Crane Company (CR) Earnings Call Transcript & Summary

So good morning. I'm Jason Feldman, Vice President of Investor Relations with Crane Co. Welcome to our 2020 Investor Day. But before we begin, I'd like to direct you to the disclaimers regarding forward-looking statements that are posted both in our 10-K and 10-Q as well as in today's presentation materials, which are available on our website. And just a reminder that we'll be citing non-GAAP measures throughout the day. Those measures and their associated reconciliations to reported results can be found in our non-GAAP reconciliations in the appendix materials that we provided today. Now it's my pleasure to introduce Max Mitchell.

Thank you, Jason. Old Chinese proverb, "May you live in interesting times." Certainly it's interesting times today. New news taking place. See what -- how the markets opened today. Incredible buying opportunities here shortly, I think. Hopefully, we bring some clarity and some color in terms of longer-term trends as well as some insights in term -- in the immediate macroeconomic environment. Thank you all for taking the time to attend and listen by webcast today, and welcome to Crane Co.'s 2020 Investor Day. Legacy, legacy, culture, results, our future. We've got an informative day for you, and I think you're going to enjoy it. I look forward to my team presenting the outstanding progress we continue to make across Crane for all stakeholders in this, our 165th year. My 16th year with Crane and going into year 7 as CEO and never have I been more energized by our teams and our businesses. First off, I would like to -- related to legacy. Now our Chairman just texted me, he's running a couple of minutes late, he's going to come in and going to point him out to you. But I would like to acknowledge our Chairman, Shell Evans, and take particular note of the legacy of this exceptional man who has influenced all of us at Crane in so many ways over a long and distinguished career, after 47 years with the company, 47 years, 36 as Chairman, and 17 years as CEO, Shell will be retiring from Crane and the Board this April. It will be difficult to overemphasize the impact that Shell has had on Crane over the last 47 years. He drove substantial change in the company's portfolio, operations, strategy and perhaps most important, its culture. The culture that Shell engrained to Crane over the decades was one with a singular focus on building shareholder value with ethics and integrity always at the forefront. That culture, along with Shell's strategic vision, are still very much core to Crane today and a critical driver of our success over the years. These shareholder returns speak for themselves. During Shell's tenure as Chairman and CEO from 1984 through the end of 2000, Crane Co. total shareholder return was 1,796%. Now if you'll turn around, I don't have to ask you to stand, Shell. Shell just came in. So say good morning to Shell. Right in the middle of your -- updating everybody on your legacy, Shell, and history. So from '84 to 2000, shareholder return was 1,796% or a compounded average return of 19.1% per year with reinvestment of all dividends and proceeds from selling stock of spun off companies. For that same period, the S&P was up 1,250% or 16.7% per year. For the next 18 years, during which Shell served as nonexecutive Chairman of Crane, Crane's TSR was 345% or 8.2% per year compared to the S&P 500, whose TSR was 257% or 6.9%, an enviable record by any measure. Shell, we thank you for your years of inspiration and guidance and rest assured that you retire with Crane in an extremely strong position. I look forward to working closely with our new Chairman, Jim Tullis, and the Board of Directors as we continue to execute on our long standing strategy. Jim has been a board member since 1998 and brings incredible experience in board governance, capital deployment, strategic execution and leadership. And if you'll join me please in a round of applause of thanks and appreciation and recognition for Shell Evans. And I see you liberally applying PURELL right now. Very wise. Very wise. Okay. Let me now take some time to quickly provide an overview of last year's performance; our thoughts on 2020 guidance and the COVID-19 coronavirus; and then move on to give some insight into Crane's portfolio, how we operate, how we will continue to drive accelerated growth through capital deployment, and how investors should think about the investment thesis for Crane. Rich will provide more insight on the financials before we turn it over to our business leaders for their updates. Starting with our 2019 results. It was a solid year. Record adjusted EPS of $6.02, record adjusted operating margin of 15% and record free cash flow of $325 million. Core growth was basically flat, in part due to the previously discussed inventory adjustment in U.S. government currency sales, which led us to reduce our earnings guidance after our third quarter and the recreational vehicle market that was softer-than-expected all year. But despite these temporary market-driven surprises, we continue to execute and deliver solid results. It was a busy year with some bold strategic moves, starting off with our public overture to acquire CIRCOR. While hugely successful in tendered shares, we ultimately decided it was a better deal for shareholders to retain our value discipline and allocate capital elsewhere. Later in the year, we completed a successful bolt-on acquisition of instrumentation and sampling from CIRCOR, and we were active in Crane payment innovations with the acquisition of Cummins Allison. We also came very close to acquiring an Aerospace business but backed off late in the process, given our continued price discipline. Overall, I would frame up our year as one of continued outstanding execution, continued success with internal growth investments and accelerated M&A activity, while working through some softer end markets. Our present 2020 guidance remains at $6.20 to $6.50. And we felt confident in that number even in an unlikely scenario where 737 MAX volume went to 0 for all of 2020. Since our earnings call, the coronavirus impact has certainly continued to change daily, and we still cannot provide a firm estimate of the potential impact at this time. However, there certainly will be some impact. And at this time, we think the largest impact will be in our second quarter. Our direct sales exposure to China is quite limited, approximately 2.5% of total Crane's sales. The greater risk is in supply chain disruptions and possibly market with recent news this week. Let's review what we're seeing to date. At a high level, China has been shut down for most of February. Remember that this really started to develop in the middle of the Chinese New Year in late January. Typically, we would have assumed the last week of January with a full ramp-up by early February. Everyone plans for Chinese New Year, so there was an inventory build ahead of this period. The issue now is the restart, which was delayed until mid-February. And even then, it was slower than -- it was a slower start than normal, perhaps reaching an average today of about 80% of associates back to work depending on the region. These are rough averages, by the way, across a broad spectrum of suppliers. In addition to the slower resumption of production, the issue now has become logistics, with travel between regions in China still tightly controlled, but improving. Raw materials in China have been impacted. So even with workers returning, production is well below normal, perhaps an average of 50% output last week at best. We anticipate this ramp-up will be measured across the supply chain, hopefully, back to 100% by the end of March. Even then, however, transportation restrictions and bottlenecks may take a while to clear up. Of course, this assumes no worsening virus outbreaks. Now for those companies running extremely lean supply chains. The impact is fairly quick. And you have seen some announcements out to this effect from other end markets. For those with 4 turns a year or the right material mix, I think it's possible to potentially make it through the supply impact with minimal customer impact. Again, assuming no worsening of the virus. Now we're seeing a mix of these scenarios at Crane, depending on the business and inventory levels. Some businesses are projecting more of an impact than others, but we just do not have full clarity yet on when each of our suppliers will be able to resume production at normal rates and when product will actually ship or where there may be transportation challenges. The supply chain impact will probably be felt most heavily in Fluid Handling, although we certainly have substantial China sourcing at Payment & Merchandising as well. We expect that there may be a modest impact on the first quarter results with more of an impact in the second quarter, but we can't provide clear quantification at this time. And again, this is news not worsening, which there's new news out even as of yesterday. We'll provide another update on our April earnings call with much more clarity. Looking beyond this year. In early 2018, we provided a multiyear earnings framework targeting $7.50 to $8 EPS by 2021, with a potential for further upside from capital deployment. Most of that plan has played out as expected. Specifically, our execution has been consistently strong over the last few years. We have delivered on our targeted repositioning initiatives, tax reform benefits have read through. We have made progress deploying capital both on acquisitions and repurchases, and we still have substantial capacity remaining. There were, however, a few areas where things did not go as planned. All were market-based, and we believe all temporary. Those 3 items included the U.S. government currency inventory correction. While these corrections do happen periodically, we do not expect the current correction. The impact relative to our original expectations is approximately $0.35 this year, and we continue to expect to revert to normal volumes next year. 737 MAX production pause was certainly not in our original outlook. The impact relative to our original expectations is approximately $0.25 this year. While we continue to expect production to resume this year, rates for this year and next are still somewhat uncertain. And third, the recreational vehicle channel inventory correction. It's extremely rare to see RV volumes decline during a period of economic expansion, as we have over the last 18 months or so. While the market is stabilizing, our current outlook for 2020 and 2021 production is well below what we expected when we provided this framework in 2018. And now we have the uncertainty related to the coronavirus. We are making progress as planned on everything within our control. At this point, we still expect to hit $7.50 next year based on what we know. But the high end of that range does not look quite feasible, given our current outlook. I would add also, even with our revised outlook, that this still represents an earnings CAGR in the teens for the 2017 through 2021 time frame. And that earnings growth has also been accompanied by improving free cash conversion. My team today will provide additional commentary on current and expected market conditions, growth investments and strategy, cost levers for their segments. I'm going to spend the rest of my presentation talking about our portfolio, businesses and how we operate at Crane. Our portfolio has evolved substantially over the last several decades and will continue to do so. As you know today, we have 3 large global growth platforms: Fluid Handling, Payment & Merchandising Technologies and Aerospace & Electronics. We occasionally get questions from investors about why this set of businesses is combined in a single portfolio. Part of the answer is history, much of which predates even Shell's tenure at Crane. We have consistently simplified our portfolio over a period of many years, dozens of divestitures of smaller noncore assets, a continued organic and inorganic growth across what we are -- what