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

Hello to everyone. Thanks for joining us today for the Oppenheimer Conference. We are really pleased that Christina and I are here to talk about Crane NXT. And for many of you, I know that may be a new name and for some, you've been with us on the journey since separation. So I'll introduce myself. I'll pass it to Christina, and then I'll jump into a few slides, and then we'll go to questions. So with that, my name is Aaron Saak. I'm the P President and CEO of Crane NXT. And Christina, I'll hand it over to you for a brief introduction.

Thank you, Aaron, and I'm Christina Cristiano, Chief Financial Officer.

Great. Well, of course, before we jump in, and I know you have these slides, we're going to go through the normal forward-looking statements, and I'll let you read those on your own time, but standard fair for discussions like this. So let's talk a little bit about Crane NXT, a premier industrial technology company that is really 2.5 years old since our separation in April of 2023 from Crane Company. And really, we positioned the company over these last 2.5 years to be a leader in technologies that we say secure, detect and authenticate our customers' most important assets. And I believe as you look at the financials of the company and our products, you'll find a lot to like in what we're creating in this portfolio. Sales last year and projected for this year around $1.6 billion with about 50% of that revenue being recurring or reoccurring, very good segment operating profit margins in the mid-20% range, high free cash flow, which helps us keep our leverage in a very nice place to keep doing M&A. Today, we stand at about 2.6x net leverage. But when you put all this together of who we are, a technology leader around authentication and anti-counterfeiting technology, underpinning what we do is all the Crane Business System and a drive for operational excellence and continuous improvement. And I think you see that playing out in how we run the company day-to-day. So as I think about who we are from segmenting the portfolio, we have 2 reportable segments, Security & Authentication Technologies, and I'll talk about that in a little more detail, particularly with one of our acquisitions more recently, that's about 25 -- or excuse me, about 45% of our revenue and the balance being Crane Payment Innovations or CPI at about 55% or the balance. We have a high degree of geography disbursement in terms of our revenue. Little over half comes from North America, about 25% from emerging markets. And that's an area that's been growing for us, particularly in our SAT segment. And then I think what's really unique about the company and makes us special is the longevity of our customers and how they've been with us, in some cases, not just for decades but for a century or more. And you'll find that, I think, very unique to the portfolio of Crane NXT, the stickiness we have with our customers and the longevity of our relationships. Now when you talk about the company and how we report, we report in these 2 segments. Security & Authentication Technologies. This year will be about $735 million in sales with 2 operating companies, Crane Currency and now the new Crane Authentication that we've just put together with our 2 acquisitions that we've done over the last 1.5 years. That would be OpSec and De La Rue Authentication. And this really coming together to form Crane Authentication just about 100 days ago when we closed our De La Rue acquisition. Now the second segment, as I referred to before, is Crane Payment Innovations, about $860 million in revenue. But both of these companies, all focused on technology that secures, detects and authenticates our customers' assets and both of these segments with leadership positions, being #1 or #2 in most of the markets they play in around the world. And what binds us together at the bottom here is this Crane Business System. It's operational discipline and rigor to drive continuous improvement, pricing process discipline as well as operational discipline. And you see that, particularly as we talk about our new acquisitions. So all of this together, creating a portfolio that we really believe is the market leader in authentication technologies. So let me take a moment and talk about our newest acquisition and the formation of Crane Authentication. For us, this is a major step forward in the evolution of our portfolio since our separation, where now we have the market leader in authentication technology, leveraging outstanding technology that's come from our currency business put together with our first acquisition, OpSec and then De La Rue Authentication, which closed May 1, to form this unified portfolio. And it's really focused in 3 areas. The first is brand protection, which makes up about 60% of the revenue of this business. This is selling our technology to major customers, think about sports leagues and apparel companies around the world that provides both physical authentication and track and trace online software to help make sure that their products are real and authentic not only through their supply chain, but to the consumers. Then we have government solutions. You can see in this picture, these are roles of tax stamps. This is what goes on wine bottles and other kind of articles so that governments can track shipments through their countries and collect their tax revenues. And then finally, identification security. This is really looking at making passports and national IDs secure and preventing counterfeiting of identities. So 3 pillars in this business, all of this now coming from the combination of OpSec and De La Rue to form this new brand. And we're off to the races in terms of the integration, very actively deploying the Crane Business System that includes 80/20 to do product rationalization, supply chain and rooftop optimization, simplifying the organization as we brought the 2 companies together and updating our pricing and, what we call, pricing standard work. So I'm really excited about where this company is going in terms of the portfolio, even more excited about where we're going to end in profitability as we exit 2026 with a company that's going to move from low to mid-single-digit operating profit to one that's going to be close to 20% operating profit as we exit 2026, all from the diligent execution of the Crane Business System. So with that, let me talk a little bit about the company holistically and where we're at. So if you look at our Q2 results, 9% sales growth, that was in line with our expectations for the full year where we maintained our guidance. Excited about the performance of the company and particularly both CPI, where we're seeing some strength returning in some of our key segments. And then in SAT, an international currency business that's just done fantastic through the first half of this year. We're deploying the Crane Business System to execute on our integrations. And again, free cash flow has been strong, 120% in Q2 that's led us to be able to be in a very good position on our balance sheet with net debt at -- net leverage at 2.6x with a lot of firepower for M&A and very confident in the activity in our M&A funnel that we'll see another deal transpire here over the next 12 months. So high conviction that we're pivoting as we exit 2025, actually midway through '25 into higher growth and operating improvements in OP, great free cash flow and position for a great 2026. So with that, hopefully, that's a little bit of an overview of where we're at, where we're going. And Ian, good to see you, and happy to go to some questions here.

