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Greetings, and welcome to Crane Co. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jason Feldman, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good day, everyone. Welcome to our fourth quarter 2021 earnings release conference call. I'm Jason Feldman, Vice President of Investor Relations. On our call this morning, we have Max Mitchell, our President and Chief Executive Officer; and Rich Maue, our Senior Vice President and Chief Financial Officer. We'll start off our call with a few prepared remarks, after which we will respond to questions.
Just a reminder that the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers and tables at the end of our press release and accompanying slide presentation, both of which are available on our website at www.craneco.com in the Investor Relations section.
Please also mark your calendars for our March 30 Investor Day event. We expect to host this event in person in New York City. Please contact me directly if you would like details. Now let me turn the call over to Max.
Thank you, Jason. 2021 was yet another year with an extremely difficult operating environment, but one in which we drove phenomenal results. I want to start by thanking our teams globally across Crane that drove these results through another year with COVID-related uncertainty, supply chain challenges, rapid inflation among other difficulties.
We have worked along with the full management team to protect our associates, both physically and financially as well as possible. And 2021 was the second year in a row where our teams had to work through numerous personal sacrifices and challenges while still protecting our customers and creating value for all our stakeholders.
Despite all of these challenges, our combined efforts drove impressive results. Record adjusted EPS of $6.55 increased 87% compared to 2020. Record operating margin of 15.8% and record free cash flow of $415 million, which was 107% of adjusted net income. For the fourth quarter specifically, adjusted EPS was $1.25 compared to the $0.92 in the fourth quarter of last year.
Let me put our performance into perspective, a few different ways. First, our original 2021 guidance midpoint was $5. That guidance included $0.44 of earnings contribution from Engineered Materials. So we delivered approximately $2 in EPS better than our original guidance on a comparable basis. Second, our 2021 results were better than prior pre-COVID peak in 2019. Again, results in 2021 better than prior pre-COVID peak in 2019. Excluding Engineered Materials in both periods, 2021 adjusted EPS of $6.55 was 15% or about $0.86 higher than the prior peak, even though many end markets remain below 2019 demand levels.
Remember, our Aerospace & Electronics business in 2021 was still approximately $150 million in sales and $80 million in operating profit below 2019 levels. That's about $1 of EPS to be realized over the next two to three years on top of the strong long-term growth profile of our defense business.
At Payment & Merchandising Technologies, after adjusting for the Cummins Allison acquisition, Crane Payment Innovations was still almost $200 million below pre-COVID levels, with more than half of that amount in our high-margin Payment Solutions business. This business continues to benefit from very favorable long-term macro drivers that are accelerating, given global labor constraints and wage inflation. This business also has a strong growth path from both cyclical and secular drivers.
And in Process Flow Technologies, while total acquisition-adjusted sales were similar to pre-COVID levels last year, the recent strength has been driven by the commercial portion of our business, with the high leverage process valve business still in the early stages of a recovery. So bottom line, performance already better than pre-COVID with a cyclical recovery still to come, along with our accelerating results from our growth initiatives, driven by a combination of strong execution on productivity, while continuing to invest across the business.
Our currency business certainly helped our performance last year, partly driven by COVID-related demand but also critically by the enormous improvements we have made across this business in the four years since the acquisition, huge improvements in consistency of execution, quality, waste reduction and productivity, but also a fundamental shift in the commercial focus of the business, being very intentional about what business to pursue, customer segmentation and more clearly articulating our extremely powerful value proposition and pricing accordingly.
And third, we achieved this record performance during a difficult period with numerous challenges. I won't enumerate them again right now. But the key message is that we have proven our ability to execute and grow even in this challenging environment, and we have not cut any growth investments to achieve our strong financial results, and you can see that in our gross margin reaching record levels despite significant inflation, solid quality of earnings as the EPS growth did not come from lower ES&A.
Building on our record 2021 performance, our initial 2022 adjusted EPS guidance is $7 to $7.40, which reflects 10% EPS growth at the midpoint, with core sales growth of 4% to 6%. We have been extremely transparent over the last two years, giving granular guidance in 2020 when few others were willing to do so. And we have consistently shared updates and changes to our guidance as the environment has evolved. This guidance is still being issued in a period of heightened uncertainty, but we have demonstrated our ability to execute and grow even with unexpected developments and challenges.