are today our growth platforms. For decades, directionally, we have continued to move down the path of fewer, larger and more global segments. All that said, there was actually a lot of common -- there's a lot in common across our existing portfolio with common characteristics that should give you an idea of the types of businesses we like. Resilient and durable. Across our portfolio, we have businesses with long-term positive demand outlooks, driven in part by their large and sticky installed base, most notably at Fluid Handling, Payment & Merchandising, or with long-lived programs, like in Aerospace & Electronics. Our businesses are also based on evolutionary, not revolutionary product cycles. That's where our strength of our brands plays a critical role. Our customers are looking for consistency, reliability, often associated with a brand that invented the technology in question. They aren't looking for the latest model of a smartphone, for example. We also supply products that are extremely important to our customers. Products that are performance critical where the cost of failure is extremely high, whether it's ensuring that an aircraft properly stops on the runway, catching counterfeit bills in a Vegas casino, or providing a valve that is the last resort to prevent a failure involving hazardous chemicals. Customers buy our products when they need something that can't fail. These are also businesses with design-driven, engineered products, where we have a differentiated product or technology-driven advantage. And you see this in our gross margins versus competitors. We're also generally involved in light manufacturing, either discrete assembly or materials conversion with high asset turns. This model generally means that we have more flexible manufacturing base. We move to this model over a long period, getting out of businesses like cement and steel during the 80s, and then out of foundries in the 2000s. And overall, our businesses tend to have high and stable returns well above our cost of capital with strong positions in our chosen niches. We spend a lot of time evaluating our portfolio, dispassionately and analytically. We look at recent performance of each of our businesses, our expected outlook, the evolving competitive landscape and we benchmark internally and against peers. No business has an entitlement as a permanent part of our portfolio, and we continue to discuss our portfolio strategy with our board on an ongoing regular basis. We look at each and every potential portfolio scenario with the modeling and analytics to assess whether options make sense today. And if they don't make sense today, under what conditions those options might make sense in the future? At this time, we do not see any imminent major portfolio moves. However, we continue to review and assess on an ongoing basis. Remember that certain options are also catalyst-based. For example, had we been successful with our attempted acquisition of CIRCOR last year, it might have enabled some post-acquisition portfolio moves. So that was a discussion of what we own. Equally important is how we operate our assets. Last year, I spoke about the Crane business system and how it is a critical differentiator for us. I would point out that for over a decade, our objective has been for profitable growth, shown here as the sun or our customers and associates. Doing this well leads to shareholder value creation. We have always driven a broader stakeholder model at Crane. Crane Business System is maniacal about being fact-based, metric-driven with talented associates developed to focus our heat, if you will, on the most strategic priorities, while constantly seeking and driving out waste, variation and overburden that is trying to drag us down in our processes and on our associates. I won't repeat the full CBS graphic explanation today. We realize that this is up in every site, in every language, locally, and is a key tenet of how we operate. A few points worth emphasizing on what this means can be summed up best as disciplined cadence and execution. We speak to a common management cadence at Crane that is similar across all businesses. Think of this as a high level playbook for our leadership teams on how to organize and execute. Constant continuous improvement mindset. We celebrate the success of today while immediately looking at ways to improve further. We have a passion for never-ending improvement. We believe there's no such thing as an equilibrium or status quo. We're either driving improvement or we're backsliding. We operate with the highest integrity and commitment to quality. And you've all heard me speak about the R.T. Crane resolution before and it is still essential to how we operate at Crane. We have empowered customer-focused and aligned general managers. Alignment between strategy and structure is critical. And we keep our decision-makers as close to the customers as possible and with broad autonomy to make the decisions that most heavily impact our customers. And across all these areas at Crane, there is extreme accountability. A level of accountability that is only possible in an environment that is data-driven, continuous improvement focused with trust, transparency and respect for one another. It's been described by some as an intense culture and one that isn't for everyone. But with our leadership team and culture, we're very proud of our business system approach and maturity. And this is not just an operations-focused business system, every function drives process improvement focused on enhancing customer satisfaction and execution. Some of our best improvement has been within our engineering teams who are encouraged to take risk and move with speed while driving process execution towards engineered excellence and innovation. You'll hear more examples on this in a bit from the team. Suffice it to say, our technology road maps have never been stronger. CBS is a differentiator for Crane, one that we believe adds value for shareholders. We believe that CBS drives direct margin improvement. Well, that isn't an end to itself, our approach focuses on driving improvement in safety, quality, delivery, performance, efficiency across our business, on the factory floor, in our offices across all functions, including growth initiatives through new product, innovation, sales, marketing, engineering, which ultimately all reads through in growth and margin. We've studied our historical margin performance. And while changes in portfolio and mix have played some role, we believe that we've added approximately 500 to 600 basis points to our margins that we attribute largely to the broad application of our methodical CBS approach. Our business system also drives free cash generation, and ultimately, return on invested capital. If you look at our operational free cash flow performance, excluding nonoperational items, such as pension and asbestos, we are consistently generating greater than 100% free cash conversion and have generated a 12% compound average growth rate and free cash flow since 2010. And that free cash flow generation creates an opportunity for us to deploy capital to create additional value. We've maintained a consistent dividend payout ratio range for many years. We repurchased shares consistently when we have the financial capacity to do so. And we've created substantial value through M&A. We have a proven track record as a disciplined, successful acquirer. That track record is evident from our financial success, consistently delivering synergies well above our original commitments. Our M&A focus has been strategic as well as financial. We've built large global growth platforms by rolling up key players in several of our primary end markets, making us a stronger competitor, while also generating solid financial results. You've seen this in our Payment business, Merchandising and Instrument materials, Fluid Handling and Aerospace & Electronics. Now we have slightly modified our internal process for evaluating M&A opportunities, and I would like to describe this in more detail for investor consideration as we move forward. We've described the type of businesses that Crane operates. We've discussed the differentiated model of how we operate and the results our business system drives. Last year, we undertook a detailed self-examination of our past acquisitions to assess performance to original assumptions. Rich will cover this in more detail, but what we found is that we consistently over-delivered on synergy savings compared to our original valuation assumptions. With that analysis, we've refined our M&A process internally to better reflect expected proven synergies, resulting in more market competitive valuations. You've seen some of the recent progress we've made with this enhanced methodology over the past year. You saw it with our approach for CIRCOR, and with the 2 acquisitions we successfully completed over the last few months. I mentioned, we were also extremely close to a third acquisition in Aerospace & Electronics. In addition to the deal math, we continue our analytical approach to M&A identification, looking at both financial as well as strategic criteria. All transactions need to satisfy both sets to be seriously considered. We are purposeful and intentional about what spaces we are targeting, looking at both the attractiveness of a potential market as well as the opportunity for extendability with further acquisitions. We have not changed our discipline on M&A. Our financial criteria have not changed. However, you will see us being more assertive in our approach for acquisitions by recognizing the full value of CBS as a differentiator in proper valuation towards strategic targets. Who we are? How we operate? All grounded in how we behave culturally as leaders and businesses. Here are the words of R.T. Crane penned 165 years ago, are a constant reminder to all associates that we are resolved to conduct our business to the strictest honesty and fairness, to avoid both deception and trickery, to deal fairly with both customers and competitors, to be liberal and just towards employees, to put our whole mind on the business. Timeless words of wisdom that guide Crane culture to this day. Crane ethics extend beyond that resolution as well. The philanthropy, sustainability and equality. A lot of activity in the market-related to ESG initiatives. At Crane, with good governance at the core, we believe that we have been focused on the areas within the broader environmental and social aspects for many years. Last year, I spoke about our philanthropic efforts that date back more than a century. Internally, we have also been focused on other areas, driving and the elimination of waste and variation in our processes. But we haven't been active in telling this story. Once again, in the spirit of continuous improvement and being good, but desiring for even better, we will be publishing our first report on our philanthropy, sustainability and equality initiatives. I look forward to sharing this report, which will be published concurrently with our proxy and annual report in mid-March. Legacy, culture, results, our future. I hope that overview helps you understand who we are at Crane, what we own, how we operate. I also think it highlights the key points that you should keep in mind when considering an investment in Crane. We have a great set of high ROI businesses with strong sticky positions in long cycle end markets. We have long track record as an outstanding operator with a differentiated business system. We generate substantial amount of free cash flow. We are disciplined allocators of capital. We are increasingly assertive in our approach to acquisitions, given our history of creating value via M&A, and we have a high-performance culture based on ethics and integrity. You'll hear these themes reinforced over the course of the next 4 presentations this morning. So with no further delay, let me pass the baton. The overall format, the same as you are used to from the last several years, Rich Maue will provide a financial overview next. Ready? Chomping at the bit?

