This is temporary. It should not obscure the quality of this business and its prospects. There are too many exciting opportunities in this segment for me to possibly cover today. In fact, there are too many to effectively discuss at our annual February Investor Day event. So we have scheduled a dedicated investor event on May 26th to focus exclusively on Aerospace & Electronics, our growth initiatives and our growth expectations for the next decade. I have complete confidence that as the COVID pandemic subsides, this business will be back to delivering margins consistently in the low to mid 20% range, along with sustainable high growth. Notably, over the last few months, there were two extremely positive developments for the Commercial Aerospace business. First, the COVID vaccine rollout has begun. And while it's unclear how quickly this rollout will progress over time, this will give travelers confidence to start flying again and we believe pent up demand will accelerate recovery, not only in consumer markets but also business travel. Second, the 737 MAX recertification paves the way for Boeing to resume shipments, which will start clearing Boeing's inventory of finished planes and permitting a measured ramp up of production for this important high volume platform again. While the commercial recovery will still take some time, we believe we have visibility at the start of that recovery. In the interim, our Defense business has been performing incredibly well, both delivering sales and profit today, which while continuing to win new business positioning us for further growth over the next 10 plus years. And lastly, Engineered Materials is poised for an extremely strong recovery. Recreational vehicle demand has soared over the last several months, driven largely by new entrants attracted to the wholesome and safe option of RV outdoor vacations. The fact that this occurred immediately after the industry went through an inventory destocking processes, helping fuel OEM build rates ahead of even strong retail sales. We expect strong sustainable demand from RVs with our transportation markets, including trailers not far behind. The building products market should begin to recover in 2021 and the Building Products business has increasing exposure to a number of high growth emerging industries, including ghost kitchens for takeout and delivery service only and cold storage to support grocery facilities. Overall, it looks like Engineered Materials is at the very start of a strong emerging new cycle with growing opportunities for share gains. Across our businesses, as our end markets recover, we are very well positioned. We are executing on the day-to-day activities needed to run our business, while also continuing to execute on our strategic growth plans, enabling above market growth as we emerge from this downturn. I'm extremely excited about our prospects for this year and beyond. And at this point, let me turn it over to Rich for some additional financial commentary.