Our guidance does not assume any material change in the operating environment. Just a continuation of the same challenges related to COVID variants, infection waves, sporadic supply chain constraints, inflation. We believe that underlying demand across most of our businesses could support a higher level of sales but will be constrained by the supply chain. It's very early in the year, and this is the guidance range that we have line of sight of today.
Our excellent performance in 2021 and our newly issued solid outlook provides all of you further evidence of our differentiated execution and the strength of our underlying businesses. And while some investors are starting to notice, as you can see in our near record stock price, we see much further upside in multiple expansion as we continue to execute on our full strategy.
So let me reiterate again the message that we have been consistently communicating for the last many years, we are executing on our long-term new product and technology road maps, innovating, developing new products and solutions to provide value for our customers. We are also executing on numerous growth initiatives across our businesses, focused on commercial excellence, and we operate with a consistent cadence and discipline of the Crane business system to drive growth, productivity and cost savings.
We have demonstrated an ability to balance those objectives extremely well, delivering on margins and free cash flow while maintaining 100% of our investments in strategic growth initiatives throughout the entirety of the pandemic. We have driven and we will continue to drive above-market growth. Paired with the market recovery and our consistent execution, we are very excited about our growth prospects and solid operating leverage driving substantial growth in free cash flow. Credibly delivering on expectations, I’ve discussed how Crane was at an inflection point for accelerating growth after years of organic investments and consistently excellent execution.
Over that time, you have seen more and more evidence supporting this view. We will continue to execute on our investor thesis. We are well-positioned for accelerating organic growth as our end markets continue to recover. We are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development and commercial excellence.
Solid execution continues to leverage that growth into strong earnings and free cash generation, which provides substantial flexibility for capital deployment from acquisitions and portfolio shaping to repurchases and dividends. Continued evidence of the value we create through acquisitions with stellar performance at Crane Currency, Cummins Allison and instrumentation and sampling. And all supported by the cadence and disciplined foundation of the Crane Business System as well as our holistic commitment to ethics, philanthropy, sustainability and equality.
Management and the Board’s confidence in this thesis is reflected in the $300 million share repurchase authorization we announced last quarter, as well as yesterday’s announcement that we are increasing the dividend rate by 9% inflection, we have clear momentum with increasing traction from our growth initiatives, and we will continue to generate substantial and sustainable value for all of our stakeholders.
At this point, I’ll turn it over to Rich for some additional financial commentary. Rich?
Thank you, Max, and good morning, everyone. As usual, I’ll be providing segment comments that will compare the fourth quarter of 2021 to 2020, excluding special items, as outlined in our press release and slide presentation. Before I begin, I would like to reiterate Max’s comments, the effort from our teams over the last two years in particular has just been amazing to watch and I’m incredibly proud to be part of this organization with so many dedicated and committed associates. Their efforts are clearly evident in the outstanding performance we delivered last year, without question, the best performance I have seen in my time at Crane.
So to start, at Aerospace & Electronics, fourth quarter sales increased 10% to $158 million. Segment margins of 13.1% increased 280 basis points. Margins declined sequentially, but we did tell you last quarter that we were expecting that sequential decline based primarily on shipment timing and mix. I expect margins to be back to the high teens by next quarter.
Total aftermarket sales in the quarter increased 25% compared to last year, driven by a 59% increase in the commercial aftermarket and a mid-teens decline in military aftermarket. Commercial OE sales increased 26% with the defense OE business down 10%, reflecting shipment timing.
On a full year basis, 2021 showed that we are well on our way to a recovery in our key aerospace end markets. Full year commercial OE sales increased slightly with commercial aftermarket up 12%, even though both had relatively tough comparisons in the first quarter of 2021. This recovery was faster than we expected and better than we guided to in January of last year. We expect accelerating growth as we head into 2022.
On the defense side of the business, sales declined as expected in the high-single digit range following three consecutive years of double-digit growth. However, as we discussed at last May’s Aerospace Investor Day event, we are extremely well-positioned in this market with numerous large programs ramping up over the course of the next few years. Importantly, most of these new programs, particularly for ground based radar systems are entirely new for us, where we had no content on the prior generation of systems.
