Crane NXT, Co. (CXT) Earnings Call Transcript & Summary

Good afternoon, and welcome to the 24th Annual CJS Securities New Ideas for the New Year Conference. I'm Bob Labick, President of CJS, and we're pleased to have with us the management team from Crane NXT. Presenting from management is Aaron Saak, President and CEO; Christina Cristiano, Senior Vice President and CFO; and Rima Hyder, Vice President of Investor Relations. Crane NXT is an industrial technology company with leadership positions in payment processing and currency is technologies secure, detect and authenticate its customer products. Start with a 10- to 15-minute overview from management, and we'll move on to a fireside chat. Clients interested in asking questions during that chat, please send those through the portal, and we'll try to weave those into the chat. With that, it's my pleasure to hand it off to Aaron to introduce Crane NXT.

All right. Thank you, Bob. I appreciate the introduction to be here and to speak today and happy new year to everyone who's listening in to learn a little bit more about who we are as Crane NXT. If we could go to the next slide, please. I just want to make the standard type of disclaimer and disclosure at the beginning of our presentation that certain things are forward-looking, and everyone is aware of the normal course of disclaimers. So thank you. So with that, as Bob mentioned, we are a new company to many people and perhaps to some of you. In fact, we were formed and launched in April of 2023. So we're just approaching almost our first anniversary as a stand-alone publicly traded entity. And as Bob mentioned, our mission here at Crane NXT is to provide trusted technology solutions that secure, detect and authenticate on matters most to our customers. We're really at our core, an industrial technology company and go to market under 2 platforms. The first is Crane Currency, where we're really the leader in anti-counterfeiting technology based on our microoptics solutions, and we'll talk about that in a little more detail later. It's a long-standing business. In fact, the heritage of this business goes back almost 200 years. Our second platform is CPI or Crane Payment Innovations. And here, we focus on detection systems and embedded software that authenticates payment transactions we provide software for remote monitoring and diagnostics of our equipment, and we have an aftermarket services business, where we provide maintenance and upgrade services to our clients across the United States. In total, we're a $1.4 billion company. 40% of our revenue is recurring or recurring, and we have adjusted op margins in the high 20% range. And another hallmark of the company is the strong free cash flow that we provide approximately 100%. And so I'd like to take a moment if we go to the next slide and just talk a little bit more about the breakdown of the company by segments, geography and customers. So today, CPI is about 65% of the portfolio, obviously, the balance being Crane Currency, but we're a very global business, as you can see in the pie chart here in the middle of the page. About 60% of our revenue is North America-based followed by Western Europe and what might be new information to some of you is we have a very large presence in emerging markets, and that's really coming out of our currency business. Approximately 17% of NXT revenue is based in emerging markets. The balance of our revenue coming out of other parts of the world, South America included. One of the hallmarks of the business, why we're very resilient and a stable business is the strength of our customer base. And I don't think you'll find many companies that can say that they have customers that have been with them for more than a century and we certainly can here in NXT. In fact, 29% of our revenue, almost 30% comes from customers with that over 100-year tenure. The most prominent of that for us is the U.S. government. And some of you may know this, but we have been providing the paper or the substrate for the U.S. currency for well over 140 years. And we provide similar type of technology to other central banks across the world. The balance of our customers have also been with us for a very long time. In fact, in CPI alone, we have many customers that have been with us for upwards of a decade or 2. So in total, a very resilient business financial stability and stability in our customer base with broad exposure to diverse geographic markets. Now if we go to the next slide, I just want to take a moment to talk about each of our segments in a little bit more detail. The first, as you can see here, is Crane Currency. And we really go to market with 3 different offerings inside this portfolio. The first is our business to the U.S. government. And as I alluded to in the last slide, we've been supplying U.S. currency paper since 1879, and we're the sole source of that paper to the U.S. government. And then obviously, that's not normal paper. It has a lot of security features embedded in it and a lot of know-how that goes along with its manufacturer. What we're also providing to the U.S. government and its most prominent in the U.S. $100 bill is our micro-optic technology. And that is the blue strip that goes down the center of the bill that many of you are probably very familiar with. That's really the hallmark of the company is the leadership that we have of microoptics as the world's leading anti-counterfeitting technology for currency. And we've taken that know-how and extended it into the international market where we now design and print currency using microoptics for over 150 denominations around the world. And so this international currency business for us is now 50% of the currency portfolio. And then finally, a new area for us is, again, leveraging our technology in micro-optics and applying it to what we'll call product authentication. This is providing security features and labeling features for everything from pharmaceuticals to luxury products to well-known products such as major sports leagues. So in total, the business, when you add all 3 product segments together, it's about $460 million. This is based on 2022 sales high op margins at about 28%. And again, a long-standing base of customers that go back well over a century, all fundamentally based on this technology leadership we have with anti-counterfeiting microoptics protection. And so you can see, again, our sales geography here for crane currency. And again, I'd point out about 50% of the business is the U.S. government, but almost 40% of this business and a growing part of our business is in emerging markets as we win new denominations every year utilizing our technology and providing those to areas that are growing quite quickly and need new and updated currency. So fundamentally, currency is a fantastic business that's performed very well, as many of you have seen over the last few quarters since we went public as Crane NXT and fundamentally based as a technology leader. Now I'll move to our next segment, and if we can move the slide called Crane Payment Innovations, or CPI. Now this is a bigger business. It's about $870 million in 2022. But again, very high operating margin at the high 20% range and a key distinguishing aspect of this business is recurring revenue that comes from long-standing customers in our service and software business. And you can really think about the business in 4 segments in terms of what we provide. The first is shown on the left-hand side of