Thank you, Max, and good morning, everyone. As usual, I'll be providing segment comments that will compare the fourth quarter of 2020 to 2019, excluding special items as outlined in our press release and slide presentation. Fluid Handling sales of $258 million declined 7%, driven by a 14% decline in core sales, partially offset by a 5% acquisition benefit and 2% of favorable foreign exchange. Fluid Handling operating profit declined 26% to $28 million with operating margins of 10.7%, 280 basis points lower than last year, reflecting lower volumes, partially offset by productivity and cost reduction measures. Excluding the impact of the I&S acquisition, the deleverage rate in the quarter was 31%, reflecting very strong execution by the team. On a full year basis, excluding the impact of the I&S acquisition, the deleverage rate was 24%, again, really impressive performance given the magnitude of the volume decline with core sales down 15%. Sequentially, trends improved with both FX neutral backlog and orders up slightly in Q4 compared to Q3, even though normal seasonality would suggest a decline over that period. On a year-over-year basis, Q4 core backlog increased 10%, reflecting in part some of the shipment delays with core orders down 10%. At our Core Process Valve business, we believe that orders have troughed. And the inflection to positive year-over-year order growth will probably occur sometime during the second quarter of 2021. We expect the recovery to be led by the chemical and pharmaceutical end markets, both of which are beginning to show some signs of strengthening. For chemicals, leading indicators, including chemical production, are improving, and for pharma, our project funnel is double the size it was a year ago. General industrial leading indicators are also favorable and given the long lead times for certain products in this vertical, we have begun to build some inventory in advance of the eventual recovery. To date, however, we have not seen distributors move to restock. Regionally, we expect the recovery to be led by North America, and China and India with Europe lagging. For the commercial side of the business, we expect full year improvement in core sales at our UK based business, driven primarily by recovery in the UK building services and water markets. Our Domestic Water Pump business should also see modest growth. In Canada, however, we expect to see further declines in 2021 with a nonresidential construction market recovery in 2022, given project lead times. For 2021, overall, we expect slightly positive core sales growth of about 0.5 percentage point, a small carryover acquisition benefit from the I&S acquisition of about $5 million and 2% of favorable foreign currency. We expect margins to improve approximately 110 basis points to 12.5%. The total leverage implied by our guidance is 50%. However, considering most of the sales growth is related to foreign exchange, that 50% does not reflect the magnitude of the underlying cost improvement, which is far more substantial, reflecting ongoing repositioning of this business, strong productivity and the carryover benefits from last year's cost reduction initiatives. This segment had its toughest comparisons in the first quarter, and we expect the longer cycle portions of this business to improve progressively and primarily in the second half of the year. If the process business does recover more quickly than we anticipate, the operating leverage will be very high, given our current cost position. At Payment & Merchandising Technologies, sales of $285 million in the quarter decreased 9% compared to the prior year, driven by 25% decline in core sales, partially offset by 14% acquisition benefit and 2% of favorable foreign exchange. Segment operating profit declined 24% to $42 million, with margins down 290 basis points to 14.7%. Excluding the impact of the Cummins Allison acquisition, the deleverage rate in the quarter was 29% and on a full year basis, it was 35%, which reflects, again, outstanding execution by this team. We are seeing strong trends across this business. At CPI, we continue to expect the greatest medium term growth in retail, driven by self checkout's strong return on investment, as well as the hygiene and health benefits of eliminating direct human interaction in the checkout process. In addition to the traditional categories of customers, we are seeing growing strength from convenience stores and discount stores as well as an interest in alternative formats, such as our Japanese pay tower solution. Transportation is also starting the year strong with public transit related projects in a number of major cities, including New York, Delhi, Mumbai, as well as a bus fair box solution for a major system in China. Cash remains a requirement for public transit almost everywhere in the world. At Gaming, we are gaining a lot of traction with our connectivity solution, which includes a regulatory compliant cashless payment option. And the regional and tribal casinos remain fairly strong, even though more destination gaming centers like Las Vegas remain somewhat depressed. Vending remains our softest vertical given the number of offices and schools that are still operating remotely but we do expect improvement over the course of 2021. And the Cummins Allison acquisition continues to perform extremely well, with its equipment business benefiting from cash and coin shortages, driving greater recycling, as well as strong growth in demand for services. Our currency business should see another year of strong growth after a great performance in 2020. We expect 2021 growth to be driven by strong demand from the US government, as well as new wins in the international banknote market. Given all those favorable trends for 2021, we expect approximately 6% core growth for the segment and approximately 2.5% of favorable foreign exchange. The core sales growth reflects solid growth across both Crane Payment Innovations and Crane Currency. We expect 2021 adjusted segment margins to increase 620 basis points to 18.5%, reflecting strong core growth, strong productivity and the impact of last year's cost reduction measures as well as favorable product mix. At Aerospace & Electronics, fourth quarter sales declined 29% to $143 million with segment margins of 10.3%. On a full year basis, core sales declined 19% with segment margins of 16.5%. In the quarter, total aftermarket sales declined 39%, driven by 54% decline in the commercial aftermarket and an 8% decline in military aftermarket sales. Commercial OE sales declined 48%, but the defense OE business remained strong, with sales up 13%. On a full year basis, the military side of our business delivered extremely strong results with 19% OE growth and 15% aftermarket growth. However, given the large impact of COVID on the commercial aerospace market, commercial OE sales declined 37% and commercial aftermarket declined 42%. We believe that the fourth quarter marked the trough for both sales and margins, and we will see improvement over the course of 2021, most notably in the second half with full year margins of 15%. We expect segment margins to recover back to north of 20% fairly quickly after 2021 as the commercial markets continue to recover on a substantially lower cost base. From a sales perspective, we have line of sight to improvement but we will