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

Good day, and thank you for standing by. Welcome to the Crane NXT Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Matt Roache, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Crane NXT's Second Quarter 2026 Earnings Conference Call. Before we begin, I'd like to remind you that the presentation slides we will reference today are available in the Investor Relations section of our website at cranenxt.com. A replay of today's call will also be available on our website following the conclusion of our remarks. Before we discuss our results, I encourage all participants to review the legal notice on Slide 2 regarding forward-looking statements, which are subject to risks, uncertainties and other important factors that may cause actual results to differ materially. Additionally, please see the note on Slide 2 on the use of non-GAAP financial measures. We also refer you to the cautionary language included in our earnings release, our Form 10-K and subsequent SEC filings. During today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures can be found in the tables accompanying our earnings release and slide presentation, both of which are available in the Investor Relations section of our website. Joining me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. During the call, we will review our second quarter highlights, discuss our financial and operational performance and provide an update on our 2026 financial guidance. After our prepared remarks, we'll open the call for questions. With that, I'll turn the call over to Aaron.

Thank you, Matt, and good morning to everyone joining us today to discuss our second quarter results. I'd like to begin by thanking our Crane NXT team members around the world for their strong operating performance throughout the quarter. The key message I want to reinforce today is that we are executing against our value creation priorities, delivering growth, building on our leadership positions and driving operational excellence through organic margin expansion and strong free cash flow. And you can see that progress reflected in our second quarter results on Slide 3. Organic sales grew by approximately 3% and total sales increased approximately 22% year-over-year, reflecting both continued strong performance in our SAT segment and the contribution from Antares Vision in our DTT segment. And I'm very pleased with the progress we've made in Q2 with the integration of Antares. We're quickly implementing the Crane Business System, including training and holding Kaizen events to improve productivity and drive growth. And we're off to a strong start in our first 100 days and remain confident in our ability to achieve our full year estimates. Importantly, given the strong first half performance and confidence in our continued momentum, we're increasing our full year adjusted EPS guidance to a range of $4.22 to $4.42. So with that, let me now hand the call over to Christina to review our second quarter performance in more detail and our updated guidance. Christina?

Thank you, Aaron, and good morning, everyone. I'd also like to express my appreciation to our associates around the world for their hard work in the second quarter. Turning to Slide 4. Sales were $493 million, an increase of 22% year-over-year. Organic sales grew 3%, driven by continued strong performance in SAT. Adjusted EBITDA was $115 million with adjusted EBITDA margin of approximately 23%, representing 150 basis points of organic margin expansion. For the full year, we continue to expect adjusted EBITDA margin of approximately 24%. We delivered adjusted EPS of $1.10, an increase of 13% year-over-year and ahead of our prior expectations. Finally, adjusted free cash flow was $79 million, resulting in a conversion ratio of approximately 124%. We continue to expect full year free cash flow conversion of 90% to 110%, supported by our robust backlog and operating discipline. Moving to our segments and starting with Security and Authentication Technologies on Slide 5. Second quarter sales were $227 million, an increase of approximately 17% year-over-year, including 1 month of inorganic contribution from the De La Rue Authentication acquisition, which closed in May 2025. Organic sales increased approximately 10%, driven by sustained demand in international currency. In the second quarter, we celebrated the 225th anniversary of Crane Currency, which was founded in 1801 and has been the sole-source provider of secure currency paper to the U.S. federal government since 1879. We marked the occasion at a celebration in Dalton, Massachusetts with the Director of the Bureau of Engraving and Printing, whose remarks highlighted our partnership on the development of the new U.S. currency utilizing the next generation of micro-optic security technology. This event also highlighted our more than 75-year relationship with the U.S. Government Publishing Office with whom we partner to make the U.S. Passport paper. In Q2, we renewed our contract, extending our relationship for the U.S. Passport for another 10 years. We are incredibly proud to serve as the trusted partner to the U.S. government on these important programs. Returning to our results. Adjusted EBITDA was $59 million in the second quarter with adjusted EBITDA margin of 26%, an increase of 30 basis points over the prior year. On an organic basis, adjusted EBITDA margin increased approximately 200 basis points year-over-year, reflecting the positive impact of productivity programs in the currency business and the execution of synergies in authentication as planned. Finally, SAT backlog of approximately $500 million reflects a new record high. This backlog provides meaningful visibility into customer demand and supports our confidence in the updated SAT sales outlook. We have a healthy pipeline of opportunities and are investing in future growth. Turning to Detection & Traceability Technologies on Slide 6. Second quarter sales were $267 million, an increase of 26% year-over-year, reflecting a full quarter contribution from Antares Vision. Despite softer hardware demand in CPI, DTT expanded organic EBITDA margin by approximately 240 basis points through pricing discipline and productivity actions. We expect to see further margin accretion in DTT as the year progresses and are on track to end the year with adjusted EBITDA margin of approximately 27%. Segment backlog was $257 million, including $125 million of Antares Vision backlog, which we expect to deliver over the next 12 months. As we integrate Antares, we are focused on converting this backlog, deploying CBS and realizing the margin expansion opportunities that supported the strategic rationale for the transaction. CPI backlog of approximately $132 million reflects sequential growth of approximately 10%, driven by order timing with a book-to-bill ratio of approximately 1.1x. Turning to our balance sheet on Slide 7. We ended the second quarter with net leverage of approximately 2.7x. Looking ahead, we anticipate deploying free cash flow toward debt reduction and expect to end 2026 with net leverage of approximately 2.3x. As we further strengthen our balance sheet, we will continue to evaluate capital allocation through a disciplined framework focused on the highest return uses of cash and long-term shareholder value creation. Moving now to Slide 8. We are updating our 2026 guidance to reflect increased SAT sales and an improvement in nonoperating expense. For the full year, we continue to expect total sales growth of 15% to 17%. In SAT, we now expect high single-digit to low double-digit sales growth based on the strength of international currency backlog and continued strong demand. In DTT, we continue to expect sales growth in the low 20s percent range with Antares Vision contributing approximately $200 million to $210 million and with the fourth quarter representing the largest contribution of the year, in line with their historic seasonality. In CPI, we expect sales to be slightly down for the full year, reflecting mid-single-digit growth in services, low single-digit growth in vending and a mid-single-digit decline in hardware. We are also updating our forecast for nonoperating expense to approximately $80 million from $85 million, reflecting the favorable impact of expected debt paydown and lower borrowing costs. As a result of these updates, we are raising our full year EPS guidance range to $4.22 to $4.42 per share. Looking ahead to the third quarter, we expect low double-digit sales growth. In SAT, we expect sales to be flat to slightly down year-over-year given the very strong comparison to Q3 2025. In DTT, we expect sales growth in the mid-20s percent range with Antares Vision contributing approximately $55 million to $60 million of sales, while CPI sales are expected to decline in the low single digits year-over-year. Now I'll turn it back to Aaron to provide closing remarks.