I’m also extremely pleased this morning to announce that during last quarter, we were awarded the single largest military modernization and upgrade program in the business’ history. You may recall that several years ago, we delivered on a large program to upgrade the brake control systems on the entire fleet of the U.S. C-130s. A few years after that, we had a similar program for the B-52 fleet. This new award is to upgrade the brake controls on the U.S. Air Force’s fleet of F-16s, which is the largest potential platform based on a number of aircraft in service.
Delivery in the U.S. starts in 2026, and this program also creates the potential for substantial incremental foreign military sales with numerous other countries that have sizable fleets of the F-16. Across this business, we expect continued accelerating long-term growth resulting from years of consistent investment in technology. Specifically for 2022, we expect approximately 8% sales growth in this business with margins of about 18% with a full recovery back to pre-COVID levels in the late 2023 or early 2024 time frame.
Moving to Process Flow Technologies. Sales of $299 million increased 16%, driven by a 15% increase in core sales and 1% of favorable foreign exchange. Process Flow Technologies operating profit increased 55% to $43 million with operating margins of 14.3%, up 360 basis points compared to last year driven primarily by higher volumes. Sequentially compared to the third quarter, core backlog was up 2% and core orders were flat despite normal seasonality that would otherwise suggest a decline in the quarter.
On a year-over-year basis, core backlog is up 16% and now at a record high. All great leading indicators suggesting that we will see continued strong growth into 2022 and 2023 led by our process business where overall order rates have already recovered to slightly above 2019 levels. The strength is being led by the chemical, pharmaceutical and general industrial end markets with power and refining still soft.
In North America, MRO activity is stable, but we have seen an uptick in order activity for new projects and our funnel of future projects is up 60% year-over-year driven heavily by the chemical market. In Europe, we are seeing early signs of projects emerging with the focus shifting from debottlenecking activity to some early planning for greenfield sites. And in China, we are seeing good chemical project activity.
For the Commercial side of the business, we continue to see solid demand in our domestic water pump business with stable conditions for our UK building services and water businesses. We do expect a modest decline in Canada, where we had a truly amazing 2021 with core growth in the high 20% range. From an initiative perspective, we are seeing further success with quick adoption and commercialization with new products in the process market, including our FK-TrieX and tough seat metal seated ball valve, which we have talked about before.
At our pumps business, our Razor residential grinder pump launched in early 2021 and is seeing strong sales with a unique cutting technology that minimizes expensive service calls. We are also doing well with our new NV high efficiency motor platform that we launched last July with great interest and order momentum. We will discuss these growth opportunities and others in more detail at our Investor Day event later this quarter.
For full year 2022, we expect approximately 3% core growth led by our process business and a 2% foreign exchange headwind. We believe demand supports the potential for higher growth but the supply chain is likely to be a constraint. Full year margins should increase to approximately 15.5%. Our prior record margin for this segment was 15% in 2013, when our sales were approximately $80 million higher than our guidance for next year. This reflects our consistent focus on driving productivity and more importantly, the positive margin benefits from several years of new product development and commercialization. Our new product development does more than drive top line growth, our new products have compelling value propositions that command very attractive margin profiles.
At Payment & Merchandising Technologies, sales of $314 million in the quarter increased 10% compared to the prior year with segment margins of 18.5% increasing 380 basis points. The progress in this business during the year has been just incredible, record full year segment margins of 22.6% and record sales at Crane Currency.
We continue to see strong trends at Crane Payment Innovations and we expect the greatest medium-term growth in retail driven by self checkout’s strong return on investment, even more valuable today in a period of labor shortages and wage inflation. In addition to the traditional categories of customers, we are seeing growing strength from convenience stores and discount stores as well as interest in alternative formats, such as our PayTower and Paypod retail solutions.
For these solutions, we originally focused on the European and Japanese markets, but over the last year, we have gained substantial traction in North America, particularly with the convenience store market, and we believe we are on track for our sales of these products to increase three to four times in 2022.
In addition to the strength at retail, we continue to gain traction at gaming, where we now have a compliant cashless payment option, a full suite of connectivity solutions and now with Cummins Allison, higher-speed counting and validation products along with service-based solutions. And in the quarter, we continued to see recovery across vending, financial services and transportation.