Yes.

Followed by Kurt Gallo, who will discuss Payment & Merchandising Technologies before we take a brief break. And then followed by Brad Ellis on Fluid Handling; Steve Zimmerman, presenting Aerospace & Electronics. Each of the business unit presentations will be followed by a Q&A session, and there will be a general Q&A session for Crane-wide questions at the end of the morning. So with no further ado, I will turn it over to Rich Maue.

Thanks, Max. Good morning, everybody. It's really great to see all of you here today at our 2020 Annual Investor Day. Thank you very much for joining us. So today, I want to briefly cover our 2019 operating results. Our guidance for 2020 and provide a consistent message with respect to our multiyear outlook and conclude on capital deployment. We cover this slide on 2019 performance during our last earnings conference call. The key messages here, mixed end markets with total sales impacted by 3 factors: the continued RV inventory correction; the temporary U.S. government currency destocking; and challenging comparisons following the 2018 currency sales to Venezuela. Despite a challenged overall top line, we drove 50 basis points of margin expansion and substantial growth in free cash flow relative to earnings. And compared to the guidance that we provided in January of 2019, we saw solid above-market sales growth at Fluid Handling, with better-than-expected margin expansion in that segment. Really impressive Aerospace & Electronics performance with the second consecutive year of 7.5% core growth, and again, further margin expansion. At Payment & Merchandising, the overall sales growth was in line with our expectations, but the margins reflect the sharply negative mix impact of the U.S. currency destocking. And at Engineered Materials, the RV inventory correction continued throughout the year, driving sales down 14%. Margins actually held up quite well considering the magnitude of the sales decline. This is the same slide that we showed you at last year's Investor Day. To remind you, in 2018, on the left side of the screen, you can see there were 2 discrete benefits: one related to tax and the other related to Venezuela, neither of which reflected the underlying earnings potential of the business. Adjusting for those factors had the impact of reducing 2018 EPS to $5.63. Comparing our projected 2019 results to that $5.63 provided a better sense of the underlying business performance that we were seeking last year, which was a 13% overall EPS improvement. This bridge shows the actual 2019 results. Note that almost all the bars in the middle are identical to what we guided. The outperformance at Aerospace & Electronics and Fluid Handling covered the market-related shortfall at Engineered Materials. The one change we cannot overcome was the U.S. government currency destocking. Without that item, we would have hit the midpoint of our EPS guidance. Even with that headwind, however, we did deliver 7% of underlying earnings growth last year. Moving to our 2020 outlook. First, from a historical perspective, we are proud of our track record, which is a direct reflection of the Crane business system, a true differentiator for Crane. As you can see on the far right of the screen, our adjusted operating profit in 2020 is expected to be well over 2x the level that we had in 2010 and with close to a 400 basis point improvement in margins over that same time. Our internal analysis supports this progression as top quartile performance among leading industrials and something we see as continuing over the long term. Now moving toward 2020 guidance. This is the same slide that we showed on our year-end earnings call. Our 7% growth is being driven by the 2 recent acquisitions that we closed in December and January, with core sales down slightly and with a minor FX headwind and no major anomalies related to tax, corporate expense or other nonoperating items. We expect 5% earnings growth overall, reaching $6.35 per share at the midpoint and free cash flow generation of 6 -- growth of 6%. Looking at our earnings guidance another way, compared to 2019, moving from left to right on the screen, we are seeing expected contributions from our repositioning actions, M&A accretion and our core business. The primary headwind this year is the 737 MAX production pause, which is impacting our overall earnings growth by 4 percentage points. Before moving on, as I mentioned during our year-end conference call, earnings will be weighted toward the second half of 2020, primarily driven by 3 factors: a second half return to normal production rates in our U.S. currency business; a resumption of 737 MAX production and ramp up later in the year; and acquisition accretion, which will build incrementally as the year progresses. I also mentioned that first quarter EPS would approximate 20% of our expected full year earnings. Now as Max just mentioned, in addition to what we discussed on our January call, we do expect an unfavorable impact on first quarter results related to the coronavirus, with the potential for a further impact on the second quarter. While I would expect to recover a portion of these headwinds in the second half, the level of uncertainty around both the degree of the total impact and timing remains high as we stand here today. That said, based on everything that we know today, we are maintaining our current guidance range of $6.20 to $6.50. As it relates to our growth outlook by segment, the details for Fluid Handling, Payment & Merchandising Technologies, and Aerospace & Electronics will be covered in the business unit presentations by Brad, Kurt and Steve. At the bottom of the screen, for Engineered Materials, specifically, we see the channel inventory destocking approaching an end in 2020, with production down in the mid single-digit range. We expect the RV decline to be partially offset by growth in our building products business. Moving to margins. Again, I'm going to let our presidents cover their specific expectations for this year. But as a reminder, the Cummins Allison and Instrumentation & Sampling acquisitions that we just closed results in a temporary dilutive impact of both Fluid Handling and Payment & Merchandising Technologies. Excluding the impact of these acquisitions, underlying margins are 30 basis points higher in Fluid Handling, and over 200 basis points higher in Payment & Merchandising Technologies. At Engineered Materials, we do expect to drive margin expansion, despite a slight sales decline driven by productivity and pricing. And worth highlighting on the screen, the 300 basis point improvement in margins at both Fluid Handling and Aerospace & Electronics since the end of 2016. Moving to our multiyear outlook. These are the long-term targets we have been sharing with you for a few years now. Overall, we are pleased with how we are performing against these targets. No changes here. On the margin side, we are solidly in our targeted range at every segment except Payment & Merchandising Technologies. The only reason we are below our 18% to 22% range relates to the temporary dilution from the Cummins Allison acquisition. Excluding that, our guidance would have been 18%. Again, absent that transaction. We are highly confident in our ability to get Payment & Merchandising technologies into our target margin range over the next 2 years. From a sales perspective, it's a challenging year ahead based on the factors that I've already discussed and what our presidents will cover off later. We do believe that these across-the-cycle growth rates are still appropriate for our businesses. And we think over the medium to long term, we will see approximately 2% to 5% overall core sales growth. This slide shows our assumptions regarding how we expect to achieve $7.50 or better next year. We assume modest improvements in repositioning benefits and M&A accretion, but the 3 big drivers of the resumption of the 737, the 737 MAX production, return to normal currency demand levels from the U.S. government, along with a reasonable amount of underlying core growth. Capital deployment could provide upside to this number or depending on market conditions, protect the $7.50. Moving to capital deployment. We are proud of the improvement shown on this chart. We have improved our free cash conversion approximately 15 points over the course of last decade, averaging 94% over the last 4 years compared to 78% from 2010 to 2015. And excluding asbestos, we're consistently converting more than 100% of adjusted earnings to free cash flow. We've shown this slide several times over the years, reflecting the fact that our capital deployment priorities have not changed. We will remain disciplined, and we always take a long-term view in our capital deployment decisions. We prioritize internal investments because they have the highest risk-adjusted returns, then it's acquisitions that enhance growth and we will remain disciplined buyers. While you all saw the 2 acquisitions we completed over the last several weeks, there were numerous acquisitions across all 3 of our growth platforms that we walked away from at various stages of the acquisition process this past year, including as Max mentioned, an opportunity recently in Aerospace & Electronics. And when we do find the right opportunity at the right price, we have a proven track record of success with integration. We look to balance acquisition opportunities with the desire to provide an adequate return of capital to shareholders. We have a target dividend payout ratio of 25% to 30%. And when our debt-to-EBITDA levels are in our target range and market pricing is right, we will repurchase shares as we have in each of the last 3 years. And of course, we're committed to meeting the obligations of our pension plans and other legacy liabilities. We also seek to maintain our current investment-grade rating. We typically target adjusted debt-to-EBITDA of between 2x to 3x. We're comfortable going above this range, as we did for the Crane Currency acquisition, where immediately post-acquisition, we were at a 4.1x debt-to-EBITDA figure followed by rapid deleveraging. Today, we're at about 2.9x, giving us the flexibility for further acquisitions. And more modest capacity for potential repurchases. Today, our M&A capacity is approximately $500 million, growing to nearly $1 billion by the end of this year. At times, there's a disconnect between how we think of leverage and the way that our balance sheet is viewed by investors. Rather than describe it in generalities, we included this page for you. We calculate our leverage the way the rating agencies do, and this slide provides a somewhat simplified version of one of the primary calculations used by one of the agencies to arrive at adjusted debt and adjusted EBITDA. Most notable adjustments on the balance sheet are related to asbestos and pension and the fact that we use gross and not net debt. So a takeaway for you all. This chart shows our historical return of cash to shareholders. We have always had a strong dividend payout and expect that to continue. Following an 11% dividend increase at the beginning of 2019, we raised our dividend another 10% just last month, maintaining our payout ratio within our target range. We expect to continue to grow our dividend as we grow our earnings. And from 2013 to 2018, we prioritized debt repayment associated with acquisitions, and we were, therefore, less active in the way of repurchases. However, we did repurchase $80 million worth of our shares at the end of 2019. And as I just mentioned, when our debt-to-EBITDA levels are in our target range and market pricing is right, we view repurchases as an appropriate vehicle to drive returns. As we've discussed previously for the 2018 to 2021 period, we had capacity for more than $1.5 billion of capital to deploy on a mix of M&A and repurchases. During 2018 and 2019, we repurchased $130 million of our shares, and we spent approximately $330 million on our 2 recent acquisitions, leaving more than $1 billion of capital available for these purposes over approximately the next 2 years. Max described a slight refinement to our approach to M&A. We continue to be extremely data-driven and analytical in our approach to every target opportunity. We recently conducted extensive analyses of actual M&A performance compared to our original expectations and board commitments. Since 2010, we have delivered between 1.5x and 2x our targeted synergies related to acquisitions. We looked at that by category of savings and overall margin enhancement, and we have refined our modeling approach to reflect those learnings. It is very important to understand that our financial criteria have not changed at all, and we remain disciplined buyers. However, by taking a more realistic view of expected synergies and overall business enhancement, again, based on what we delivered on past transactions and our ability to execute, we expect to be more competitive in the M&A environment. You saw a part of that with the offer for CIRCOR last spring as well as our recently completed acquisitions of instrumentation and sampling in Cummins Allison. I would also add that what you haven't seen is the numerous transactions that we still walked away from, even with this refined approach, including that opportunity at Aerospace & Electronics. So in closing, we have a portfolio of high ROI attractive businesses and our financial results attest to the performance as an outstanding operator of these businesses. We are generating a lot of cash with free cash conversion now at far higher levels than we have seen historically, and we are disciplined in our allocation of capital. While we expect to be more assertive with M&A going forward and see the opportunity for substantial acquisitions across our portfolio, we remain disciplined and we will continue to foster a high-performance culture with the strictest focus on ethics and integrity. Okay. Let's now get to the exciting stuff, and hear directly from our leaders. First off is going to be Kurt Gallo, and he's going to share with you the exciting things that we have going on in Payment & Merchandising technologies. Kurt?

