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

Good morning, and welcome to the 25th Annual CJS new ideas for the New Year Conference. I'm Bob Labick, President of CJS, and I'm pleased to have with us here today, Crane NXT. Crane NXT is an industrial technology company focused on securing, detecting and authenticating critical items for its customers. The company had an active 2024 in M&A, building out its brand authentication adjacency, which complements its core currency and payment innovation businesses. We're happy to have with us President and CEO, Aaron Saak and Senior Vice President and CFO, Christina Cristiano. Start with a 10- to 15-minute overview, and then we'll move on to a fireside chat. For clients interested in asking management questions, you can send those through the portal, and we'll try to weave those into the chat as well. And with that, my pleasure to hand it off to Aaron Saak about Crane NXT.

Well, good morning, and thank you, Bob. It's a pleasure to be with you and everyone listening today, and we certainly appreciate the opportunity to talk about Crane NXT. And as you said, I think a very exciting and transformative 2024 for us, and we look forward to what's in store for the company in 2025. Now I know for many of you, you've been with the story of Crane NXT since our launch, which is coming up on almost 2 years, and that will be in April of 2025. But for many of you, as the name of the conference implies, this may be a new idea. And so we're excited to tell you about Crane NXT and our vision for the company. And so before I begin, I just wanted to go through the normal forward-looking statements that are typical. And so let me do that. As you can see, please read those at your leisure, but understand, as always, we have that disclaimer at the beginning of any of our presentations. And so with that, let me talk a little bit about the company, again, for those who are new to our story. We are a leading provider of trusted technology solutions that secure, detect and authenticate our customers' most valuable assets. That's really the hallmark of the company and where we're positioning ourselves as a premier industrial technology company. As I mentioned, we launched in April of 2023 just less than 2 years ago from the separation of Crane Holdings company. And really, I think a hallmark of the company is our best-in-class financial profile that includes significant margins and free cash flow, a very strong balance sheet. And you can see that on the left-hand side of this page. We're ending 2024 based on our original guidance coming out of our Q3 call at about $1.5 billion in sales. Almost 45% of the company has recurring and recurring revenues, which we think, again, is a hallmark of the company and provides resiliency for the future. About 27% adjusted operating margins and a very strong balance sheet. As we exit the year, we were at about -- or exited Q3 at about 1.7x net leverage. And really a hallmark not only to our financials is how we run the business, and that includes s utilizing the Crane business system to drive continuous improvement and continuous margin expansion over time. And as Bob mentioned, we had a very active 2024 with our first M&A transaction that was post announced and closed. And so a hallmark of the company, both in its current form and in its predecessor has been a very disciplined capital allocation process. In this case of Crane NXT to diversify our portfolio, as Bob mentioned, and really provide differentiated positions with leading market technologies, all aligned to secular growth trends. So again, we're very proud of what we've accomplished in almost the first 2 years of existence for Crane NXT and believe we have a very resilient portfolio as we move forward. So with that, let me dive a little bit deeper into who we are by segment and geography and customer. We go to market and report as 2 segments, the largest of which we call CPI or Crane Payment Innovations, which is approximately 60% of the portfolio; and the second is security and authentication technologies. About 40% of the portfolio and where we've done our M&A here over the last year. In terms of geography, we have a very wide exposure around the world, which I think, again, builds to the resiliency of the company. About 60% of our sales are in North America, and it may be interesting to many of you, about 20% of our sales are in emerging markets where we're really aligned to growth demographics and overall secular tailwinds and then finally, I think a hallmark of the company is the long tenure of many of