At Crane Currency, coming off a stellar year, we recently received the formal yearly currency order from the Federal Reserve, no surprises, consistent with the message we have conveyed for a few quarters now. Demand for U.S. currency remains elevated and we expect volumes in 2022 to remain similar to 2021. In addition to that strong core U.S. government business, we continue working to secure our position on the new series of bank notes that will be rolled out over the next several years.
On the international side, we continue to win new business, with twice the number of denominations specifying our micro-optic security solutions in 2021 compared to our typical average. When our technology is specified in a new denomination, it typically drives recurring revenue from reprints for more than seven years. So this is great news.
However, as you know, this is a lumpy business at times. And from a timing perspective, international sales will decline somewhat in the first half of 2022 and then start to pick up again in the second half of the year and into 2023. For the overall segment in full year 2022, we expect approximately 5% core sales growth, partially offset by a foreign exchange headwind of about 150 basis points. We also expect very strong segment margins in the 22% range.
Turning now to more detail on our total company results and guidance. In the fourth quarter, our non-GAAP tax rate was 13.6% and 17.5% on a full year basis, exactly in line with the guidance we provided last quarter. As we have explained previously, our 2021 tax rate was lower than normal, primarily due to the expiration of the statute of limitations on certain tax items.
For 2022, we expect to revert to a normalized tax rate of approximately 21%. Free cash flow from continuing operations for the full year was extremely strong at a record $415 million and which reflects 107% conversion of adjusted net income. In addition to solid free cash generation, our balance sheet is stronger than ever. As of the end of the year, we had $479 million of cash on hand and long-term debt of $842 million with no short-term debt outstanding. Total net debt is just $363 million.
As a reminder, on May 24, we announced that we had signed an agreement to sell our Engineered Materials segment for $360 million. The regulatory clearance process is ongoing. We have completed our response to information requests from the Department of Justice, and we expect approval to close sometime in March. When the transaction closes, we expect proceeds net of tax to be approximately $320 million, which is not yet reflected in the balance sheet metrics I just mentioned.
Last quarter, we announced an authorization for a $300 million share repurchase program. We continue to believe that this program properly balances two objectives, maintaining balance sheet efficiency and preserving ample financial flexibility for the volume of M&A activity we believe is actionable, while also providing an attractive return of cash to shareholders.
During the fourth quarter, we spent just under $100 million on repurchases, leaving approximately $200 million remaining under our authorization. We believe that share repurchases are advantageous at this time, given our very high confidence in our medium- and long-term outlook, paired with our current discount to both trading peers and fully synergized acquisition multiples.
We also announced yesterday a 9% increase to our quarterly dividend reflecting management and the Board’s confidence in our medium and long-term outlook. Taken together, recent events including the Engineered Materials sale, the largest repurchase authorization in our history, and this dividend increase demonstrate that we continue to evaluate all capital deployment and strategic portfolio options to drive shareholder returns.
Moving to the overall outlook for 2022, as Max mentioned, our adjusted EPS guidance is $7 to $7.40, reflecting 10% earnings growth at the midpoint. We have provided additional details in the slide presentation but this guidance assumes core sales growth of 4% to 6%, partially offset by a 150 basis point headwind from foreign exchange.
Corporate expenses will decline to a more normal $75 million range, with non-operating expenses declining slightly to $26 million, a tax rate of 21% and an expected share count of 57 million. For free cash flow, guidance is a range of $350 million to $390 million, modestly lower than our 2021 actuals, primarily due to timing-related items.
On Slide 15 in our slide presentation, you can see that from 2016, through our 2022 guidance, we have averaged approximately 100% free cash flow conversion. Regarding the cadence of earnings, sales and EPS will accelerate gradually throughout the course of the year. There is no hockey stick expected for the second half, but the first quarter will be modestly lower than the quarters that follow, for sales, margins and EPS, particularly for aerospace and electronics.
Overall, a really incredible year in 2021 and a very strong outlook for 2022 and beyond. We are poised for yet another year of success, and we look forward to discussing our story in more detail at our March 30 Investor Day event.
Operator, we are now ready to take our first question.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Damian Karas with UBS. Please go ahead.
Good morning, Damian.
Hey. Good morning, everyone. Congrats on the quarter.
Thank you.