Thank you, Rich. Good morning, everyone. As Rich mentioned, my name is Kurt Gallo. I'm the Senior Vice President responsible for the Payment & Merchandising Technologies platform. We have a great day planned for you here, and I am excited to share with you a number of the great opportunities that we have and that we're tackling across the PMT platform. Per our team's performance in 2019, as Max and Rich mentioned and discussed, we had some challenging market conditions this past year, but still made substantial progress on our growth and productivity initiatives. Specifically, our international currency business grew 58% year-over-year when excluding the Venezuela impact. And further, Crane Payment Innovations, the largest and most profitable business in this segment, continued its strong track record of growth with a 5% gain in 2019 and an average growth rate of 6.5% over the last 5 years. In 2010 -- in 2020, excuse me, we expect to deliver core growth of approximately 1%, Cummins Allison will also contribute to sales and adjusted operating profit growth, although it will be initially dilutive to segment margins. Excluding the impact of the Cummins Allison acquisition, adjustment segment margins would expand substantially to just over 18%. We have a proven track record to integrate acquisitions and realize synergies as well as driving year-over-year productivity across our core businesses. The integration of the currency business is going very well and the team continues to perform at a very high level with notable share gains and process improvements taking hold across the sites. Helping to ensure our path to long-term profitability, organic growth -- and organic growth are strong. Global sectors -- helping to ensure our path to long-term profitable growth, our global sectors trends are very strong across our business. No matter what we read, cash is not going away anytime soon. With the addition of Crane Currency to our business platform, we now have a closer connection with the central banks and the key decision-makers that are involved in setting fiscal policies and cash production levels. On a global basis in both our experiences and third-party data analysis, we continue to see an increasing demand for cash across virtually all geographies. You will certainly hear about the occasional country that is trying to minimize cash usage and programs to drive towards a cashless society. We absolutely see continued growth in cashless transactions and expect this trend to continue, much of which is heavily influenced by online shopping. The fact remains that cash in circulation globally continues to grow by almost every measure, by volume, by value of notes, and as you can see here on this slide, as a percentage of GDP. Recent estimates put the annual issuance of notes at $172 billion, with circulation growing at an annualized rate between 2% and 4%. As the global economies continue to grow, there's a continued demand to drive down labor costs while still providing high levels of customer service and security, particularly at Payment Innovations & Merchandising, we continue to benefit from businesses' never-ending pursuit of productivity and security. As you know, all forms of payment carry a cost. For credit card purchases, that cost is straightforward, typically between 2% and 5% of the transaction value plus the cost of the labor. The cost of traditional cash handling for a retailer is more heavily influenced, however, by the cost of labor to accept that cash, to make change, to reconcile the cash drawer, to count the cash in the back office and then to take the cash and deposit it in the bank. Our automation solutions are able to dramatically reduce the cost associated with handling cash, whereas the retailers have very little ability to reduce the rate for cashless fees. These facts, combined with the increasing labor rates and continued growth of cash globally, are driving the use of our payment and security technologies. In addition to the direct productivity benefits, automated solutions provide better security and allow employees to focus on more value-added customer-facing activities. And studies are showing growing acceptance and preference towards self-payment solutions. I'll spend the remaining part of this presentation outlining how our fundamental focus around CBS drives a business cadence and culture of performance management that will deliver growth and profitability. I'd like to start by discussing the 3 pronged growth strategy that we have for our business. It starts with building off of our incredibly strong customer base, with expanded new products being developed that are enabling us to move further downstream. Where today, we not only provide both cash and cashless payment devices, but also fully-packaged solutions. Secondly, we're leveraging our engineering and technology innovation to provide greatly enhanced customer solutions that increase security, improve productivity and provide a connectivity system permitting end to end-user management. And finally, we remain incredibly active on M&A opportunities, and we'll continue to build our vision around the engagement across the full cash cycle with industry-leading technologies. Cadence, rigor, accountability, processing kaizens are fundamental elements of our CBS culture that continues to drive new and innovative products, expanding the market and creating solutions that accelerate our customers' profitable growth. We're very excited about our move into downstream packaged solutions. We are now providing, in select markets, complete payment stations that integrate into a business' existing point-of-sale systems and automation cash acceptance and dispensing. Paypod, seen here on the left, automates cash acceptance and dispensing. And since its launch, we have achieved over $2 million of sales. Through this solution -- though the solution is targeted primarily at European small retail owners who couldn't normally afford a traditional self-checkout, we are now seeing interest in the U.S. market as well. There are more than 1 million small businesses in Europe, looking at payment automation systems for a variety of reasons, including reduced cash handling cost, increased security and hygiene requirements in the food and industry -- food service industry. Our pay station offers the perfect solution with a compelling value proposition. This is only one example, but an exciting opportunity of how we address our customers' needs while improving our value to them as well as expanding our addressable market as we move from components to systems. At each of these evolutions -- at each of these evolutionary steps, the addressable market for our products has grown. And today, it is nearly double what it was just 5 years ago. We are looking globally across both our traditional markets and in new segments to find additional opportunities. The payment automation underlying value proposition of productivity and security is nearly universal. But form, fit and function does vary slightly across the global markets. For the Japanese market, we recently introduced an alternate design that is getting strong reviews and pilot adoption. With our years of experience in the global trends of cash usage and increased labor costs, we continue to find new adjacent opportunities for expansion, such as the smart safes in Japan as well. And with the recent acquisitions of Cummins Allison, we're also offering coin redemption kiosks, similar to that of Coinstar, for both the banking and the retail market sector. These are all bold bets, but we are seeing the benefits read through. In 2020, packaged solutions annually will account for approximately $17 million of our sales versus 0 just 2 short years ago. In payment, we've also been growing in our cashless business for years. Today, we have more than 0.5 million combined cashless readers and telemeters in the field. We're very excited about our latest new product in innovative -- innovation, called ALIO, an all-in one cashless reader and telemeter. This product will continue our cashless growth and is expected to be a major step forward for unattended solution providers. This product simplifies the OEM integration and is configurable for all forms of cashless payment methods, including credit, debit, NFC, such as Apple Pay, and is configurable for both micro payments as well as requiring pin data with our PIN on Glass technology. This product also has a connectivity solution that links our customers' payment systems across a network, allowing for a fully-connected and management-enabled system, which will expand our connected vision. Connectivity is a natural extension of our business, given the number of devices that we have in the field totaling over 10 million. And with the applications of where they're used, we offer a comprehensive solution with a broad offering, including wireless connectivity, electronic payments and full system management applications. Our connectivity solutions have clear value propositions, providing productivity and efficiency with a holistic system solution that includes a comprehensive suite of business management tools and data analytics. First and foremost, these solutions provide value to our customers, while strengthening our long-term relationships and provide a reoccurring revenue stream for us. Growth opportunities at Crane Currency are as exciting as those across the rest of our payment business. Banknote design, formulation and printing is very technology -- is a very technology-oriented business with complex and unique customer substrate requirements, combined with sophisticated equipment and extremely rigorous process control procedures. Banknote design requires a combination of mathematics, science and art. And the ability to combine those varying skill sets, our micro-optic security technology is a clear differentiator, as it is the only security technology that has never been successfully counterfeited. Micro-optic technology by Crane continues to win share globally. We are now providing technology in over 137 denominations across 48 countries. And as you can imagine, all countries have the same needs or monetary usage demands. Thus, we have continued to expand our micro-optic technology into a variety of new designs and new use cases and application methods. By doing so, this has also increased our addressable market. As an example, in 2020, we increased our addressable market by just over $100 million with the launch of a new micro-optic solution for low denomination bank notes. Like our sales funnel, our new product development pipeline is also full, and we anticipate launching new solutions in each of the next 3 years. This is in addition to the 4 technology offerings that we have today. And in each of these launches, we will increase the addressable market for Crane Currency. The PMT platform has continued to mature over the past 10 years, and we have grown this business through a combination of organic growth in 6 strategic acquisitions. At the core of each of these businesses is a sophisticated technology solution that focuses on delivering highly-secure solutions that drive down cost and drive up productivity and customer profit. In each of our acquisitions, we are focused both on the value of the underlying technology and on the ability to extend that technology across the market segments. The cash and payment cycle markets are broad yet niche markets and offer an abundance of acquisition opportunities. Cummins Allison, acquired at the end of 2019, is a well-run business with a strong culture of providing innovative and high-quality products that are supported by a world-class field service organization. It's the natural fit within the CPI business, where CPI has historically provided front-of-the-store consumer-facing payment solutions, Cummins provides the back office cash accounting solutions. Both CPI incumbents, Allison, sell to the same vertical customers and utilize similar underlying technologies. Strategically important is the Cummins Allison national field service organization. With over 450 field-based team members now offering us the ability to not only expand our on-site service to all CPI products, but also to the vast number of other third-party OEMs who lack the breadth and scope to service their products adequately. This will be a future growth and profit driver for the business. Combination of both organic and inorganic growth, together with driving CBS in all that we do, has radically changed this business over the last decade. In 2009, this segment had sales of just under $300 million with $18 million of adjusted operating profit and 6% margins. And now, in 2020, we expect sales of approximately $1.35 billion with operating profit of $215 million and margins of 16%, and we expect to see margins improve over the next few years as we integrate the Cummins Allison acquisition. Although this business can be lumpy at times, the underlying fundamentals are very solid and the combination of our strong technology leadership, combined with the discipline of CBS, gives us a market growth profile that is highly compelling. Not only do we have compelling growth initiatives, we at Crane are relentless on driving productivity and efficiency. CBS is the foundation of everything we do at Crane, providing the voice of the customer, understanding of our customers' needs as well as the fundamental tools to deliver operational improvements year-over-year. Our continued operational improvements helped fund our investment in growth initiatives, while CBS also provides a structure for successful engineering designs and new product initiatives. I'm sorry, let me see here. Okay. In Payment & Merchandising, we have leveraged CBS across 3 primary areas: accelerated acquisitions, core business productivity initiatives, and creative design innovations for both existing and new products. We have a successful track record of integrating acquisitions and have delivered more than $60 million in synergies over the last 10 years. To put this in perspective, we acquired Crane Currency approximately 2 years ago. Over that time, we have conducted over 100 kaizen events, opened a brand-new facility in Malta, and achieved over a 30% reduction in print costs. In its first year of operation, the Malta facility printed nearly 2 billion banknotes, and the Currency business is on track to replicate that past annualized savings again in 2020. We have been consistently good at acquisitions in the payment platform, and we are typically an advantaged buyer with business synergy opportunities greater than others in the space. I'm very pleased with the progress that the CPI team is making with the integration of the Cummins Allison business, and I'm confident that this acquisition will be another home run for Crane. Core business productivity comes in many shapes and sizes, whether it is improving an order entry process, applying for a global commodity strategy, or just making the daily work for our teams easier. Collaborative robots or cobots are another example. Cobots allow our associates and robots to work harmoniously together, sharing the workload within the cell and driving productivity with much greater flexibility than with full automation. Cobots improve the work and environment for our associates implementations -- and implementations are focused on areas with -- where the scope -- our focus on areas with the type of repetitive work and where associates typically don't like and where the automation -- and where the automation improves both safety, reliability and productivity. The highly flexible, easy to implement systems today, combined with compelling prices have made the use of cobots commonplace across our payment sites. Even in our low-cost regions, the payback in savings is typically less than 1 year. In our business, CBS tools are helping to drive value analysis and value engineering. For example, we have dedicated engineers well versed in a 3-P tool set of: Production; Preparation; and Process. This tool helps to deploy a comprehensive and exceptionally detailed approach to product-cost analysis and design. This kaizen approach emphasizes creativity over capital and utilizes customer data, product tear downs, supplier benchmarking strategies to drive cost reduction and design efforts. Cadence is also critical here, and is being driven through monthly ideation sessions. At these sessions, a key product or topic is selected and analyzed with a scope where the cross functional team, including engineering, manufacturing, supply chain, finance and marketing, a weekly project cadence at the -- by the cost reduction team then develops and tracks the ideas through to the implementations via a detailed action plan. The net has been our ability to drive down material costs consistently yielding an annual 5% productivity improvement. In summary, Crane Payment Innovations and Crane Payment & Merchandising segment has a long track record of solid performance in market segments that continue to show long-term growth and drivers on a global level. We're a technology-driven business and invest heavily in R&D. Our technology, whether it be in banknote security and printing or coin and bill validation technology, positions us well ahead of our competitors. Our scale across the cash cycle provides a fundamental differentiator in the market. This allows us to expand our reach with new products and service offerings, such as packaged solutions, like the Paypod pay station, the fully connected solutions that provide incrementally more data analytics and management and enhanced note security features, opening up new markets, new countries and denominations, and finally, a national field service organization that offers expanded coverage and expansive growth. These are just a few of the recent new offerings from the Payment & Merchandising Technologies platform. All of this combined gives the PMT segment strong fundamentals that will drive long-term growth and profitability. Can I take your questions, please?