have another quarter or 2 of declines, and we expect full year core sales down approximately 8%. The first quarter comparison is particularly challenging as last year's segment aftermarket sales were not materially impacted by COVID until April, with OE sales hit even later. We expect sequential sales growth to resume by mid year likely in the latter part of the second quarter, but we won't see segment year-over-year core growth until the end of the year. Engineered Materials sales decreased 2% to $43 million, driven by a decline in sales to building products and transportation customers, largely offset by mid-teens sales growth for the recreational vehicle market. Operating margins improved 230 basis points to 11.7% despite the modest sales decline, reflecting once again, strong execution, productivity and cost reduction measures taken earlier in the year. Trends in the recreational vehicle market are very strong, with OEs ramping up production to meet unprecedented demand levels, driven by consumers looking for safe vacation options in this COVID environment. While COVID has had a positive impact on demand, there are also other favorable underlying trends that were present before the pandemic, including favorable demographics and younger families increasingly attracted to the camping lifestyle. Demand for our transportation products is also strengthening with trailer volumes improving. Building products demand is recovering a little more slowly, but we do expect positive year-over-year growth by mid year, probably in the second quarter. As Max highlighted, building products has exposure to a number of high growth emerging areas. For 2021, overall, we expect 20% core sales growth, driven by approximately 25% wholesale unit growth in the RV market, strong market growth for trailers and the beginning of a recovery in the building products market. In addition to market growth, we expect substantial share gains across all three end markets. Segment margins should improve 220 basis points to 15.5%. We are at the beginning of what looks like a very strong period of growth for this business and where secular trends also suggest a much longer RV end market cycle than the industry has historically seen. Turning now to more detail on our company results, total company results and guidance. In the fourth quarter, our non-GAAP tax rate was 10.4% compared to 20.5% in the prior year and slightly lower than we expected. Driver of the year-over-year decline in the tax rate was the expiration of the statute of limitations on certain tax items, as we explained last quarter. On a full year basis, the non-GAAP tax rate was 20.5% compared to 21.1% in 2019. Free cash flow for the quarter was a very strong $275 million, which was above our October guidance for $230 million to $260 million. This free cash flow beat was primarily driven by extremely effective working capital management in the fourth quarter. There are a few pages covering our free cash flow performance in the accompanying slide presentation that I want to cover with you today. First, Slide 15 shows the walk from our $325 million in 2019 free cash flow to the $275 million that we delivered in 2020. That 15% decline in free cash flow compares very favorably to the 36% decline in adjusted earnings per share. Of course, the primary driver of the decline in free cash flow was a $139 million decline in adjusted net income, also notable was a $20 million increase in pension contributions. We had the option to defer those payments, but given the strength of our underlying cash flow, we saw no reason to defer and create an additional headwind for 2021. Substantially offsetting those two items were $84 million in working capital improvement and $35 million in reduced capital expenditures, both of which we managed extremely carefully last year. We also saw somewhat lower asbestos cash outflow given COVID-related court closures that reduced trial activity. Slide 19 then provides a walk from 2020 free cash flow of the $275 million to our 2021 guidance for free cash flow of $260 million to $290 million with a midpoint of $275 million. Our guidance implies a $69 million free cash flow benefit from higher adjusted net income, which is largely offset by [$41] million of incremental CapEx and $11 million of higher net asbestos cash outflows as both of those items revert to more normal levels. We also expect working capital to be a modest use of cash supporting the volume growth, most notably at Crane Payment Innovations and at Engineered Materials. Slide 20 puts all of this into context, and I think this slide includes some of the data that may not be getting as much attention as it deserves. Over the last several years, we have seen a step function and sustained improvement in our free cash conversion from the high 70% range from 2010 to 2015 to 99% on average over the last five to six years. More specifically for the five year period from 2016 to 2020, our average free cash conversion was 100%. Including the free cash flow included in our 2021 guidance, that average drops very slightly to a 99% six year average and that average does not exclude anything. The chart on the right side of the slide shows that if you do choose to exclude asbestos, the average free cash conversion is even higher at 111% for that same 2016 to 2021 period. This structural improvement in our free cash conversion reflects our growth over the years. Our P&L has grown while asbestos outflow has shrunk as well as continued improvements in working capital management and the substantial impact of acquisition activity. In addition to solid free cash generation, as you can see in Slide 16, we also have a very strong balance sheet, and we maintained very high levels of liquidity throughout the worst of the pandemic in 2020. That liquidity ensures that we were able to continue to work on all of our strategic growth initiatives without interruption. At the end of 2020, we had more than $1.1 billion in available liquidity. When our $343 million term loan comes due in April, we expect to repay it with cash on hand and commercial paper. Even with that near term maturity, we are very comfortable with our balance sheet and we have substantial flexibility for capital deployment. We have been actively looking at quite a few potential acquisitions recently, all in our Aerospace & Electronics and Fluid Handling spaces, and our M&A capacity, while modest today will grow rapidly to nearly $1 billion by the end of this year. In addition to free cash flow guidance, as Max mentioned, our adjusted EPS guidance for 2020 is $4.90 to $5.10. And there are some additional details in the slide presentation, including a 2021 adjusted tax rate of 21.5%, $65 million of corporate expense, $35 million of net nonoperating expense, a diluted share count of $59 million and capital expenditures of $75 million. Regarding the cadence of earnings throughout 2021, EPS will be far more level loaded than normal. Notably, we expect Crane Currency to start the year very strong and that business is likely to make a greater contribution in the first half of 2021. The defense business should be relatively consistent throughout the year, but most other businesses should strengthen progressively over the course of 2021. Let me now turn it back over to Max for some additional comments before we get to Q&A.