So thanks for the overview, especially on the product portfolio. So if I was to kind of summarize this, how do you think about just like your overall growth strategy across brands and commercial and government IDs? How do we kind of like synthesize that strategy into what you're doing going forward?

Yes. And I assume, Ian, you're specific to Crane Authentication with that?

Yes, yes, because, OpSec and De La Rue, et cetera.

Yes. Well, I think about them in these 3 pillars or these 3 segments as we laid out in the slides. And in total, I believe the company of authentication is going to be about a mid-single-digit grower. Some of that is dependent on each customer and each segment adopting the technology. If you start at brands, this is the area where the value prop is very clear because brands are getting counterfeited and they know it to some degree. It's just a question of how quickly they can implement our technology into their supply chain, both the software and the hardware, the hardware being the label technology, the software being the track and tracing of that article through the supply chain. Now the beauty of the business is once you get that customer, it's like an ERP implementation. It's very hard to dislodge us because it's sticky. And you want to keep having the reporting of the goods and where they're manufactured and how -- and where they're sold through the supply chain. So again, a mid-single-digit grower with the potential always for some upside depending on how brands adopt the technology. Similar in governments. Now this business is primarily in emerging markets. So think the Middle East, Africa, Southeast Asia, where governments are trying to find ways to ensure that their tax revenue is being collected. And that's where we're seeing growth as those economies grow. So think about that as kind of a mid-single digit, mid-single-digit plus type opportunity, very large projects typical in that business, similar to our currency business. So when you win a book of business from a government, you tend to stick -- have that be very sticky, and those tend to come in larger wins time over time. And then finally, in ID. ID, definitely a mid-single-digit growth type business, growing with GDP plus accelerated beyond kind of GDP growth with the need for governments to add more authentication technology to their IDs, very similar again to the dynamic we see in our currency business, where you kind of have a lower growth in volume, but you have this additive effect of people upgrading the core product based on the need to prevent counterfeiting. So in full summary, a mid-single-digit growth business, but one that's again going to get sequentially more profitable every quarter based on our deployment of the Crane Business System.

Okay. And also, when we think about the partnerships, I know you have some professional sports partnerships. What's been the receptivity by other leagues? And what's sort of the opportunity just either whether it's domestically or internationally? How do you view that?

Yes. I think in the domestic leagues, if we just talk about sports leagues, for example, that's going to be expansion within those leagues to more products and think about a good, better, best strategy where very high-value products, one increasing authentication. Take the example of like Aaron Judge's bat versus a key chain. You're going to have very different levels of authentication security on those. Why I say it this way, Ian, is because we own most of the sports leagues already today. So there aren't too many more for us to get. All the big ones have been using our solution for some period of time. And in the first quarter, we announced a major renewal of the NFL during the Q1 earnings call. Now your point, though, is correct on international. I think that's a real opportunity for us as we look at leagues in other regions of the world. And that's one the team is actively exploring, particularly when you think about -- the geographic dispersity of those leagues, some of which aren't even aware to us here in the U.S., same dynamic, same amount of counterfeiting going on, same opportunity for us that we appreciate here in the U.S.

Okay. And I know you've referenced here on the CBS a bunch already. But can you maybe give us some like tangible examples? Maybe we pick on either OpSec or De La Rue. What are you doing? Like where is CBS helping you? And what's the real potential for that? And what are the levers?