We have microphones. If you wait we'll pass around the mic so we can hear your question. I have Nathan, Rob and then Ken. Let's go Nathan.

One of the things you talked about was the potential to expand the field service out of Cummins Allison to other parts of the business. Can you expand on that, what the opportunity is there? I would think that probably is higher margin kind of revenue that you would look to generate there. Just any more color and detail you can give us on how you see that?

Yes, sure. So the team here has, as I mentioned, 450 field-based service technicians in sales. The opportunity here, certainly from a CPI perspective, today, we use all third-party service providers to service and repair equipment in the field. There's also a number of our OEM customers, frankly, who are underserved from a field-based service standpoint. They use a number of third-party service providers that are very regional based. So this opportunity with Cummins as a holistic team provides us the opportunity that we're actually closer with a lot of our OEM partners to provide them a holistic view. And again, these are partners that are already using our equipment. And we have the ability to not only service our own equipment within theirs, but also to help them by servicing their equipment. And again, keeping in mind, it's already at all those same customer sites that we're familiar with.

Do you have any idea what the opportunity might be just in terms of size of revenue?

It's early days. So we have not yet quite outlined that the entire scope there.

Fair enough. One of the other comments you made was that moving from components to systems had doubled the TAM in CPI? Was that CPI overall? What specifically were you talking about there? And how much bigger do you think you can get that addressable market with this move from components to systems? Thanks.

So that comment was specifically stated around CPI, and how much bigger. So I think the opportunity is huge. We've talked about the opportunity with Paypod. We've talked about a little bit of the opportunity with smart safes and package -- and various package solutions. Doubling the market. CPI had always put the market at about $1 billion for that segment. So easily, today, we see it, as I mentioned, roughly $2 billion, and it can continue to grow. There's opportunities in this package solutions space, broadly as we start looking across all the different vertical markets that we service to really be a significant player in various segments across the globe.

Was just curious if you could give us a little bit more detail on what the path back to the 18% margin looks like, whether we need to believe to -- believe that you can get there? I see you assume that the USG business comes back? How far does that kind of get you back to 18% and then even just a couple of years ago the business was almost 21%, kind of a third part of the question, as we move back into the range, what does it take to get back into the higher end of that range?

Yes, I mean, so right now, as I look at the plans that we have put in place across each of the different businesses within the [ EMP ] platform, the execution is absolutely there, right? As I mentioned earlier, the -- and what Rich mentioned and Max, the currency synergy savings and integration is going absolutely on track. So we feel very good about where that is, and that starts moving us down the path, to your point, to the 18%. And then the integration targets that we have set for Cummins Allison as well. So I see this all as very well within our grasp to achieve. Just based on our basic operating execution and executing on the plans that we've done in the past.

But I would offer up is that even with U.S. governments stable at where it is today, right, which is not what we expect. We expect to have the return come back. It would be at 18% in our guidance for 2020, if not for the Cummins Allison acquisition. What's going to get us in there within the next, I call it, 2 years is just simple execution against Cummins Allison integration. And then I would say, to get to that higher end of the range, it's just going to be our continued growth and leverage, in particular, at USG, which margins are considerably higher and mix is up.

Got it. So with the USG business comes back as you expect, how much of a boost do you get from that?

It's substantial. It would put us probably closer to the 1-year mark than 2 in getting to the 18%.

Got it. And then just on the microtechnology that's currently in the $100 bill. Just curious what you think the odds are of seeing the U.S. deploy that into the $20? I don't know, any time in the next couple of years, say?

Yes. I certainly can't comment on the timing. We obviously continue to work very closely with the Bureau of Engraving and Printing as well as the Federal Reserve Board. And so we feel good about the technology, we feel good about the adoption, and we feel good about where things stand in our relationship. I think that's really all I can comment on it at this point.

In terms of probability, it's not, in my opinion, it's not a matter of if it's a matter of when. And so it's just around new series. So just publicly -- what's publicly available information on new series, and we feel very strong about our position.

I wanted to follow-up on CPI. It looks like this year, you're looking for sort of low to mid-single-digit core growth. And I'm just curious considering the comments earlier on transition from components to systems. What do you need to do, is it an investment? Or is it a demand equation to maybe see any sort of acceleration in growth, or across the cycle is CPI really sort of a low-to-mid single-digit growth business? I would think fundamentals of the market would maybe drive a little bit greater pull than that.

So CPI growth, as I mentioned, has been over the last 5 years, about 6.5%. And again, we feel very good about that business and how it's positioned in the marketplace. I don't see any reason that I would expect to see any kind of significant change in that growth rate relative to that core business. Relative to what do we need to do to really drive growth from a packaged solution standpoint. What's interesting there is that it's generally the same customers that are using our products. Same type of applications, I should say, the challenge ultimately is the channel of the market and how do you expand more traditionally, we go-to-market via OEMs there's a little bit of a shift in the approach to the marketplace. So as you start selling packaged solutions, it's a little bit of a different sales approach, and you're working, obviously, as I mentioned, with smaller retailers. So those are the key challenges with that business. And again, the investment really is both a combination, as I would see it, both from internal investment as well as acquisitions. So for example, the Cummins Allison acquisition did bring us a packaged solution around that coin redemption kiosks.