Well, that was quite a bit this quarter, but we felt we had a lot to cover. We hope that helps put things in perspective. Thanks, Rich. I would really encourage all of you to join virtually for our February 25 Investor Day event as well as our May 26th Aerospace Electronics Investor Day, where we will share our thoughts on the ongoing evolution of our portfolio as well as additional details and progress on our strategic growth initiatives. We have an exciting story. Over more than a decade, we have proven that the strength of our execution as a differentiating factor. Increasingly, over the last several years, we have a demonstrated sustainable and structurally improved free cash conversion in line with best-in-class industrials, and we have consistently invested in organic growth, demonstrated how we are positioned for above-market sales growth, and accelerating inorganic opportunities. Overall, it's a compelling story. We look forward to sharing more with you next month. Let's now open it up for questions. Operator, we're now ready to take our first question.

[Operator Instructions] Our first question is coming from the line of Damian Karas with UBS.

So first, I wanted to ask you about the guidance for 2021. The EPS range it seem a little tight considering the level of uncertainty that you're still talking about [indulging]. Max, I think you made a comment that you could see some upside to that guidance range. I mean, in your mind, what are the key drivers that would lead to such a scenario?

I think Damian, it's all around any assumptions you might have on COVID vaccines recovery, broader economic recovery. We debated the range extensively when we dialed into a $5 midpoint. And I think the thing I would leave investors with is our confidence of that range, given our current assumptions, which is a flat to Q4 second half 2021 first half with continued improvement into Q3 and Q4. If an investor believes that -- now, we don't believe it's going to be significantly worse than that, but there's still a tremendous amount of uncertainty out there. I mean, I think we should -- once again, we were one of the few that gave guidance and fairly accurate guidance in an unprecedented time where many were criticized for even giving guidance. I think we're close to our businesses. I think we understand the range of potential outcomes. I think it's measured and balanced in our view. We have high confidence but it's the uncertainty around the recovery that leads us to keep a tighter range quite honestly and uncertain in terms of the improvement.

Damian, just to add a couple of things there, just to make sure balancing some of that more measured recovery, and I would say some of our shorter cycle businesses earlier on, because we do expect earnings to be more level loaded overall. There's not a hockey stick, in other words, in our overall performance. But some of our businesses, like I said, like Max just said, clearly are pacing at more of a measured flatter in the first first few months, four, five months of the year.

And Rich you had talked a little bit about the cadence and mentioned currency kind of front-loading in the year. For P&C segment, could you maybe just elaborate a little bit on your expectations for the various pieces of the business? And what the cadence looks like kind of across the board? And I'm just curious on currency, specifically, what are you assuming relative to that BEP order for fiscal '21? Are you kind of -- because it was a very wide band, what's your assumption for your business this year relative to that?

Yes. So really, with my comment with respect to currency, it just gets to the order profile and delivery profile of certain of our customer base, particularly across the board but notably, we see that in the international side of the business. So we've had really, really nice momentum in currency all through 2020. I mean, exceptional performance. And it wasn't just USG, I think we talked about this in the third quarter as well. Very good strong performance through the year, and that momentum continued with a nice order profile exiting. But the timing of our shipments sometimes can be different. So in currency, in particular, for example, we would expect a stronger first half than a stronger second half at this point. Our assumptions right now, stronger in the first half of currency and a little bit -- I don't want to even say weak or just not as strong in the second half. CPI, I would tell you is the opposite case, where we're going to start to see things come back a little bit more towards the second half, as markets recover as the vaccine gets distributed and so forth. So I think at a high level, that's what I would say.

On the BEP order specifically, in addition, we assume the low end of that range, which is I think is good planning because of some of the constraints we're seeing from the BEP's end as well. But if there's upside from the BEP, we'll be prepared to produce as well.

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

Max, I just wanted to start off. I mean, you opened up with some pretty bullish comments on order trends through the fourth quarter. I mean we're almost at the end of January. Can you just comment on if you've seen that strength continue past the new year and to the start of this year?