So I wanted to ask you about the EPS growth guidance here. I get kind of up 6% if you adjust for the buyback, just seems a little disconnected from your positive comments about the demand outlook. I think the order rates that you’re seeing, the backlog expansion as well. Could you maybe just elaborate on that $7 to $7.40 range, quantified to the extent you can on the supply chain constraints you’re factoring in and any other key risks? And maybe just talk about any areas where you suspect you’d have a chance to outperform there?
Sure. Well, just to your question on the EPS guide and the components, the way I would look at this, you mentioned the shares being lower from the buyback. I would also point out that our tax rate is going to be notably higher. So they substantially offset one another. You look at the business unit performance together with the lower corporate costs, then essentially we have a 9% increase in core earnings growth. So that’s the way we’re looking at it.
As I – we had an outstanding performance in 2021, Damian, just exceptional across the board, margins, free cash flow, growth initiatives, you name it. So, we do feel really good about 2022 and 2023 from a demand point of view without a doubt. So, our commentary, as we reflected on the call here in our prepared remarks, is clearly should be a takeaway for you in that regard as it relates to demand. Now, so the reason why the guide might not be higher than you otherwise would expect is entirely due to the supply chain. So, we think it’s a balanced view. If things do improve, we could see a path to another couple of points of growth, frankly, as we’re sitting here today.
Damian, with the supply chain, many others are talking about this in terms of why they’re missing or what are the challenges. And I would call it out again that you’re not hearing that from Crane. We’re managing with the challenges, and we’re doing an incredible job. Our teams are doing an incredible job. What’s within our control, there’s a significant amount of uncertainty. I think – I mean there’s no news here. We just read the newspaper and the volatility every day. But inflation rates, rate adjustments, Fed moves, what happens, the demand is there today, supply is being constrained, not much is changing on that front in the near term that we can see for the balance – certainly from a six month timeframe for sure.
From logistics challenges, port congestion, I mean everything that we all know and are dealing with it. We – I think what we’ve done well at Crane is manage through this. We understand it. We’re not putting undue burden on our team associates facilities, while we’re communicating really well with our customers, being intentional on the decisions we make. And I think that we’ve really given a good, solid guide based on this environment. If you believe the environment is going to improve. I mean, you can model it and make your assumptions. And as Rich said, we have the opportunity to do better. But it really comes down to what’s outside of our control related to your economic assumptions.
Understood. And then I think you laid out the currency pieces for this year. Maybe you could just further spell out your growth outlook, what you’re expecting for CPI and thinking about the various end markets there?
And Rich, I guess regarding your comments on Paypod in the U.S., I was able to see some of those products at NRF Expo last week. I was wondering if you could maybe just elaborate on that market opportunity for Paypod in the U.S. and kind of where you’re seeing the business gaining some traction?
Yes. So first on the differential growth rates. So the U.S. government, as Richard said in his prepared remarks, for currency, we expect to be about flat. International currency down at least in the first half, and then we see things picking up. And so that implies that CPI should be growing kind of in the low teens range. And it’s pretty broad-based, right? I mean it’s certainly retail and vending are probably the two leaders, but really good solid growth out of gaming and financial services as well. Rich, on the – do you want to elaborate on the Paypod?
Yes, I mean on the Paypod, look, we’re – like I said in our prepared remarks that our intention to be in different jurisdictions now in the U.S. we see – look, I think an excellent opportunity with the smaller format for convenience stores. It’s an opportunity that just given the success we started to see out in the other geographies that we could capitalize on here. So, we do see, I think, an excellent opportunity to continue to push ourselves in retail into different formats. I would say it’s – while a little bit early, we feel like we have a funnel here that’s substantial enough for us to have mentioned this on the call today.
Great. Appreciate the color guys. Best of luck.
Thank you. The next question is from Kristine Liwag with Morgan Stanley. Please go ahead.
Kristine, welcome back.
Yes, thanks. Following up on the supply chain question, I have a multipart question here. Can you provide more color on the actions you’ve taken to manage your supply chain and labor issues? I mean, you’ve highlighted that you’ve done better than everybody else. So, what makes you different? And then also, if the raw materials and labor inflation stay higher for longer, do you anticipate that your supply chain can manage as well as you have?