our customers. In fact, you probably won't be speaking with many companies in this session today and conference over the next few days that have customers that have been with us for over a century. And we certainly do here in Crane NXT. In fact, 1 customer, the U.S. government, has been with us for almost 150 years. But they're not the only one. We have many of our customers, in fact, approximately 80% who have been with us for decades. And so again, building to a very resilient, sticky business as we look at the portfolio. So as I go to the next slide, I wanted to lay out how you see us reporting in terms of our financials and how we'll talk about the company here today. Again, the theme here is we've taken a very deliberate approach as we've launched the company focused on technology solutions in the thematic of secure detect and authenticate, customer assets and to make sure we're aligning the company to secular growth trends. And this really leads us to our 2 segments: security and authentication technologies, whereas we ended '24, we'll be at about $620 million in sales and Crane payment innovations at about $870 million in sales. Now under security and authentication technologies, this is where the M&A activity has occurred. We think we're building a fantastic position as a real market leader in this space, all focused on trust and counterfeiting protection and we closed our first major acquisition in the second quarter of '24, and that was OpSec. And as we announced in the fourth quarter of last year, we have entered an agreement to acquire De La Rue Authentication, which we expect to close in the first half of 2025. Now outside of aligning the company to the secular growth trends all around secure detect and authenticate technologies. What binds the company together, as I mentioned before, is this focus on continuous improvement as exemplified in the Crane business system. And this is a long-standing hallmark of the company to drive continuous improvement year-over-year, both in our core businesses and in the businesses that we acquired. And so we're going to continue to build out this portfolio based on our strong free cash flow, continue to add to our market leadership positions and continue to utilize the Crane business system to drive value for our shareholders. And so with that, I'm presenting here the growth formula, which we talked about for Crane NXT. And it really starts at the top of this diagram with a core business in differentiated niche segments that generates very strong free cash flow, and you'll see that as a hallmark of the company. We take that strong free cash flow and we use a disciplined framework to return some of that to our shareholders in the terms of a competitive dividend, and you'll see that our dividend is roughly about a 1% yield over the course of the last year. We want to always keep our net leverage in check and our target long term is to keep that below 3 and then utilize the remainder of that free cash flow primarily for M&A as we executed in 2024 with a very disciplined approach focused on secular growth markets where we can find niche technologies and then improve those through the application of CBS. And I think our efforts in 2024 show we've made very good progress towards this vision for the company. And so with that, my last slide before I hand it back to you, Bob, is just a reminder on who we are as Crane NXT and that we're in the early stages of a journey. Again, less than 2 years out as a new company, but I think well underway in doing what we said we were going to do of building a premier industrial where we had very strong performance in Q3 with about a 14% revenue growth, and that's 5% core revenue growth. We continue to focus on driving the Crane Business System to improve operational performance, both in the core and as we acquire new assets. And we're executing our strategy, exactly what we laid out in our first Investor Day as we launched the company to position our portfolio into higher-growth, adjacent end markets really aligned to niche and differentiated positions over the long term, while at the same time, keeping our balance sheet and our leverage in check, using our strong free cash flow to do that. And with that, we have, again, very good capacity and a strong funnel for continued M&A. So I think we're in a really very, very positive position heading into 2025 over the long term in positioning the company for significant shareholder value creation. So with that, Bob, I appreciate the time this morning, and happy to hand it over to you for the fireside chat.