this page is what we'll call components. These are things you typically don't see but are embedded into machines that process cash and coin and credit card transactions where we're providing the intelligence and very sophisticated detection equipment and embedded software to transact and authenticate those transactions inside of things like self checkout, vending machines and other type of applications. The largest market or 1 of the most exciting markets for us in this space is in gaming, where these type of cash and coin transaction machines are placed to alter out casinos. The second go-to-market solution we have or what we call systems. So this is taking this core components business and putting a larger platform around it. This includes self-checkout counters that you've seen in this picture and are probably very familiar with. It also includes very large pieces of equipment that process cash transactions and coin transactions at a high speed. So think about the kind of automation equipment you would see inside a casino not on the floor, but in the back office as well as in the back office of financial institutions, larger capital-type expenditures for our customers. And then we add to that, this recurring revenue and reoccurring revenue component in aftermarket services. So as the picture shows here, we have a fleet of 450 technicians around the United States that go out and service our products for our customers every day. This includes installation of the products and general ongoing maintenance and upgrades. Along with that, we sell a software solution that provides not only recurring revenue to us, but it's really fundamentally based on remote monitoring and diagnostics of the equipment as well as use time and other analytics and KPIs that our customers use to run their operation. So in total, when you look at everything from the components to the systems through the aftermarket and attached software services, we have a complete suite of solutions, making us really the industry's most advanced provider and the #1 provider in all key markets we play in. The business is again very global. 67% in North America, but the balance with a large presence in Western Europe, a growing presence in emerging markets and in other parts of the world as well. So again, a really fantastic business and 1 is our financials have shown produces strong margins as well as strong free cash flow. Now as we launched the company last year, we set out a plan for what the next 5 years looks like for NXT. And that's what's shown here on this next slide. You can see our jump-off point. In 2023, when we launched the company with sales of about $1.4 billion we forecasted long-term mid-single-digit growth profile with EBITDA margins in the high 20% range and 100% free cash flow. We've executed on that through our first 3 quarters as a new company. And in fact, our free cash flow has been very strong, where we've reduced the leverage from where we started now down to 1.3x. So a really strong balance sheet for the company going forward. And we've laid out a plan to grow the company utilizing the 3 pillars that you see in the middle of this page. First and foremost is to continue to reinvest and grow our core business. We think it's resilient. We have strong leadership positions, and we see tailwinds both in currency and CPI in many of the verticals we play. So you can see listed on this page a few of those investment areas. The U.S. government is launching a new series of currency over the coming years. It's called Catalyst, and I'm sure we'll talk about it here in the fireside chat later today, a fantastic tailwind to our business. We've been growing our international currency business. In fact, our backlog is at an all-time high and we continue to win new business based on our quality and our technology and we're investing in growing our product authentication business, again, taking this technology into new markets outside of the legacy currency applications. We continue to see growth in automation, driven by labor scarcity in our CPI business and adding more connected services and field services on to generate more recurring revenue at an accretive margin. So we have a lot of enthusiasm for the core business and we want to continue to make that priority 1 in our investments and true to who we are as Crane NXT into our legacy as a prior part of Crane Holdings we drive operational excellence through what we call the Crane Business System or CBS. This drives year-on-year margin improvement, pricing discipline and improved free cash flow conversion, as you can see in our results. many businesses have a business system. I've certainly come from businesses that have had that. We really put it to good use here at Crane NXT and the results speak to it as you see margin expansion, great free cash flow conversion and a history of productivity improvement year-on-year. And so that's really core to who we are. Culturally, it's core to who we are as we think about acquisitions as well, which is a big part of our strategy long term, which is to continue to diversify the portfolio outside these core markets into near adjacencies. And for those who have been with us on this journey since April of last year, we talked a lot about our free cash flow conversion and putting it to work in M&A. And that 2024 is the year that we really focused on starting to do that. In addressing new markets for the company that have large TAMs that are very close to what we do today in secure, detect and authenticate technology and really will position the company to be a $3 billion top line company in 5 years based on our strong free cash flow, disciplined M&A execution and still with very virtuous financials of mid-single-digit plus growth and high EBITDA margins. And we want to be sure as part of this journey that we're keeping our leverage in check. As I said today, we're at about 1.3x as we announced at the end of the last quarter. We're very mindful to keep that below 3x. So we feel this is an excellent opportunity for investors. And for those who've been with us on the journey the last several quarters since we launched, I think it's been a very rewarding journey where we're seeing more people understand the story, as Bob alluded to, as we're executing operationally. And now as we start to move into our next chapter, which is around continuing the operational discipline, but moving on to M&A, we have the opportunity for compounding value creation. And so with that, Again, Bob, thank you for your time today to invite us here. We're happy to take questions, but I just want to point to these 5 main takeaways as I complete my prepared remarks. For those who don't know us, I appreciate the opportunity to talk about what I think is a new exciting investment thesis for an industrial technology company that's new, but it's been around for over 150 years, providing trusted technology solutions, all in the thematic of secure, detect and authenticating our customers' assets. It has very, very attractive financials with mid-single-digit growth, best-in-class margins, high free cash flow. And with that a strong balance sheet that we want to put to use as we have in the past, to continue to diversify and build the company. And that's where we're really focused as we go forward into adjacent markets with our M&A. So with that, Bob, I'm going to pause, and I'll hand it back to you as we take questions from those listening in and from -- I know ones you'd like to ask as well.