What I think we’re doing better than others from – throughout the two years, the last two years is understanding the reality of the situation and not anticipating it to improve and making it ugly and getting the facts and understanding the true forecast, which allowed us to – whether it was – we have such diverse businesses, but it could be everything, from inventory moves to substitution, to finding alternative sources of supply, nothing that everyone else isn’t trying to do and having to do today. I think we started earlier and balance it against our forecast and expectations versus assuming improvement and finding out that we’re getting surprised. That’s the general supply chain comment in general and some of the actions we’ve taken. On the inflation side?
I mean, I think I’ll chime in on the inflation side. Look, we’re not planning for this to ease up. We see this being a continuing challenge through the balance of the year. And I think your question was centered around with that in mind and the supply chain constraints that exist today, can we still continue to operate the way we are. And just – I would reiterate everything that Max just said, yes, we believe we can, and we will. I think the cadence that we have put in place over the last 18 months when we started to see this all come to pass is going to stick with us here. I think we’ve got an excellent set of teams across the globe that are very tight to all these different variables that we’re seeing, whether it is supply chain, whether it’s labor, what jurisdiction and so forth. So, we feel good about being able to continue to tackle this through 2022 – at least through 2022.
Great. And how much conservatism is baked in to your 2022 guide? Is that what’s driving the range of $7 to $7.40?
I would say that the range is based – is effectively both sides of supply chain. To the extent that things ease up, which we really expect, we feel like we have that upside opportunity. As I mentioned in my prepared remark – within my – and in response to the first question, we see a couple of points of potential growth to the extent that, that eases up.
I would hesitate to call it conservative. I mean, again, based on what we see and know today, we feel confident in that range. Our assumptions are the current environment continues for all of 2022. So again, based on your own views of the economy recovery, if things improve, both on the demand side, supply chain, air traffic, which I know we’re all hopeful for, the news that we want to convey is that we feel solid in this range, given things continue at the same level through all of 2022. I hope that helps.
That’s really helpful, Max. Yes, that helps a lot. And if I could squeeze one last one. When you look at your 2022 segment margin guide and your revenue, this incremental margins of about 35%, I mean this is trending above your historical target, which is in the 20s. And so looking beyond 2022, and I’m sorry if I’m looking ahead beyond your guide, but is this 35% run rate how we should think about the business today? I mean, after not having engineered materials anymore with your cost reduction and also all these new products you have rolling in? Is that the 30-ish range more of how the business is running going forward?
Kristine, yes, I would absolutely say that. We feel like we've made a bit of a step change with respect to our leverage rate. You mentioned new products that's absolutely a component of this. If you look at our gross margins over the last, call it four years and frankly, in our 2022 guide, we see just continued upward momentum even in this inflationary environment. So that's a combination of obviously being able to offset with price, but it's really the new product development initiatives and the value that's driven by those new products. So 35% is something that we would expect to see.
If you look beyond 2022 and you're in 2023, the other thing I would point to is the two highest margin businesses in Crane still have substantial recovery to go. So aerospace, the commercial aerospace portion of A&E and then on the payment side of the business, Crane Payment Innovations still has a very long way to go. So there's some excitement, I would say, around 2023, maybe even bleeding into 2024 on the leverage rates that will drive those margins.
Great. Thank you very much for the color guys.
You’re welcome.
Thank you. The next question is from the line of Matt Summerville with D.A. Davidson. Please go ahead.
Thanks, good morning. A couple of questions, getting back to the payment business. For lack of a better word, you can sort of drive a truck through the low and the high end of the print order range, provided several weeks back. What in your mind ultimately flexes actual production to the low end versus the high end? What are the key constraints here? And I realize we’re planning for, you're planning for it being flattish. But at the high-end, it's up some 30% or maybe even more. So help me understand how you see that rolling forward?
First, Matt, I'd give a nod to – read some of your research, both on cash as well as the retail segment. And I thought the depth of analysis, data analytics, insight was absolutely exceptional, so just a nod to your research.
On the specific USG order, so without going through that entire cycle of the average, which probably is going to be around 6.5 billion notes, we went into COVID, and there's clearly been a demand. The BEP is also challenged as a manufacturer. They're doing the best they can. They're also struggling with COVID, with other challenges, other supply chain issues that they're dealing with outside of our paper and so all those factors weigh in.