Consistent with what we would expect, Ken. So I feel fine with how things are progressing to our guidance in my comments.

And I think you also mentioned there was some timing issues around just site disruptions at the end of the fourth quarter with some shipping. Can you sort of quantify what that impact was? And how much of the benefit that could be in the first quarter?

We're looking at that is roughly $0.06 overall. We would expect all of that, frankly, to hit in Q1.

Now if there's other disruptions, Ken, I mean, this is where there's just some knits and gnats. You're seeing this, whether it's automotive, whether it's electronics, whether it's shipping, whether it's constraints, it was a little -- we didn't anticipate it. It was a little surprising, but it was nothing major. It was just a number of very small disruptions around the world, random could be a supply chain disruption and absenteeism problem.

So I think we're going to see that continue to improve. So I would expect it to read through all in Q1. Again, it's all around the assumptions of COVID. I think we all believe it's peaking, spiking as the spring and summer comes, it should do nothing but improve as vaccine continues to get distributed as well.

And I guess if I interpret those comments, it sounds like the way to think about that is maybe a series of one offs, but nothing from a disruption standpoint that you would say is a longer term risk, I guess, or a risk to the full year beyond what you've identified already?

Nothing.

And just finally, if I could, I think great -- congratulations, great work on the cash. Again, I agree. I don't think it's something that people have paid as much attention to perhaps as it justified, especially considering the performance last year. But as you think about 2021 and you think about capital allocation, you called out you're active, obviously, looking I think you specifically said Fluid Handling and Aerospace & Electronics from an M&A standpoint. How should we think about capital allocation this year? And can you give any more color on timing or types of things you're looking at from an M&A standpoint, either in terms of size, markets? Just refresh us on your criteria there?

I'd like to defer a little bit of this to the Investor Day as well as the May Investor Day, we're going to give a little more color and clarity. I would just say that Payment & Merchandising, we've had some major acquisitions to date, there's some significant opportunities just focusing on integration and execution. No problems, just continue to focus on the core. So you're going to hear a little bit more of -- as we look at 2021 holding on Payment & Merchandising, prioritizing, Fluid Handling and A&E.

And just in terms of criteria and such, to be very clear, our disciplined approach continues, Ken. We'll continue to be mindful of all of our metrics. In terms of the capacity that I mentioned during the call as well, the cadence of that grows pretty progressively, as you might expect as we go through the year. So we ended the year at 4 times debt to EBITDA. We'll finish next year right around 3 times.

Our next question is coming from the line of Brett Linzey with Vertical Research Partners.

Just wanted to start with payments and the margin expectations for '21, a very robust rebound in '21 on margins and even more significant than the actual decline last year. I'm just trying to understand the various considerations, what are volume incrementals versus restructuring, versus simply just the mix of the businesses?

Yes. I think you hit all three pieces, I would say, Brett. So there's a considerable amount that's reading through. Now this is one of the businesses, in particular, in CPI, as you know, currency really benefited. So the CPI or Crane Payment Innovations business had substantial cost out, unfortunately, given the challenging end markets in that space. And then as we think about 2021, we get the full read through on that. And then on top of that, the volume is coming back we can provide a little bit more at February. But there's a fairly, you might say, equal distribution among those three components, the third being mix, where we're seeing some continued strength, not only in currency but on that payment side, that contributes even more because of the mix of the profile of customers and business that we have in that space.

And on the significant cost out, I mean, as volumes do return, you're talking about '22 really being the recovery. I mean, should we expect some of those favorable cost items this year to layer back in next year?

Actually, no. And even the mix component, I'd be cautious about thinking that, that's temporary either, particularly on a total company Crane Co. Level. So Aerospace is still going to come back in a pretty strong way when you're thinking about '22 and forward. But yes, that's what I would say there, Brett.

And then just one more on Aerospace & Electronics, you indicated you think you've reached a bottom. So that does imply that the rate of the year-over-year decline does begin to get better in Q1? And then just on the aftermarket side, spare parts and shop visits, clearly lower. But are you seeing any semblance of a bottom in aftermarket on the commercial side?