All right. Super, thank you, Aaron. That was a fantastic introduction. We appreciate it. And I think -- maybe we'll start off with the M&A this year because it is a big change. You've obviously done a lot in the last 18 months or so. But talking about the M&A, the authentication assets, you've committed to spending, I think, $660 million to acquire 2 Bedrock assets. You mentioned OpSec and De la rue, maybe you can dig into the technology acquired. Why these are good, sticky businesses and the overlap with your existing technology as well?

Yes. Thanks for that, Bob. And I would say we're very excited and still bullish not only on what we acquired and will be acquiring with the close of De La Rue but also on the demand and the trajectory of the end markets all around authentication. But to your point, if I take it back to our strategy, we started the company with the Crane Currency asset of one of the core pillars of the company. And when you really look at what we do in Crane Currency, it's all around authentication. It just happens to be for currency and applying a physical authentication on to currency bank notes, whether that's the U.S. government and many people know that Blue Strip that's down the $100 bill. That is our hallmark micro-optics technology that's never been counterfeited and we apply that to now over 150 denominations around the world. So it's really a bed mark of the company of this differentiation in the technology. And we've been moving to take that technology into other end markets that are growing and have the same need for anti-counterfeiting protection. And we really saw M&A as a way to accelerate that strategy and OpSec being one of the leaders in this area, where their portfolio is focused more on brands, I think sports and apparel and using holographic technology to protect and secure assets, whether that's [ League paraponellia, ] think of jerseys and other things that we all may buy as we go to sporting events or coats and jackets and things of that nature. And we can extend that thought process out of a brand in apparel to industrial goods and to pharmaceutical products as well. So we really like that market. We think OpSec brought with us now a channel to that market and core technology in their holographic capabilities that augmented what we could do with our micro-optic technology. And then we see De La Rue as further acceleration of this strategy where they bring extra strength, if you will, into the government sector of using the similar type of technologies, but really having a very strong position with governments and their tax stamp business and also brings us into the ID verification market and think of passports where you're securing and protecting and authenticating passports. So I think this is just a continuation of expanding our markets, one adjacency at a time, all under the macro and secular trend of the need for any counterfeiting protection, both physical and digital. And both of these assets not only give us access to new channels, but access to new technologies, as I just described. So hopefully, that's helpful, Bob.

Yes. No, absolutely. And part of -- I forget, was a Crane holding company before you spun off the other Crane company and now your Crane entity. But part of that was the Crane business system for years in terms of you had an acquisition history and you were able to integrate companies and raise the ROIC of the businesses you've acquired and of the investment itself. Can you talk about how CBS and that methodology can be additive to these assets? And how the integration is going, I guess, with OpSec so far because you haven't even gotten De La Rue yet?

Sure, Bob. And thanks for mentioning that because I think there's a secret sauce, if you will, to how we run the company and have, to your point, for many, many years, and I think we're all very proud of this heritage. It's the focus on continuous improvement. And that's driving process discipline to drive outcomes that ultimately lead to business results, whether that's revenue growth, margin expansion accessing new markets through a series of tools that are all part of our Crane business system playbook that includes lean, 80/20 and policy or strategy deployment. This is a very well-developed toolkit that's core to the DNA of the company. And you can see it deployed in all of our M&A going back now well over a decade, where we take an asset that we think may be aligned in the case of OpSec to fantastic end markets with strong technology leadership positions, but there's an opportunity to do better and to continuously improve and we see that in OpSec. As ways to improve the supply chain, ways to improve the manufacturing footprint and drive productivity inside of operations. Way to improve pricing and the commercial discipline on contracts. These are all the tools that we deploy in CBS and are applying those to OpSec. And I would say in terms of the acquisition itself, we're right on track to where we thought we would be. Going as expected. And in fact, we have a full range now of CBS practitioners inside the business and CBS champions inside of each of the manufacturing facilities driving that continuous improvement mindset. And that's what we'll do with each acquisition and what we're planning to do and well in the middle of planning as we close and intend to close the De La Rue acquisition in the first half of '25.

Okay. Great. And I think with a little bit of growth, and these are secularly growing but little growth, these 2 assets could be at $300 million in revenues in the not-too-distant future. That's still 25%, 30% of the target you laid out the separation deck, $1 billion to $1.5 billion in acquired revenue. Is that target still relevant? Are there more assets out there? How do you think about -- do you pause now? Can you keep going? What's next for M&A? And will it be in similar brand authentication assets?

No. Thanks for that, Bob. The strategy here is unchanged. And I'll just go back to what we said at the time of separation because the key message that we wanted to make to all of our shareholders is very disciplined, I would say, logical M&A. And I like that as a programmatic approach to do M&A where we can take on an asset that's one step adjacent to perhaps our core business as I think we would say OpSec and De La Rue are. It's of a size we can incorporate in, and we see the opportunities to drive margin expansion through the application of CBS. OpSec and De La Rue were the first two. And as you know, Bob, we also did a small technology bolt-on called TruTag, that shows, again, we're able to go find technologies that we think we can accelerate through our channel and also drive margin improvement over the long term. So what I would envision and feel very confident that we'll execute our continued M&A activities similar to the OpSec and De La Rue, both in this authentication segment or the security and authentication technologies segment, but also in other areas that are one-step adjacencies from our CPI business and continue to drive the thematic around secure detect and authenticate. We have a very rich M&A funnel. As most companies do, we turn down more deals than we execute on because we have to have a high conviction, and we're going to continue to follow the disciplined approach, which is ensuring that we're aligning to these markets that the asset we're acquiring has a leading position in their market, and we can see a line of sight to continue growth above GDP run rates and that -- and probably most importantly, we have a clear path to value creation, which is a double-digit ROIC by year 5 for the assets we're acquiring. So again, Bob, I would say we're continuing on pace. And I would expect that in '25. And the strategy is unchanged, and we feel very good about where the funnel sits.