In addition to the exciting new series, which we're all working together to make progress on, takes cycle time-off of the press, just as it does with us as we continue to run samples. So you're under pressure as you're trying to move to a new series, you're trying to also satisfy current demand. I think the BEP is doing a phenomenal job, but it is constrained.
Once again, as we – the Fed would love to see 9.6 billion notes. The constraint in the supply chain is tapping it out at 7 billion to 7.2 billion in that range and that's why we believe it's going to be flat. And so you saw the range widened where last year, it was 7.696 billion, now it's 6.9 billion to 9.6 billion. So they’ve widened the range because of the reality of the situation.
I think from an investor's viewpoint, take confidence in the demand that's being flattened level loaded out that's going to continue for many, many years into the future. So that's how I think of it.
Got it. And then just as a follow-up, and thank you for the acknowledgment, Max. But I want to talk about – and as you know, we've done a lot of work around the payment business and on the retail side. One of the things that we're seeing now in retail self-checkout, what appears to be a little bit more of a pivot towards deployments of cashless self-checkout. What does that ultimately mean for Crane? How should we be thinking about that trend in the context of your business? Thank you.
So the first point, Matt, that I'd make is that there's been explosive growth across various types of self-checkout, both traditional formats as well as new formats, right? And some of those new formats we've talked about for a while, the Paypod, the PayTowers, but also some retailers saying they want a nontraditional format and developing it kind of their own homegrown solution.
Where we're seeing cashless only is almost exclusively, if not exclusively, in new applications that historically have not been served through any form of automation at all. There are also entirely new areas of automation in certain markets, certain settings that are using both cash and cashless or cash-only, right? So what I'd say is that there's no cannibalization that we're aware of our existing business. It's really that depending on the specific type of a store or retail outlet, depending on the specific needs and whatnot, there's a different structure, different format that makes sense. And the cashless only is in new areas, not areas that historically have been cash.
The other thing I'd chime in on here, Matt, is when you look at the overall pool of self-checkout overall and the growth that we're expecting to see, notwithstanding the growth in cashless in some areas to Jason's point in areas that are new, on the cash side, the entire pool is expanding, right? I think you actually maybe even cover some of that in your report. So we just see the opportunity just by having that bigger pool continue to show great opportunities for us as we look forward.
And a reminder, we are – and we are participating on the cashless side as well. We have solutions in that realm that we're benefiting, gaming as well. The gaming one that absolutely just announced, which is an excellent format, so that's a cashless conversion of two player in that space. Right?
Perfect. Thank you guys.
Thanks Matt. Thank you.
The next question is from Nathan Jones with Stifel.
Good morning, Nathan.
Good morning everyone.
Good morning.
I'm going to ask a few questions about asbestos, the business is running at a free cash flow yield or I guess it stops running at a free cash flow yield of about 7%. If you take out the asbestos expenses, it's about 8.5%, which is probably about as good as you can find for industrial companies. I know you guys have had a policy of defending a lot of these things. I think about two-thirds of the expenses are on defense and one-third on settlement. And at some point, it was likely to be more valuable to not defend those claims and to settle them.
Can you talk about where you are in that cycle with the balance sheet having essentially no net debt pro forma for the Engineered Materials business? What thought have you given to actually getting that off the balance sheet? And do you view that as a good use of Crane's capital?
That's an excellent question, that the market certainly has evolved and changed. It's something that we've looked at, studied for quite some time. There's some vehicles out there that are interesting. The market has gotten very competitive. I would say that we're actively investigating no guarantee, no certainty there, but we are actively investigating on that front.
In terms of the strategy, it has changed over the years. We were defending hard, but with unfavorable rulings, we’ve shifted the strategy to reduce our defense costs and more of a settlement strategy. And so I think we're doing an outstanding job there and having a consistent and understood a repeatable outlay. But that's a good question. And you guys have anything else that you'd add?
No, the only other thing, Nathan, is that the 60% that you mentioned is a historical number I believe it was after the Dummitt decision when things changed a little bit. Today, our settlement costs are approximately two times to three times defense cost, right? So that ratio has changed pretty substantially over the last five years. And come down in the aggregate.
Continues to reduce.