Thank you so much Aaron. That was a terrific introduction. I really appreciate it. So yes, I'll start off, as you mentioned, it's been -- you're approaching 1 year since the spin of Crane Company and since you guys as a stand-alone entity. Maybe just take a second to highlight the key accomplishments in the past year, 9 months to 1 year. And the key to dos for the next 12 months, you mentioned briefly M&A, but I'm sure there's that and a couple more things on the agenda for the coming year.

Yes. Thank you, Bob. I appreciate that. So I think as everyone can appreciate in those separating the company and creating a new publicly traded company is no small feat. And that's what was started in 2022 and obviously culminated in April of last year. So really, our focus last year was to ensure we built out the management team that we've kept our business leadership intact and obviously satisfying our customers that goes without saying, but also transitioned off any TSAs we had with the legacy organization, which we have to all extent. So I feel very actually proud of what the team accomplished both within the businesses and the corporate team to execute the separation, I think, flawlessly. A big part of last year, too, was to tell our story as you're seeing here through today about who we are and getting investors just aware of the legacy of the business and our profile and where we're taking the company and then really to operate the company well. I made that a point that I discussed at our first Investor Day that while we want to grow the company, and we have, I think, very clear aspirations for where we want to go over the next 5 years, you have to start out of the gate and in these first few quarters, operating and proving that we know how to grow the business and execute on free cash flow, continue to expand our margins. And I think there, again, the proof is in the performance of the company. So we feel very good about that in these first 9 months. Now as you said, Bob, we're off to, let's say, the second chapter of the story, which requires us to continue to execute flawlessly. That goes without saying but to now start to accelerate some of our transformation in the portfolio of the company through M&A. And I think that's a big focus for us in the balance of 2024.