Thank you, Christina. To wrap up, we delivered a solid second quarter and continue to execute against our key value creation priorities of accelerating organic growth, building on our leadership positions and driving operational excellence. Based on our continued momentum, I'm pleased that we're in a position to raise our full year adjusted EPS guidance. We're confident in our ability to deliver against the commitments we've laid out, strengthening the portfolio and converting our competitive advantages into sustainable growth, margin expansion and strong free cash flow. So thank you again for your time this morning. And I'd also like to again thank our Crane NXT team members around the world for their commitment to our customers, our communities and all of our stakeholders. And with that, operator, we'll take our first question.

[Operator Instructions] Our first question comes from the line of Matt Summerville of D.A. Davidson.

A couple of quick questions. How much capacity is being added either organically through your own footprint or through partners for security, substrate and printing as it pertains to the currency business? And can you give a little bit more granularity as to what we should read through the fact that you're now booking out into 2028? And then I have a follow-up.

Yes. Thanks for that, Matt. And we just feel incredibly bullish about this currency business, both domestically and internationally, and you see that in the backlog, again, reaching another all-time high this quarter. We're adding capacity very quickly, both as you alluded to, and we've mentioned in the past through some partnerships here this year, and that's going very well, as well as the build-out, particularly of our micro-optics facilities both here in the United States and in Europe. And that's already going on and is going to continue for the next several years as we see the volume both coming into our backlog and what we see getting tendered that we feel we have a very high probability of winning. So that being said, we're in a place to sustain high mid-single-digit growth in the international currency business for the next few years. That will ultimately lead to doubling over the next several years, the size, particularly of our micro-optics capabilities. So I think that puts us in a very good position, both for obviously, the rest of '26, but into '27, '28 and beyond. And that's what we're investing for.

Maybe just as a follow-up, can you give a little bit more granularity and detail around how we should expect third and fourth quarter revenue and earnings cadence to look across the 2 reportable business segments? Obviously, there's a little bit of volatility in demand impacting CPI.