Okay. Super. And then moving on to CPI. We view this as a group of niche leading products in targeted end markets. And so I was hoping we could discuss the end markets that you focus on and the outlooks for each and maybe start with gaming because there's been more changes there in short-term iterations. Talk about your visibility now and just kind of go through the end markets for CPI.

Bob, it's Christina. I'll take that one. So just thinking about the year overall, outside of gaming, the CPI end markets were growing at mid-single digits and as you mentioned and we discussed throughout the year, the gaming market has been working through a correction of inventory levels with our OEM customers, where inventory levels got higher than normal as a result of long lead times, right? So looking back to right around COVID and right after that, our lead times went up to over 1 year and a normal lead time would be anywhere between 8 and 12 weeks as a reference point. And that's really what we're back to now. And so what we've seen is a buildup of our backlog as a result of over ordering that our customers have been working down now over the last year to 1.5 years. And directionally, we expected this to resolve toward the end of '24. But as we mentioned on our last call, it's simply taking a little longer than we thought. And so this work down now of inventory levels and resuming to normal ordering as we would expect, will happen now more towards the middle of 2025. And that's really -- part of it is our own doing actually because now we're able to ship our products much faster to our customers based on these lower lead times and they simply don't need to hold as much inventory as they were holding 1 and 2 years ago. And so their inventory levels are a little lower than they had historically maintained and now we simply got to just work through this cycle, and we expect that to start to move again in the second half of '25. So outside of gaming, as I said, the other end markets are growing at mid-single digits. And if you start with the largest part of the CPI portfolio, which is vending. And there, just as a reminder, we sell the entire vending machine, not just the components, and that includes the cashless reader as well as [ non coin ] receptacles. Here, we're seeing very strong performance post-COVID, right? So during COVID, everything shut down, the places where people would normally go to use vending machines not open and that really took a toll on the business. And we've seen a nice resurgence since COVID and growing now solidly at mid-single digits. And we're expanding our offerings here into coffee, which has been popular in Europe, and now we're starting to see that growing in the U.S. And we also see growth in our aftermarket parts business, which comes at a high margin. So feeling good about vending. And then moving on to financial services, again, mid-single-digit grower here and this is really driven by our services business. So we have a fleet of about 450 highly skilled technicians that service our equipment and mostly in the U.S. and a little bit in Europe and Canada. And this group now is -- that's a captive fleet that we have and continues to grow and identify new opportunities to expand our service offerings. So very strong performance there, again, mid-single-digit performance in Financial Services. On the services side, and we see equipment there continuing to grow at low single digits. Lastly on the retail side, this for us in 2024, has been driven by growth in the custom self-checkout market, where we work directly with our retailers or the integrators that they hire to customize the self-checkout experience in their stores, and that includes our components. That's a smaller part of the business. The larger piece of the business would be where we sell directly to OEMs, but we saw the custom self-checkout growing this year in '24. So solid growth there. Now specific to the OEMs, as we noted last quarter on the earnings call, they've been reporting softness in their hardware market. And we've even seen other retailers reporting their results, and we've all seen some softness in retail. So this is an area we're going to be watching closely in 2025. There's known headwinds in the retail market, and we're going to continue to be working with our OEM partners to understand their demand levels and manage our inventory accordingly. So again, just wrapping up CPI in total, outside of gaming, growing at mid-single digits and the area of focus for next year will be headwinds in the -- potential headwinds in the retail end market.

Got it. Okay. Great. And then kind of following up on the M&A discussion and some of your comments there on services. I think we've talked a little bit in the past. Is that a potential area for M&A, some more services? And would it be into CPI as a whole? Would it be in financial services? Or how are you thinking about potential M&A in the services area, how would that fit for the company?