Super. And then through M&A or internally built, I mean 1 of the things we've talked about is product authentication, brand authentication and to be a big component for you over the next 5 years. What are the key steps internally or organically that you need to take? And what's necessary externally or through M&A for product authentication to become a significant portion of the P&L?

Yes. I think this is a particularly exciting area. And when folks look at the U.S. $100 bill and see the micro optics and then start to see how we're applying it to other labels and other goods, whether those are luxury goods or pharmaceutical packaging or high value-added products that our customers want to protect their brand, kind of a lightbulb goes off for most people that sees and can extrapolate how we can apply this technology and use it as the next iteration of technology over holograms that probably many people are familiar with when they purchase clothing or open a box what have you that's using something to authenticate the product. So for us, in 2023, it started first organically with establishing a team around focusing on markets unrelated to currency and taking the technology into new areas, which we did post separation and still new leadership in the business and reinforced both with sales and marketing, but also our technology teams, a focus on taking this core product organically into new markets. And we're excited about that. Now I think as you alluded to, Bob, a real accelerator for the strategy is via M&A. And that would include the opportunity to do things both with physical products, things like our label technology, but also digital in terms of moving into track and trace type solutions to help our customers follow their products through the supply chain. So I think it's both set of actions. One is we want to continue on the organic investments we've made. And certainly, this is an area we think is rich for M&A.

Great. And then just as you talked about, it's still a new industry to many. And maybe you could talk a little bit, is this a B2B industry? Is it B2C? What's the marketplace? And how are you set up to growth in this area?

Yes, I would characterize it as if you look at the whole value chain, it's a bit of a B2B2C kind of industry. So ultimately, a consumer is using or seeing the product similar to how you would buy a hat or a jacket and look at a label and would create on it a hologram or a micro optics technology inside the label. But our route to market is to another business. So whether that be a luxury brand or a pharma brand or a label maker that has specked us in as the technology they want to use. Our sales will be to that entity, and then they'll be making the final product and selling it to the consumer.

And then just kind of jumping ahead here a little bit. You talked about this a little on the most recent earnings call, but we still have been getting some questions. Can you just talk about the backlog and the recent declines there? And what's the base level? Obviously, there was supply chain issues in that area, which caused the backlogs to swell and kind of -- what's the base level? What verticals are impacted? And how are things looking now?

Very good question. Bob, why don't I pass it over to Christina to take that one.

Great. Thanks, Aaron. Yes, you're correct. As we reported back in Q3, our backlog has been roughly 2x the normal level resulting from long lead times based on supply chain constraints. And this elevated backlog was primarily driven by our gaming end market, where customers were ordering equipment 1 year in advance in some cases. Our supply chain has since returned to normal and lead times for gaming are back down to 10 to 12 weeks, which we would consider normal. And so now our customers are adjusting their ordering patterns to reflect these shorter lead times. Over the next 6 months, we expect backlog to continue to come down to more normal levels, and that would be about $150 million for CPI in total. I'll just close out by saying we believe the underlying end markets are healthy and that the growth drivers in CPI, which relate to automation and labor scarcity have not changed. So we feel good about the underlying demand for the business.

And at various times, we've talked about -- or you talked about in the presentation today too the high degree of recurring or reoccurring revenues that you have, but there's opportunities to grow that, and 1 of the ways would be through software sales. So can you discuss the opportunities for software or other sales for automation and gaming? I think you've talked about in the past, software that will know how much cash is in a slot machine that can use that towards the capital requirements for the casinos and things like that. How should we think about growing beyond just mostly hardware and growing the software and services portion of your [indiscernible].