Yes. I'll start there, Matt. And I think it's just worth noting that we had a strong first half of the year, and that gives us the confidence to raise our full year guidance. So in the third quarter, we'll see a low double-digit sales growth overall with a mid-20s percent EBITDA margin. Now in SAT, we'll see a low single-digit decline, and that's largely driven by the comparative to 2025 in currency. As you know, we had a very strong end of the year last year. Authentication will perform as expected in Q3, which is a mid-single-digit revenue grower. In DTT, we'll see a mid-20s percent growth. Antares will contribute $55 million to $60 million of sales. And then in CPI, we'll be down in the low single digits, which is continued softness in our hardware end markets. I do just want to point out the phasing of the revenue in the back half of the year will be a little more skewed toward Q4, which is aligned with our normal seasonality. But so overall, if you look ahead to the full year, we're expecting a mid-teens sales growth with an adjusted EBITDA margin of about 24%, and that's 100 basis points of organic margin expansion year-over-year.

Our next question comes from the line of Michael Halloran of Baird.

This is Trent on for Mike. So a quick question on the first one here. Just good to see Antares moving higher right out of the gates. Just any color on the confidence there and what you saw to raise expectations into this year?

Yes. Thanks for that, Trent. Bottom line is my confidence is very high in how we're executing Antares. It is 150 days in now post the close of the acquisition. As I mentioned in the prepared remarks, we've really had a lot of good early success in implementing and driving CBS to get after our synergies, and that's going very well. And as you know, it opens up for us here at Crane NXT, these new exciting markets in pharmaceutical track and trace technology, and food and beverage, inspection and detection that I'm more confident than ever that's going to play out for us very well over the long term. So I couldn't be more pleased with how the team is integrating into the company, how we're executing and again, gives us really high confidence as we look at the second half of the year.

That's great. And then as a follow-up kind of on the flip side of DTT here, it's not terribly surprising to see some pressure as it relates to the core CPI hardware and vending business. Just any thoughts on the state of the union, where we are by end market? And what gives you kind of confidence in the outlook there based on the backlog or anything else you're seeing? I know book-to-bill was kind of flattening out and you're starting to see sequential backlog growth? Just any help there would be helpful.

Yes. Thanks for that, Trent. So you're right, a little bit softer in the top line of CPI in Q2, driven by vending and hardware. And really in hardware, that was in retail, where we've just seen a little slowness in some of our larger projects. I think the key point here, and you mentioned a few of these that I want to reiterate, are one, sequential build in the backlog book-to-bill well above 1 and excellent execution by our team to drive organic margin expansion over 200 basis points of margin expansion in the quarter. I think that's really best-in-class execution when you look at where we're at on the top line and over 100% free cash flow conversion. So CPI for us in this portfolio is driving this great free cash flow and high margins. And we are continuing to invest in areas we see growth like services, which continues to grow at mid-single digits. So when you put that together, we've adjusted the forecast. You saw that for the rest of the year and have high confidence in the outlook and again, why we're overall raising guidance for the full year.

Our next question comes from the line of Bob Labick of CJS Securities.

Congratulations on strong execution.

Thanks for that.

So the portfolio is really taking shape here. And one of the benefits of Crane NXT is the Crane Business System, CBS. And you've alluded to it, but can you maybe like elaborate a little bit more on some of the CBS actions taken in OpSec and De La Rue to date and some of your intentions for Antares?

Absolutely, Bob. And I appreciate you mentioning that because sometimes it can get lost. What really matters with CBS, not as just saying that we have tools and resources, but it's got to drive outcomes. And that's got to drive quality, delivery, cost and productivity in the P&L. And that's what you're seeing in the authentication business where we had organic margin expansion in authentication over 300 basis points in the quarter, and that's CBS in action. And it's coming from how we're doing 80/20 on the product lines to reduce those at lower margins and move up to higher gross margins. We're seeing that come through. We're also seeing it in consolidation of the footprint of the business, and that's very tangible when you go to the business. In fact, Christina and I were just there earlier this week to our facility in the United States. And I would say it's a transformation that's occurred in how we're running the business day-to-day as you walk through those factories, the optimization that's occurred on the factory floor, and you see it in our CBS daily management boards and the Kaizen schedule that's being run. Case in point in our facility here in the U.S., we're going to run about 1 Kaizen a month for the next several months, all around driving productivity, and that's what's driving the hundreds of basis point margin improvement in authentication. The exact same thing is happening in Antares Vision. And I was there 2 weeks ago, again with Christina, and we toured the floor and you already see the transformation occurring in the operation, and that's what gives us high confidence in the margin expansion we're going to see through the balance of 2026 and onwards through the implementation of Kaizen in that business. So I feel very good about it. It's tangible. It's real. It's not hypothetical, and you see it in our outcomes.

Okay. That's wonderful. And then I think in the past, you've given us a sense of the authentication assets margins. It sounds like you may be even a little ahead of schedule. But could you remind us kind of where they started the year, where you expect them to finish in authentication and how -- that sounds like it should be a tailwind to next year's margins as well, if that's the case?