Well, I'll give you 2 examples. They'll both be operational in nature. One is in OpSec where we hosted several kaizens in each of the factories to go through and look at how we can improve the layout and what we call the standard flow of the factory to improve overall productivity. And that's true in the factories here in the U.S. and in the U.K. And so each of those kaizens will last about a week with the team, with the operators on the line, with the leaders of those factories and some coming from the corporate CBS office that we have here in the company to put forward, what we call, a future factory vision and then a vision for that particular production line with a goal for productivity. And in the case of OpSec, what that's doing is driving several points of incremental productivity inside of the factory, particularly on the manufacture of some of the holograms that are used. So that's kind of the traditional example. Now that we have De La Rue in place, we've also run an 80/20 process, which is a different tool in our CBS toolkit that probably many folks are familiar with, to look at how do we rationalize 2 product lines, one from OpSec, one from De La Rue, understand what we should be doing on driving pricing in those product lines or which ones we should eliminate and rationalize to improve the cost structure. So we've done that already in the first 100 days to go in and look at a particular type of products inside of OpSec and De La Rue and stop manufacturing one, move to the other, lowers the cost structure and also allows us to get some pricing out of the customer. So those are 2 examples just in the last, call it, 100 or so days since we've done the acquisition that are going to drive real value for us. And those happen over and over in the company. We're going to do over 100 kaizens this year inside of Crane NXT. So imagine that, a week of people's time out to simply drive continuous improvement in the process, that's just the DNA of the company. And I'd say, Ian, that's not always true. As many folks on this line probably know, that's not true of every company. So when we get into an OpSec that's not used to that, we can drive real meaningful improvements in the operating performance of the business.

Okay. And then if we were to shift to the currency for a second. When we think about the new launch cycle of the new bills coming out of the U.S. government, if we were maybe to look at the revenue opportunities what do the revenue opportunities look like by year? Like what's going to be the biggest opportunity? What's going to be really kind of the home opportunity? And also maybe when you talk about that, talk about margins as well amongst the different denominators?

Yes. Maybe I'll start, Christina, and hand it over to you. The way the U.S. currency program works just for a little [primer] is you want to look at the total volume of bills being produced. But what's more important is you want to look at the mix of those bills because as we all know, the $100 bill has a lot more security features on it than the $1 bill. So it's worth quite a bit more to us on the order of 2 to 2.5x the amount of technology in it. And you can see that in the variable cost to produce that's published by the U.S. Treasury Department. So the growth algorithm for this business is going to be probably flat, low single-digit volume growth over the next 5 or 10 years. However, the amount of technology adding into this is going to get not just incrementally higher, but when you look at the step-up from the redesign, it's a real opportunity for us, to your point, to drive both revenue and margin growth. So let's take the $10 bill as an example. The upgrade of that bill will include new security features that will allow us to have a product that looks closer to like in the range of what the hundreds are looking like than what the existing 10. And on a variable cost basis, while we can't disclose that at this point in time, the cost difference in these security features is almost double, depending on the exact design that gets chosen. So what we see happening is this accelerator every 2 years as a new bill is launched, that the incremental improvement over the prior bill is going to bring a significant step-up in revenue for us as well as increased operating profit because the margin of those security features is very high. Now I can't speak to a specific model because we haven't released the designs of the new 10 and certainly the 50, the 20 and the 100 that will be coming. But if you follow what's happened in our international currency business over the last 4 or 5 years, I think that's a very good proxy for what's going to happen in the U.S. business. That's a business that's expanded operating profit by hundreds of basis points over the last several years and one that's growing at mid-single-digit plus consistently. I think that's how we should be framing the U.S. business over the next 4 or 5 years.

Okay. And then when we think about the launch, is this just a launch where the new notes will just replace the old ones coming out of retirement on a natural basis? Is there an acceleration of that? How do we -- how does that work?

You're not going to see any kind of cliff, Ian, where the old notes are called back in. So think of it more like a gradual as notes are returned back into the bank, then new notes will be released. So there won't be any step change, let's say, in the volume of notes out there. But over time, you'll start to see that change.

Right. So you won't have like a big spike followed by like you were saying, a cliff.

That's correct.

Okay. That makes sense. And then I know we did talk about international a little bit, especially on the league side. But is there any other opportunities internationally to grow? I know that's actually been a big driver of some of the margin expansion opportunity that you've recognized already. But maybe talk a little bit more about the international opportunity and how we think about recurring versus new wins and then just adoption of micro-optics?