And as you look at some of the evolution of the channel what does that do to the margin profile? Does -- I would imagine if you're not working with partnered anymore, that might be a positive, but clearly, as you're selling more to or the customer becomes a smaller business that could perhaps be a headwind. How do we think about that over the next few years?

The return on investment for these packaged solutions or with payment automation is very strong. As I mentioned, for example, with the Paypod it tends to be less than a year in payback. So with that type of value proposition that we bring to the marketplace, I would expect margins to remain healthy. Plus coupling on top of that, our ability now, at least in North America to offer a full-service solution with the field service organization, I would expect that to help as well.

I think just to add to that a little bit. Systems are going to be from a components versus systems, you generally are going to have slightly lower margins from a systems point of view as we see it, but I would say that commercially, we're still working through a lot of these details, Ken, so -- but overall, to answer the question on mixing up or down on margin profile, I would expect it to be a little bit dilutive but not something that would cause us to not pursue the market growth and the OP growth.

Clifford Ransom at Ransom Research. I'm just thinking at 450 service people for a nationwide business isn't a lot of people, is the advantage to increase the number of cities or the density of those locations?

So right now -- I'm sorry, ask the question again, Cliff. I'm not sure I fully understood.

I would have guessed, and correct me if I'm wrong, that it would take a lot more than 450 service people to service 1 million machines across the United States. Is it a question of opening new cities? Or is it a question of adding people to existing cities?

I think it's a little bit of both, honestly. So today, the service programs that we offer really varies from anywhere from a 4-hour response time to a 48-hour response time, again, it depends on the contract and the need of the customer. And then based on those contracts and their density. We position our salespeople, our offices based on that. There are some of our sales people, our field technicians. There are a number of our technicians that are home-based as well. So they have an office where the parts are stored, but obviously, then there's a home base, they're closer. So if you get out to the Midwest, where things are much more spread out, there's driving distances associated with this, so people will be spread out geographically based on what the customer profile is and the demand need. So it's -- I would expect it to be a combination of both.

Have you been able to assess yet the profile of adding people to that system? It strikes me that would be a fairly sophisticated technician, or maybe not?

Well, there's a lot of training that goes with it, without a doubt. We have very good training programs. As we've reviewed the Cummins Allison business profile and their training program, they have an extensive training program. Well, a very strong process of bringing team members back in. And there is a constant flow of technicians coming into the business and adding, so the -- from what I've seen, as I mentioned, it's a very well-run business, and they really kind of have that down to a science on how you bring people into different training modules, the rate and then the certification of the associates so that they can service higher level class of equipment. So not every tech is a tech level 10, right? There's different levels of technicians. And so we space it out appropriately based on what the needs are in the products.

Any other questions? So we're right on time. So why don't we take a break until about 5 after. [Indiscernible] [Break]

Okay. We can get started.