So what I would say is to be cautious when I say trough more from a sequential point of view. The first quarter of last year for Aerospace was very strong, in particular, frankly, in the aftermarket side. But overall, we had a solid first quarter. And so my trough comment meant here in the fourth quarter relative to Q3 and Q2. So we expect things to improve from Q4 but on a year-over-year basis in Q1, will be down. From an aftermarket perspective, similarly, we expect really that to begin to return in a more meaningful way as passenger air travel recovers, which we really don't expect in a very meaningful way until the second half of the year. It starts to progressively improve but it really starts to improve in the second half of next year.

And so when you say down, should we split the difference between Q3 and Q4, or is it more like Q4 in terms of year-over-year in Q1?

I expect the profit improvement in the first quarter in that business relative to Q4.

Our next question comes from Caitlin Dullanty with Bank of America.

I have a few on A&E today, the first one is, it would be great if you could comment a little bit on what you're seeing in terms of channel inventory trends, destocking and any different dynamics that you might be observing in the various areas of aftermarket?

So on aftermarket, right now, the way we're thinking about aftermarket as it relates to 2021, is it's going to be a lagging improvement as passenger air miles grow, okay? Because there are inventory levels that are in the system without a doubt, that will be replenished, replenishing the demand initially, and hence, a good reason why we have more of our aftermarket improvement occurring in the second half of the year. So I think to answer your question, that would be, yes, there are inventory levels that are in the system that will be tapped into first and our assumptions in our operating plan -- in our plan and guidance reflect that.

And then how large is Defense as a share of the A&E business today? And if you could share a little bit on how you're thinking about your Defense strategy over the next several years in terms of investment in organic growth, inorganic growth, maybe a target split between Aero and Defense? And anything you'd share on that or specific programs that you're pursuing?

So today, as of the end of this year, it's roughly 50% of the business. Actually, I think it's 51% as we look at it today and would see a similar profile really next year. And that reflects the growth and strength that we've seen in this business over the last few years. If you were to take this business, our Defense portion of this business and compare it to 2018, we're up 10% if you compare it to 2018. If you compare it to 2017, we're up 22%. So we're seeing really, really nice strength and it's following all the technology investments that we've been making over the last several years. We're seeing a lot of that growth in radar applications, whether it’d be ground based radar, tactical vehicles, radar in aircraft and so forth. Just to give you a little bit of color in our microwave business, for example, we've historically had around three or four development programs ongoing at any point in time. Today, I can tell you, we have upwards of 20. So very exciting what we're seeing in the space. Our high power business in our Florida operations, same kind of thing. We're working on more development programs for future revenue streams than ever before. So we're excited about what the prospects are. It's going to be a tough comp next year, I would tell you, in 2021 relative to 2020, given all the growth that we've seen. We've had high double digit growth over the last couple of years. So it's going to be tough to see that happen again in 2021. But we are really, really encouraged about '22, '23, '24, '25 and so forth.

And Caitlin, we're going to provide even more color on the May 26th aerospace dedicated day to really go through this, our core competencies, what the technology road maps have been, the programs that we're on, the programs that we're targeting and long term trends from power conversion, electrification, sensing, thermal management, as Rich talked about, moving up the curve from microwave components to integrated microwave assemblies. So it's a robust list and we look forward to sharing that with Investors, May 26th.

Our next question comes from Matt Summerville with D.A. Davidson.

A couple of questions. I want to try and get back to a comment that Max and Rich, I think you both sort of touched on, which is kind of this cadence as we move into the first half '21 relative to the second half of '20. And I want to make sure if I'm understanding correctly. So you obviously have the tough comps in Commercial Aerospace, particularly in Q1. So that's sort of on the negative side. On the positive side, we've certainly talked about and you guys mentioned the tailwinds in the currency business. Then you have a little bit of timing that shifted from Q4 to Q1. If I throw that all together and kind of think about the puts and takes, how should we be thinking about Q1 revenue and earnings relative to the run rate you guys did in the back half of '20?

It's going to be significantly better and it's going to be driven largely by your comment with respect to currency and the cost that we took out last year that we start to see the full impact of in the first half or first quarter of 2021.

And then maybe as my follow-up, if you could spend another minute. I know you touched on a couple of the end markets where you expect to see earlier recovery in Chem and Pharma, maybe a little bit in General Industrial. But could you do a little bit more of a deeper dive on end market trends as it pertains to the Processing Commercial Valve businesses with some sort of geographical overlay to it as well, please?