Got it. I mean I looked at ITT getting rid of their asbestos liability, which would imply that it would probably cost $450 million, $500 million for you guys. And if you're spending $45 million of cash a year, it's kind of a 10% cash-on-cash risk-free ROI, simplifies the story. So it would seem like a reasonable avenue for cash deployment.
The other one I wanted to ask was on the Process Flow business. Can you talk about the differences in the growth rates between commercial and process valves? I think you said – I mean, obviously, the Canada business had a great year last year and just where we are in the recovery process for the valve side of the business.
Yes. So commercial absolutely had a fantastic year last year, we did mention Canada, but the other portion also just had a really strong year last year. On the process side of the business, orders – the orders were growing throughout the year and core growth started to inflect. So as we look forward into next year, we see commercial waning a little bit, but still growing for sure. And we see the commercial valves business, in particular, that the areas that I mentioned on the call, North America, Europe, China, being areas where things will continue to pick up, not just debottlenecking and MRO, but some early nice signs around project activity. So high level, Nathan, I would say it’s, it was a phenomenal year at commercial in 2021. It's still going to be a good year next year, but muted growth rates, and we'll see the process start to pick back up.
We see there's some opportunities to simplify the portfolio, particularly in that Process Flow segment, I think maybe some of the commercial businesses might not quite fit the strategy in that. Are you looking at further business portfolio simplification, post the divestiture of the Engineered Materials business? Some of those businesses seem like they might be at kind of peak revenue levels and might not be a bad time to start thinking of disposing of those?
Well, we look at the portfolio all the time. Nathan, and we'll continue – nothing – we're focused on what's in front of us right now, no other decisions at this time, but we actively continue to evaluate.
Okay, thanks for taking my questions. Looking forward to seeing you in March.
Yes, Nathan.
Yes. Looking forward to seeing you in March. It's going to be a great day. A lot of great news to share. It's great updates. So thanks, Nathan.
Thank you. The next question is from Elizabeth Grenfell with Bank of America. Please go ahead.
Good morning, Elizabeth.
Hi, good morning everyone.
Good morning.
I was hoping you could just speak to what you're seeing in the M&A environment and how you're continuing to think about your portfolio shaping? And any evolution you might be thinking about there?
Well, we continue to be active in each of the segments. I can tell you that we've been very aggressive on a couple of deals that last year that maintaining our discipline, even though we're being fairly aggressive on value and making sure that we fully uncover our synergies, we ended up not being successful in the flow space. In particular, there's some opportunities as we're thinking about it right now in A&E as well as the flow space that continues. So it's an active market, we continue. There's a lot that we bring from a synergy side, and we're being aggressive. So I'm hopeful that we'll have some opportunities that present themselves here in 2022. I don't know if you...
Yes. I would just echo. I mean, I think we had – in A&E and during the year as well, we did see similar situations as in process in PFT from a multiple perspective. We had the announcement in the fourth quarter on the share repurchase. That reflects – looking at the size of the deals that were out there and these multiples and the cost and our discipline, it felt like just given what we – frankly, I hope you're hearing it on the call, but how we feel about our medium and long-term growth.
One of the best values out there, Crane's stock.
That, this made a lot of sense to us. But it was – it was taking into context the cost of these deals we were seeing and some of the multiples that simply the math didn't work for us relative in particular to our own math.
Alright, thank you very much.
Thanks, Elizabeth.
Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Max Mitchell for closing remarks.
Thank you for joining the call today, and thank you for your interest in Crane. 2021 was a year of incredible performance in an environment of uncertainty and challenges. And for that performance, thank you to our global teams, our leadership, our customers, our suppliers, and all of our stakeholder communities. And even with continued uncertainty in the macro environment, Crane will continue to credibly deliver on driving consistent profitable growth.
As the late great Colin Powell said, "If you're going to achieve excellence in big things, you develop a habit in little matters. Excellence is not an exception. It is a prevailing attitude." our attitude at Crane remains centered on excellence, honed further and sharper over time by focusing on the many little matters, which add up to big things and are the critical driver of our consistently strong results.
We hope you're all able to join our upcoming March 30th, Investor Day event. Don't miss it. We have a lot to share. It has been an incredible journey for all of us and it is not over yet, we are just getting started. Thank you all. Have a great day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.