Well, good morning. I'm Brad Ellis, Senior Vice President, I've been with Crane for 23 years. And I know I've met most of you over the years, and it's really great to see you again. Today, my message is consistency in Crane Fluid Handling's strong execution and results, compelling strategies to continue winning share and outgrow the market and how we are delivering on our commitment of a 100 basis point improvement on average per year. 2019 was another great year. We outperformed guidance, the market and our competition. Core growth of 4%, margins improved 190 basis points and operating profit increased 18%. We delivered these results through impressive execution of our share gain initiatives, productivity and pricing. For 2020, we expect 6% sales growth, driven by a recent acquisition of Instrumentation & Sampling, along with our continued momentum with share gains and pricing initiatives, partially offset by a modest decline in our underlying markets. Turning to the market outlook. Chemicals and pharmaceuticals are important markets for us, driven by global growth in housing construction, advanced materials, industrial manufacturing and agriculture. And we are seeing demand from continued investment in the United States, driven by cost advantage chemical feedstock, demand growth in China and Middle East, and growing demand for specialty chemicals, such as MDI, PVC, propylene oxide, sulfuric acid and fertilizers. In 2019, Crane's chemical business grew 5%. Driven by 2% market, 3% from share from our new products and projects in hazardous applications, like acetic acid, where we won a $5 million project order providing solutions for reducing emissions with our in-line linkage technology. In 2020, we expect a slowdown in the chemical market. The U.S. and EU chemical production indices, which are typically good, a leading indicator. A drop from a 2% positive beginning of the year in the first half to a decline of 2% up by December. We have also seen chemical project delays and investment slowdowns. For example, Covestro recently cited challenging global market conditions and announced the delay of a large MDI project in Texas by 18 to 24 months. And the Wacker announced that it would be cutting its production workforce in response to an expected decrease in demand for polysilicon. Beyond 2020, this will be a healthy market and continued investment. For example, BSF has begun construction on a $10 billion petrochemical complex in China to be launched in 2022 and completed by 2030, supporting automotive electronics and the new energy of the vehicle industry. And we have healthy project activity in the U.S., like Rubicon, MDI expansion, the Shintech and for most other PVC projects, along with the Lyondell petrochemical project that's expected to complete in 2021. General industrial is another large market for us, with exposure to end applications, including pharmaceutical, pulp and paper, mining, industrial automation and transportation. For Crane, our sales declined in 2019 because of a non-repeat of a major 2018 pharmaceutical insulin project. Mid to long term, we expect pharmaceutical to grow at a 4% CAGR. Our smallest markets are oil and gas, and power, combined, represent 20% of our sales. The majority of our exposure to oil and gas is in refining, which declined in 2019 due to several refining turnaround delays in North America, hydrochloric acid, [ occulation ] and delayed coking units, where we have a strong installed base. Midterm, we expect slow market recovery with share gain opportunities. For example, our differentiated fully compliant API 641 XOMOX sleeved plug valve has positioned us to win in customers like Phillips 66, who are looking for solutions to reduce emissions. Outside of North America, we continue to see refining investments in Asia and Middle East, we have been successful winning new content in China with our Pressure Seal offerings and our new triple offset valve. Most of our power exposure is for nuclear service work in North America. With a smaller component providing equipment for coal and gas plants. As you know, [ plant ] closures are expected to continue as fossil fuels are replaced by renewables as technology and economics continue to improve. We don't expect a recovery any time soon in conventional power generation, although our exposure at this point is minimal and focused mainly on MRO. Our nuclear business is almost entirely service based. And we have been successful winning share and expect that to continue with our industry-leading service levels. On the commercial side of our business, we continue to see good trends in the U.S. municipal markets with a solid long-term outlook supported by an aging water infrastructure, that continues to need to be upgraded. In the nonresidential construction markets, last year, we saw robust growth in Canadian pipe valves and fittings, partially offset by weakening commercial construction demand. We expect stable but slightly slower markets going forward. Overall, based on the facts today, our core markets will be modestly down in 2020, but remain positive in the midterm and we will remain focused on outperforming of the market. How are we being successful driving share gain? Similar to what you'll hear across Crane in all of our businesses, well vetted strategy, having the right organization structure, aligning our top talent to our strategic priorities and executing with leadership cadence. At Crane Fluid Handling, we are investing in the future with 20 exciting breakthrough growth initiatives, focus on product innovation, customer excellence and localization. No doubt about it, it is working. Crane has outperformed our whole peers. Product innovation remains our top growth strategy. 3 breakthrough projects I highlighted last year are delivering outstanding results. Our triple offset valve grew 45% last year and achieved our planned targets. We are winning in chemical, petrochemical and refining, differentiated by our top tight inline seal, low torque and low emissions versus competition. As an example, BSF MDI polyurethane production was being shut down every year due to repeat failures in the bearings and leaking of competitor valves. Crane TOV was installed with no issues, saving BSF $5 million in lost production. In 2020, we are launching a size extension of our TOV up to 64 inches, increasing our served market by $100 million. Even before we formally launched this new size, we have already secured $1.2 million in orders from chemical companies in China, like Shaanxi Yanchang petrochemical, these are ethylene oxide and ethylene glycol applications where particles were causing competitor valves to jam and leak. Last year, I gave you a bold growth target of $40 million. And I am pleased we have raised this to $50 million. This is incredible work by this team. Another initiative I highlighted last year is our SITHE Chopper Pump. Of the estimated installed base of 650,000 waste water pumps, more than 25% of those clog on a monthly basis. We are gaining share because our solution dramatically reduces service calls, from 12 calls a year to 3 to 4. I am pleased with the success and in a very short period of time, we have created significant market momentum, exceeding plan targets and building our confidence in achieving $20 million of incremental growth, up from $10 million I told you last year. I also introduced you to a new and truly breakthrough opportunity. I was quite excited about it last year. I joked with you that you probably see a painted pipe, but I see an innovative solution that's going to generate $25 million of incremental growth. And that opens up $600 million market to us. The Resistoflex large diameter epoxy black pipe was successfully launched last year with shipments of $3 million. Impressive performance for a brand-new product, and it's just its first few months. One of the main orders was for the Duke Energy seawater cooling project. When the President of our process valve business and I met with the VP of Operations of the EPC responsible for this project. We explained the coal power epoxy pipe that was installed the prior year only lasted 8 months before it started to experience significant leakage. Our solution provides more resistance of delamination and corrosion and lasts 12x longer. This was incredibly successful, a wow factor by this team. We have sold to more than 20 different customers already in refining chemical power and wastewater and on track to deliver the $25 million that I mentioned last year. Now let me talk about some of our other new and truly breakthrough opportunities. In 2020, Crane will be starting a multiyear launch of a new range of metal seated ball valves, our Krombach brand already has a strong reputation in the top 10% of critical applications in petrochemical and refining markets. Our new range will open up 70% of the remaining applications and expand our addressable market by $475 million. We are accomplishing this by creating innovative next-generation solution with longer-lasting inline sealing and lower cork requirements for meeting our customers to use smaller actuation. Saving our customers money. This is an exciting new product and an example of how we are providing truly new and unique solutions to our existing loyal customers, we expect this to generate a $15 million of incremental sales. Another breakthrough initiative is the development of a high-efficiency motor for our pump business. As regulations increase, municipalities are listing higher efficiency solution as a requirement in their specifications. We have initiated a multiyear development project to create a differentiated solution that will leapfrog competition and expand our served market in the lift station, a market by $260 million. Consider this a $15 million incremental growth opportunity. We have had a great reoccurring revenue business selling mechanical pressure switches and niche industrial applications with an installed base of $4 million. That reoccurring core will remain a high-margin business for us. However, this year -- last year, I explained how we also are moving into higher growth, smart instrumentation with digital pressure transducers that provide industrial plants remote access to device configuration, diagnostics, preventive maintenance, ultimately reducing the operating cost for our customers. We just achieved a big milestone with a successful launch of a smart instrumentation, digital high-pressure transducer with the part protocol. Our confidence has grown, and we have increased our sales target from $7 million to $15 million with this product range. We continue to invest in geographic expansion and localization in higher growth markets. In India, our focus is share gain in the pharma market. We expanded our Sitara site to manufacture our aseptic diaphragm valve, improving our competitiveness with shorter lead times and better cost position. This has been highly successful in helping us win share. We are now localizing the same product into our Suzhou manufacturing site to gain share in the growing $40 million Chinese pharma market. Also in China, we are localizing our sleek plug valve product to improve lead times from 14 weeks to 3 and reducing cost by 40%. This will help us win share in the China chemical market, particularly for corrosive applications, including chlor-alkali, MDI, sulfuric acid, organic silicon, applications Crane already is a leader in other geographic regions. In the Middle East, we are growing our presence with a new greenfield operation in Saudi Arabia that is becoming an increasing requirement by our larger customers, such as Aramco, SABIC and Modi. It will reduce lead times by more than 60%, helped grow our MRO business and increase participation in chemical and petrochemical investments. Our localization efforts will deliver over $13 million by 2022. We have decades of history growing successfully through acquisitions in Fluid Handling and will continue to look for opportunities. Our approach is to prioritize on attractiveness, based on financial performance, positive growth drivers, ability to differentiate and price for value, but also extendability where we see runway for further deal flow availability and where crane can add value and differentiate itself by driving meaningful synergies to accelerate deals. Our latest acquisition, as you know, with CIRCOR's instrumentation and sampling business. This is a great addition to our process valve business, helping us provide a more comprehensive range of products and solutions to our existing customer base. This is already a well-run business, and we are very pleased and impressed. With the I&S management team. There are certainly areas where we see opportunities to make improvement in the Crane way, particularly through supply chain initiatives, working capital management and manufacturing efficiencies. The instrumentation and sampling area is one where we have a long-standing interest. And we already are looking at potential acquisitions to complement I&S business. Along with driving growth, Fluid Handling has a track record of margin expansion and we expect this to continue. 3 years ago, I highlighted the incredible operational improvement we have driven over the years, and told you we would grow margins 100 basis points on average per year and get back to mid teen margins, both of which we are achieving. And now, I am confident we will achieve record margins over the next couple of years. Our previously announced repositioning actions of consolidating 2 facilities has gone exceptionally well. Crane has maintained high customer service levels, now on track to generate $15 million of annualized savings. Last month, we announced further repositioning of our European operation that will generate an additional $10 million of savings. The vision remains to have future state consolidated factories that are streamlined, modernized centers of excellence that will reduce lead times and position us for future growth. Across Crane, we leverage a well-defined strategic sourcing process that has evolved for years. It starts with a common spend analysis tool providing valuable insight to every Crane supply chain professional globally. Cadence of commodity strategy development, commodity councils with shared spend across Crane, strong regional sourcing teams in China, India and Mexico. And we bring this all together with advanced technology tools, templates in a library that our associates can leverage. This ensures repeatable process execution and sustainable results. An example is the execution of our diaphragm valve sourcing project of 10 machine parts. This is where sites, multiple sites, work with our Mexico sourcing team, executing the Crane tollgate process in our iManage tool and leveraging global spend, resulting in $435,000 of savings, a 55% reduction, while also accelerating the project time line by 40%. At Crane, we have always strived to reduce waste in everything we do. This includes reducing our use of natural resources in proactive ways to protect our planet. Initiatives to lower energy consumption, lower emissions, lower consumption and recycle. One example is an automated coating process just installed that eliminates the need for manual dip coating of our water products. Which reduces the physical burden on our associates, eliminate emissions from escaping into the environment, consumes less energy, saves us $150,000 per year and ensures optimal coating to our customers. These are win-win situations having a positive impact on our environment, our customers, our associates and our shareholders. At the same time, every Crane site strives for productivity and reducing waste. We honor the spirit of our Crane's philanthropy by encouraging our associates around the world to give back to their local communities. We allow every associate to take paid time-off during the week. So that they can volunteer at local charities. For Fluid Handling, this has included Habitat for Humanity, homeless shelters, providing food for women centers, assistance in helping fight the fires in Australia, helping orphan children in India, just to name a few. Our associates find this rewarding. It builds teamwork among our Crane associates, and they take enormous pride in their contributions. In summary, in 2019, Fluid Handling outgrew the market, continued strong execution, resulting in 18% operating profit improvement. This was a 55% leverage on core growth. 107% free cash flow conversion and we are achieving our commitment of 100 basis points improvement on average per year. Impressive results, incredibly proud of this global team. Today, I highlighted some of our exciting prospects and investments into continuing the future share gains. And how this is an attractive high ROI business platform positioned for exciting inorganic growth. Thank you for your time. I am open for questions.

Clifford then Nathan.

Cliff Ransom. I'm always amazed that your $1 billion portfolio is made up of so many relatively small [ new development ] products. Have you ever had a $100 million product come out of your new product development process?

We're building that right now with TOV, as I mentioned, I mean, over a short period of time, launching it 3 years ago and now saying within the next 3 years, it's going to be $50 million, I think, is quite impressive and shows what we can do. With regards to the business, there's pluses and minuses of these initiatives. When you have a niche, you don't have -- you get a high margin. And -- but it's harder to grow. And I think that relates to your question of how, from an NPD perspective, can we grow in some higher markets that might be larger served, and you can see that on the ball valve, we're opening up $475 million, on the Resistoflex line pipe, we're opening up a $300 million market, TOV $900 million market. So we're going after some of these driven by [ treasure ] deployment on how can we really drive breakthrough growth within the business. And I think you'll start to see more of this as we go the next 5, 10 years of NPDs that are going to generate significant growth.

I wasn't being critical when I asked that question. I like that business model. So I understand it. How have you used the Crane business system to enhance, accelerate, diversify your NPD processes.

I'll leave the mic with Cliff because I have a question for him after this.

You do this to me all the time.

Any others that want to ask me questions, just to be prepared for Max to ask you a question. Okay. So the question was, how do we leverage CBS into new product development. And clearly, we have a lot going on. We've always been good. For quite some time we have continued to advance, improve, rev level, train, educate on our NPD tollgate process. And we've gained success over time. At the same time, and we constantly look at how do we improve it? Like we do across Crane everything we do. The -- within NPD, a president and myself, we went to -- for those familiar with Scrum and Agile, very popular in Silicon Valley and software, where they really significantly reduced software development time. And -- but it's not very well used in industrial products. So we went and spent the time with the President of scrum.org, he brought in experts, and we just spent a day just really trying to understand how can we take this from a completely different industry that's been working and apply it to industrial products. And so we've taken the best parts of our NPD tollgate process, which has got us to where we are successfully to now, how do we take this concept, where it's a 2 week sprints, team based prioritize on what's critical, bringing customer involvement as soon as possible, test as soon as possible. Do your prototypes as soon as possible so that you can learn, you can make decisions. These 2 week sprints, our President sit on them. I sit on them. And if we're not there, teams are making decisions anyway. Because that's what they're all about. What do you need to get accomplished? It's the kaizen approach, Cliff, how do you focus a team? How do you drive the improvement? What do you need to achieve? And you better get it done by Friday. And we're going to have a report out...

All right. Easy now. Easy. He's getting exciting. Okay, so my question to Cliff Ransom, Ransom Research. [ Talking about lean ], although our businesses are much more holistic than just lean. There's these rumors you went to school with [indiscernible] many years ago. No one knows the space better. Heavy privilege of participating in one of our president's kaizen, so my question to you, is have you seen any company deploy what you saw in that week, better than what you saw ever in your career? That's my question for you.