Yes. Maybe I'll start that one, Aaron, and then you can jump in. When you think of our share today in the international currency market, we're actually in the early innings. We estimate between 15% and 20% market share in the world. So plenty of room for us to grow, and we are winning share. And what you're seeing now is a record-high backlog level, which gives us very high confidence in our sales forecast for this year and also sets us up well for success in 2026. In terms of the mix between existing customers and new wins, Ian, I think this is a very sticky business and so once you've got your technology spec-ed in on a banknote, the customer tends to renew. And when they're reprinting, they'll keep the same technology and design in the note. And so that means a lot of, what we call, reoccurring revenue for us. And so we're seeing significant growth in reoccurring revenue, meaning repeat orders from existing customers, and we also expect to win 10 to 15 new denominations each year from new customers that haven't been doing business with us in the past. And we're on track to hit that target for this year.

Okay. And then we're going to shift to CPI. Maybe give us around the world of the different segments, what you're seeing as far as order patterns and inventory levels and just sort of overall underlying market growth in those...

Yes. Well, thanks, Ian. I would just start by saying I'm very encouraged by particularly what we're seeing with CPI and gaming. I think for a lot of investors, that's been a question mark for us as we've come through the COVID inventory normalization cycle. We said a few quarters ago now, probably about a year -- a little less than a year ago, we thought inventory would get normalized somewhere in the second quarter, third quarter. We start to see a return of orders and we'd be on a positive growth trajectory as we got to the second half of this year. That's exactly what's happening. And we've seen orders now up significantly year-over-year, and we have very high confidence. We're going to see double-digit sales growth in the second half of the year in gaming because the end market is healthy, growing, call it, low single digits. Our OEMs are healthy. They've drawn down their inventory, and we're the #1 provider still with leading technology position. So now the orders are just following the recovery from this very high level of inventory. So that feels very good to us, and you're going to see that positive growth in the back half of the year that's going to help our margins too because gaming is the highest margin part of the CPI portfolio. So that feels good. The next area I'd talk to is vending where we had a lot more commentary on that in Q1, where that's the one area of the portfolio that's been impacted, particularly in demand by tariffs. So we put in price increases in the 2Q time period to get ahead of the tariffs. We saw some pull forward in customer orders getting ahead of the price increases that landed in Q2. That's going to come out of Q3. And it's really the China tariffs that is what we're looking at. That's really what affects the vending business. We'll make up for them in price. The question will be on demand. And so we're hopeful for a resolution there on the China tariffs. The rest of the business performing as we expected, both our retail business, doing what we thought for the balance of the year, no change. Same for financial services. When you back up, I think, Ian, you look at CPI as a technology leader, #1 technology position in its market, low single-digit type growth dynamic in that market long term with fantastic free cash flow that we use to deploy in the rest of the portfolio. So that's how I would frame CPI, but feel good really where we're headed exiting this year back to growth.

Okay. Any trends you'd like to kind of call out there, whether it's like adoption of self-checkout or how is self-checkout going or any other kind of category?

No. I think each one of those, you could pick on something a little nuanced in each vertical. Let's talk retail first that you mentioned it. Self-checkout is continuing to get adopted. The form factor or the design of the self-checkout system has changed from where it was 5 to 10 years ago to be less the standard box that just gets put at the end of a checkout line to something more custom and designed. So what we're seeing is a real change in the channel for our products, where 3 or 4 years ago, it was 70% to 80% OEMs that we're selling our components to that are putting those in their standard self-checkout lanes, and those are getting sold to the Walmarts and Targets and CVSs of the world. Today, we're going to move very quickly to that being about 50-50 as we exit this year, which is a big change. And that's because custom self-checkout is now the growth in this market where the big retailers are disaggregating the OEMs and are putting together the products themselves. So they get the best of breed of what they want to look at or have their checkout look like for their consumer. So they're picking their own PoS or point of sale, they're picking their own credit card terminal, they're picking our cash and coin components, someone else's scanner, and they have their own teams developing it. So it's a real change in the channel. But for us, it almost doesn't matter because we're agnostic in many ways to the channel. We'll sell to either the OEM or to the retailer or their integrator, really doesn't matter because we're still the #1 technology leader. And that's the key to CPI is to maintain that technology leadership.

Okay. So speaking of that, maybe touch upon the competitive dynamics that you're seeing in CPI, market share shifts or anything else along those lines?