So let's see, what I would say is from a chemical perspective, things are a little bit better than the others, for sure, in terms of performance, progression from Q2 to Q3, to Q4 and what we're seeing in terms of recovery into 2021. I would say we bottomed out in chemical in that June-July time frame and things have just been getting modestly better since. Obviously, oil and gas is not significant for us and the overall investment in that space not being strong, industrial production. Again, similar to chemical and that a bottom to that June-July time frame, so we're a bit more optimistic here. We started to build inventory levels in the fourth quarter. We took some decisions to actually go out and procure in anticipation of high runners being stocked out and those kinds of things. So we feel pretty good about industrial production. And I would say that's largely here in the US. From an MRO perspective, we feel pretty good in the Americas. We're a little bit cautious in Europe. China, not so great on MRO but a little bit better on projects. And the projects are really all brownfield and productivity improvements versus really any greenfield. There might be one greenfield, if I'm not mistaken, in China. But other than that, I hope that gives you a little bit of context.

Our next question comes from Nathan Jones with Stifel.

I’m going to go back to Payment & Merchandising here a little bit. Revenue guidance for 2021 is a little lower than I was expecting. I think I have some idea where that's coming from. So I wanted to kind of target it on that. I was probably expecting Crane Payment Innovations to be better. It sounds like you guys are building in some conservatism for the COVID impact there. Obviously, CPI has had a lot of challenges with just access to customer sites and things like that. Can you talk about a little bit of what kind of impact you built into this outlook from COVID? Because it sounds like, at least for the first half of '21, you're not assuming that things get a whole lot better there, that maybe you are restricted from getting into customer sites for potentially a longer period of time than I think we were expecting?

So I would say that our activity with customers is solid, strong. There's no customer issues per se, financial or otherwise, we feel pretty good about it. The activity that we saw coming out of the fourth quarter, in part, absolutely was Payment Innovation. So we are seeing that momentum. What I would say, Nathan, is we're being a bit cautious for sure, given the uncertainty in the spaces that we're in. But absolutely, we're seeing that momentum and expecting a better part of the recovery to come in that second half.

It also sounds like, Rich, one of your comments there to another question where you weren't anticipating a lot of the costs that have been taken out of this business to come back as revenues ramp up. Do you think there's been a structural change in the incrementals that the Payment & Merchandising segment is going to be generating over the next few years?

You know, what I would say, in our Crane Payment Innovations business, I would say, for the next couple, yes, we'll see how things form. What I would say is in Crane Currency, I would say, yes, to that. I really would. The amount of operational improvements that this business has been driving since we've acquired them has been exceptional. And a lot of the margin improvement that we're seeing is coming from not just volumes, but it's how we're running those volumes through the factory. So structurally, I would say, on the currency side even during COVID the amount of work that we've done to continue to improve that business has been substantial and it's reading through in the results. But again, on the CPI side of the payment innovation side, next couple of years, yes, and we'll see after that.

And one last question I wanted to get in is on inflation. Clearly, a lot of steel inflation, a lot of the raw material inflation in the second half of 2020. You're still in a spot in the cycle here, we're at relatively low levels of demand, although they are improving. Can you talk about how that likely impacts your ability to pass through higher raw materials? And do you see any price cost headwinds coming through the businesses in 2021?

So no, our price discipline has been pretty solid. Our strategic sourcing has been solid. We've seen this coming and been monitoring it, and our plans for 2021 incorporate the right level of pass through on price. Really, what we're seeing it's more about lead times across a couple of our businesses, and all of those extended lead times or challenges that we're seeing, we're dealing with and we've got plans in place, and again, are reflected in our guidance. So no headwind from a cost point of view.

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor over to Max Mitchell for any additional concluding remarks.

Thank you so much. Thank you for joining the call today. We hope you're all able to join our upcoming February 25th Investor Day event as well as our May 26th Aerospace & Electronics Investor Day. We have a lot to share. It's a compelling story. We look forward to sharing more with you next month. It's been an incredible period for all of us, and it's not over yet. My thanks to our global teams. I'm proud of how we reacted to the pandemic and how we led and worked together. In the words of the late great Sir Sean Connery, there's nothing like a challenge to bring out the best in people. As we have seen over the last year, we all grow through adversity and I remain proud of Crane's leadership and compassion in dealing with the pandemic, and I truly believe that we have been forged to do new levels of strength and determination through that process. Thank you for your interest in Crane, and have a great day.

Ladies and gentlemen, this does conclude today's conference and webcast. Once again, we thank you for your participation, and you may disconnect your lines at this time.