I think I would answer it by saying that in -- I had a period in lean thinking. It's not who compares to whom. It's where you're going versus yourself because it's -- you are your own benchmark. Your customers are your benchmark. And I would say, what I saw going on in that President's kaizen was very, very impressive. Probably find something or some other company in some other product line, I don't think there's -- is there any point in doing that, Max? It's -- I mean, you've told me you don't want to go for prizes. And I think that's true in lean all the time. So I think it's the progress that you make -- the most amazing thing about your lean journey is you've spread it across all of your divisions, all of your segments over the last 10 years. And it's get better, everybody gets better.

You should run for politics. This is a good nonanswer. You never experienced anything like what you experienced that week. Next question.

Cliff will take any questions you have for me. If I take the 3 new products that you put up there with those revenue targets, localization and add all of those together, over the next few years, that will probably total about 3 points of growth a year. I think I reached your slide for the medium-term target, you had 2% to 4% for Fluid Handling. But you're also talking about being relatively positive on the underlying markets in the medium term. Which would suggest that maybe 2% to 4% is a little low on the medium-term growth target for Fluid Handling over the next few years. So any comments you could make around that?

Yes. Yes. So combined are $138 million. The -- from when we launched it. The -- and I hope you're right. I hope it is low. When we look at those targets, that was from when we launched. And so it's not necessarily incremental, just moving forward. Because I want to be consistent with what I talked about in previous years. So for example, TOV. So TOV, $50 million. So I first introduced that to you a couple of years ago. And first year was $3 million, then we went to $1.5 million, then we went to $6 million 2 years ago. Last year was $12 million. This year is going to be $18 million to $20 million. So when you look at it from that perspective, it gives a little more understanding. But clearly, I think we have the initiatives to outgrow what we said.

Fair enough. Maybe a question on the supply chain here and the impact of shutdowns in China and those things. And Max, you said that Fluid Handling was probably the most at risk from those kinds of interruptions. Can you maybe give us a little more color on what types of products, where inventory levels are, how long it would be until you would experience disruption around that? Just anything you can help us to frame the risk around that?

Yes. No, very good. So look, we were on this early, starting in January. We have a strong sourcing team in China of about 50 individuals. Whether it's commodity managers or quality team. So even before the Chinese New Year got over with, our team working with each of our business units were on the phone evaluating, talking with every one of our suppliers. We have 192 suppliers in China. From that, we were evaluating when are they planned to come back? When are they allowed to come back, what's the status of their associates? And we have had daily updates since then. Now the good news for us is we don't have any suppliers in Wuhan. As you know, Wuhan is really known for automotive. Now we could have some subsuppliers there, but we're also tracking to that level. And we have our own manufacturing sites. So we have a very good perspective of what's happening within our own facilities, which you can see it's happened with the supply base as well. So with that, we're seeing, as Max mentioned, maybe you were at 50% of output, maybe at best, but also Max mentioned, and I hate to say it's fortunate on -- in a situation like this. But with the Chinese New Year you naturally build up inventory. And so we did that. And so that helps in regard to this ramp-up.

If I could, Brad, too. Just to give Nathan, I think, just looking for just a little more insight about any regional for what we're seeing, which is over generalizing in Fluid Handling. If you looked at what's happening, there's a couple of -- so subsuppliers who to suppliers to our suppliers and we're seeing some foundries starting up slower. So it starts right at the very beginning. So we're seeing a couple of foundries in certain regions, the Xincheng region, which is outside of Beijing is coming back a little slower than in other regions. Tianjin is actually coming back quite quickly, very minimal impact. So it really is quite varied across the country. And it really depends on the extent of your subsuppliers, and where your main supplier is located so it is -- it's very hard to come up with one answer, and it really does require on a case-by-case basis, an analysis of what's impacting you. Some of the businesses I thought might be impacted more are not going to be impacted at all. Others that I didn't appreciate the subsuppliers. We're seeing some surprises. So that's kind of the dynamic that's taking place. Anything else besides subsuppliers?

Logistics. Even when our subsuppliers might be coming up there's roads that are just shut down. Trucks can get in, they can't it out. And so how the logistics play out in making sure you have parts. So even when you do have the associates in your manufacturing facility they have the parts to build.

And even that's changing very rapidly. Every day, it's a new decision made by local authorities of what routes are now open, how someone from a quarantine region or a more tightly controlled region is able to now travel to another region to drive transportation truck so it's unfolding very, very rapidly. But I would say, improving very, very rapidly within China. Nathan, does that help? Ken?

I just wondered if you could provide some comments on pricing. I mean, your end markets in a number of areas, continue to probably underperform in terms of growth relative to what we would have thought over the last few years. You're obviously driving margin expansion. And I'm curious in this environment, what percentage of your growth in the pricing environment, how much are you getting from pricing. You're obviously getting some success there. But if you could just provide a little bit more detail on that, that would be great?

Yes, we are being successful with pricing. Probably because we provide excellent service levels, provide best products. And so -- and in niche markets. So first, let me start with the tariffs, right, and the impact of tariffs and being able to get pricing for those, now very different by market by competitive situation. But most of the pricing related to our approach was not necessarily to link it directly to a tariffs, of which we think we'll be able to maintain moving forward. Last year, there were some inflationary pressures. In total, $8 million of inflation last year. Tariffs was $5 million, and we got pricing for those. So we're by market, product management, driving specific pricing actions, which we're reviewing on a monthly basis per vertical per market. And having some success, and that's part of the reason for the 190 basis point improvement in margin.

And as I think about the growth, not just in '20, but across the cycle. Is it the appropriate framework to still think of that as roughly 50% share versus sort of 50% underlying demand or core growth?

Yes, that's a good assumption.

I had 3 questions. First is you talked about the acceleration in the second quarter versus the first quarter in terms of potential impact from COVID-19, is that because that's related to drawing down your initial safety stocks for the Lunar holiday, and then in turn, you have a gap and then you hopefully, things get better, and that's why the second quarter is kind of...

Correct. That's a high-level summary.

The second would be, have you ever thought about moving your supply chain out of China into Southeast Asia, Mexico, Eastern Europe, because last year, we had tariffs as a disruption. This year, we've got obviously, the virus. Is there an economic…

I would say that we've always had a strategic approach. Brad mentioned our strategic supply chain strategy, sourcing. It starts with we don't default to any one country. We look at what country makes the most sense for a number of reasons. So we have just the same sourcing team he talked about in China, we have in India, we have in Mexico, we look globally on a regular basis. We have a very disparate and diverse range. I would say that we're not overweight on any one country. However, the world anymore is so tightly linked more than ever even if you said you were getting away from any one country. So in many cases, some subsuppliers -- the world's too connected anymore.

Okay.

That's one thing, that this is going to be difficult to unravel in the future.

Last question would be, as you've got all these new products and initiatives to improve margins, what is the future runway for making your products able to be either connected or smart so that, in a digital economy, you can provide value beyond physical product or the service or the reliability or on time for actionable insights to operate them with greater utility and functionality for your customers. Is that on the radar screen at this point?

The -- let me answer it a couple of ways. So from a valve perspective, I don't necessarily see the valve specifically getting connected. Now the top works on -- the top like with our Westlock business, that's where we're starting to come out with more protocols for connectivity, information, sensing, connecting to larger systems in a plant. So that were seen as growth opportunity. There's NPD projects related to that. We have 6 of them that I didn't even mention here. I talked about the -- a pressure transducer, smart instrumentation where, in the past, we've been mechanical, now we're going into smart instrumentation. That's all about connectivity. Our launch was in oil and gas. That was very successful last year, and now we're taking that, expanding the portfolio into industrial applications. On pumps, part of the -- of how do we accelerate, we're not a large -- we're a smaller player in pumps. So how do we differentiate ourselves? We differentiate ourselves with nonclogging. But there's other aspects of how we're trying to differentiate, where we're putting a remote access onto -- in connecting the pump. So when we go out to a municipality, we're being able to give that information to the municipality. Let's get on the pilot. Let's prove to you that we're not going to clog. And it helps them in regard to their service levels plus then helps us in getting into new opportunities.

I just asked because in 5 years when 5G is here and everything is connected, you don't want to have the best analog devices that are missing a big portion of being able to create value for customers.

Point taken. Any other questions? Rob, last question, we need to move on to A&E if we can.

Sure. Just a couple on margin. So your range for the segment, 13% to 18%, you're at 14% now. Curious how much more upside there is assuming the end markets remain flat.

Remaining that end markets remained flat.

Meaning to get further up into that 13% to 18% range, you would now start to need some help from volume versus just -- market volume as opposed to just other initiatives you have in front of you.

So we have a leverage from share gain. So even if market is down, we think we can pull in 2 to 3 points of share gain and then get leverage from that. That with a combination of continued driving productivity within our operations, whether that's driving our future factory visions or leaning out our value streams, driving material cost savings, I think if there's 75 to 100 basis point improvement that we can get and still kind of deliver on the commitment of, on average, 100 basis points per year.

Okay, Rob, what I would add is one of the elements that Brad touched upon during his prepared remarks was repositioning benefits from the actions we just took that are going to benefit $10 million worth in this business, really starting in probably towards the end of or middle of '21.

Yes.

So there's...

1.5 next year, 0.5 in '22.

So mostly in '22, but that's added runway. The other thing I would say is that in all the NPD initiatives that he highlighted, it's about growth, but it's also a lot of that -- those initiatives drive cost out of the product as well. So the profitability of that -- of those share gains that he mentions is also greater.