Market share is pretty stable. And you like that in, what I would say, is a mature business. It's an oligopoly. There's maybe 1 or 2 other major competitors, very rational competitors. One is a company out of Japan called JCM. The other is a company out of Japan called Glory. They play in different parts of our market. What I would say is we're always occupying that #1 leadership position in technology, and we're investing there. You can see it still as we talked about in our Q2 earnings, where we've launched new products in CPI, one called the JetScan Ultra that's gone very, very well in terms of initial sales into the financial services sector that offers higher speeds, more automation and a better sensor package to pick out counterfeits and soiled currency. So we're going to continue to launch new products like that in CPI. It's critical. Again, share, not too much changes in share, very incremental just due to the maturity of the market.

Okay. Okay. And then -- and I know you mentioned tariffs, but can you maybe talk about what you're doing to mitigate them and what the impact is going to be?

I'll let Christina.

Yes. Just a reminder, Ian, that tariffs were not material for us overall, about 4% of our COGS and primarily related, as Aaron said earlier, to tariffs out of China that impact our vending end market within CPI. So we sized the direct impact originally at about $25 million, and we updated that to about $15 million in our most recent earnings call just based on the changes in tariffs. So overall, not material, primarily related to China, and we're mitigating that direct impact with pricing and productivity. Now what that does do, though, on an indirect impact is it causes some changes in buying behavior, primarily again in vending just based on customers trying to get ahead of pricing increases which we saw in Q2 and perhaps even pushing out some orders because there's too much uncertainty, which we're anticipating in Q3 and we signaled in this quarter's earnings call. So I think overall, you'll see a little bit of noise around the underlying demand as people weighted out what's happening with tariffs, but on a direct basis, fully mitigating with pricing and productivity.

Okay. So Christina, since I have you here, it just looks like things are like on the upward for you here. It seems like backlog and gaming is getting better. We're getting closer to the launch of the redesigns from a currency perspective. So how are you thinking about like capital allocation here, your free cash flow and anything else, more deals? How are you thinking about that?

Yes. I appreciate the question. And I would say, you're right. The year is unfolding as we expected it would. And we're starting to see positivity in gaming, which will return back to double-digit growth in the second half of the year. International currency continues to be very strong, very high backlog levels. And this is all really as we planned. So we feel really great about that. In terms of capital allocation, in general, we're CapEx light, right? So we'll be approximately around 3% of sales in CapEx. Over the last 2 years, as you know, we've made significant investments in upgrading our U.S. currency equipment, and that's going to support the whole new series for 10 years to come. So we're not going to see another big investment coming out of the U.S. But of course, we're highly focused on investing in organic growth. So we will make investments into other programs as we continue to evaluate the businesses. So you're going to see that we're going to continue to pay a competitive dividend as we always have, targeting a yield of approximately 1%. And then, of course, I know Aaron loves to talk about M&A. And so that will be a primary focus for us in the future as well. So Aaron, I don't know if you want to maybe end on that note.

No, I think that's right. Number one priority is invest in the core; number two, pay a competitive dividend; and three is M&A. And we've done 2 deals in the last 1.5 years or so. Funnel, Ian, is active and robust as it's ever been for us, and we feel very good about that. So that's where I think there's high, high confidence that in the next 12 months, we'll have another deal coming through. But we want to stay disciplined in the framework, right? We're looking at M&A that is a one-step adjacency from our core. It's very clear how we can add value either commercially or operationally off the existing portfolio we have, continues to diversify us to be less reliant on cash in markets and can generate a good return. And of course, last but not least, I would say, that financial criteria keeps our net debt below 3. That's our target. So those are going to be deals of $100 million -- couple of hundred million dollar revenue, probably lower OP or EBIT than we have today. But that's because we see this opportunity to improve it, and that's where the value gets created over the next 3 to 5 years. So I feel very good about that, Ian. And of course, should M&A not be there for us, we're in this very nice position to think about share buyback as well. But I would just put that as the level of priority. And again, the funnel is strong and most of our deals that we really spend a lot of time on are all cultivated. They're not getting shopped around. There are things we're in, negotiating with the owner that we think we can get a very good deal on for our shareholder and add a lot of value to.

Okay. Well, this is really helpful. And I know we're pretty much out of time. So I want to say thank you again for this. And I think the outlook is very, very favorable here, especially kind of with things getting better.

Yes. Thanks, Ian. It's good to see you again. Appreciate it.

Thank you.

Thank you.