Crane NXT, Co. Q2 FY2025 Earnings Call

Thank you, operator, and good morning, everyone. I want to welcome you all to the second quarter 2025 earnings call for Crane NXT. Before we begin, let me remind you that the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com, and a replay of today's call will also be available on our website. Before we discuss our results, I encourage all participants to review the legal notice on Slide 2, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, we refer you to the cautionary language at the bottom of our earnings release and our Form 10-K and subsequent filings pertaining to forward-looking statements. During the call, we'll also be using non-GAAP financial measures, which are reconciled to the comparable GAAP measures in the tables at the end of our press release and accompanying slide presentation, both of which are available on our website in the Investor Relations section. With me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. On our call this morning, we'll discuss our second quarter highlights, our financial and operational performance, and our 2025 financial guidance. After our prepared remarks, we'll open up the call to analysts for questions. With that, I'll turn the call over to Aaron.

Thank you, Matt, and good morning. I appreciate everyone joining today's call to review our second quarter results. I'd like to start by recognizing our NXT team members around the world for their continued dedication and for delivering another quarter of strong execution. As shown in the highlights on Slide 3, our second quarter performance was in line with our expectations, with sales growth of approximately 9% year-over-year and adjusted EPS of $0.97. We achieved 120% free cash flow conversion in the quarter, reflecting continued operating discipline. In Q2, we continued to build momentum in our strategic growth areas. Our currency business delivered another standout quarter, again achieving a record high backlog. We also recently introduced new innovative products in our Authentication and CPI businesses, which position us well for future growth. In Authentication, we launched Fortress, an advanced proprietary security feature that can be applied to a product surface or label to authenticate the product in real-time and to trace the origin of the product to the point of manufacturing. This product was introduced to a major customer and has a strong pipeline for additional applications. And at CPI, we launched several next-generation products that will enhance our leadership position using advanced imaging and detection technology. This includes the new JetScan Ultra, a high-speed currency scanner that provides counterfeit detection for the banking, gaming and retail markets. Since the close of the De La Rue Authentication acquisition on May 1, we have made significant progress in integrating this business with OpSec to form the new Crane Authentications. I'll provide more detail about our actions in this area in a few moments. We continue to have a strong balance sheet with ample capacity for additional M&A. Given the strength and activity in our M&A pipeline, I am confident we will have another transaction to announce within the next year. Finally, we continue to navigate tariff and macro uncertainties and are mitigating these impacts through a variety of pricing and supply chain actions. Given these initiatives, we remain confident in our outlook and are reaffirming our full year EPS guidance in the range of $4 to $4.30. Now turning to Slide 4, I want to take a moment to review our strategy of building a leading industrial technology company focused on solutions that secure, detect and authenticate. Ultimately, what we do here at Crane NXT is focused on providing confidence to our customers and their consumers that the products they buy and the way they buy them are authentic and secure. Over the past quarter, we've integrated De La Rue Authentication and OpSec to form Crane Authentication. With this business, we have created a leading position in the authentication market. A key to our success is utilizing the Crane Business System or CBS to drive operational improvements in both our existing businesses and those we acquire. So with this in mind, I'd like to move to Slide 5 to discuss the actions we've taken over the last 100 days since closing the De La Rue acquisition. As shown on the left side of this page, we now have a market-leading portfolio focused in 3 areas: first, brand authentication, where we sell advanced security technology for labels, track and trace software, and provide additional online services to the world's leading brands to protect them and their consumers from counterfeiting. Second, government solutions, where we work with governments to ensure the collection of tax revenue and authentication of products. And finally, identification security, where we design and manufacture ID documents for governments incorporating new security features to prevent counterfeiting. Over the past 100 days, we hit the ground running, deploying the Crane Business System to integrate the business and achieve our planned synergies. These actions include utilizing the 80/20 process to rationalize product offerings, consolidating our site footprint, leveraging scale to drive supply chain savings, integrating the organization to simplify and reduce the cost structure, and implementing improved pricing processes. I would like to thank the entire Crane Authentication team for their hard work during the past quarter. Thanks to their efforts, we are now anticipating accelerated realization of operating synergies, which will lead to operating profit margins of approximately 20% as we exit 2026 ahead of our original expectations. So with that, let me now hand the call over to Christina to review our second quarter performance in more detail.

Thank you, Aaron, and good morning, everyone. I would also like to start by saying thank you to our associates around the world. We appreciate your hard work. Starting on Slide 6, we delivered second quarter results that were in line with our expectations. Sales increased approximately 9% year-over-year, driven by acquisitions and strong performance in international currency. Core sales declined approximately 1%, reflecting the anticipated lower volume in CPI. Adjusted segment operating profit margin of approximately 24% was down approximately 350 basis points year-over-year, driven by the lower CPI volume and the expected impact of dilution from acquisitions. Free cash flow conversion was approximately 120% in the quarter, and we continue to expect the full year conversion to be in a range of approximately 90% to 110%. We delivered adjusted EPS of $0.97. Moving to our segments and starting with CPI on Slide 7, core sales were down approximately 7% year-over-year, outperforming our expectations driven by the timing of shipments. Adjusted operating margin decreased approximately 300 basis points year-over-year, reflecting the lower volume and unfavorable product mix, partially offset by productivity gains. We expect margin accretion in the second half of the year, driven by improved product mix from gaming sales growth as well as productivity programs and disciplined cost management. These factors will result in CPI's full-year operating margin to be between 29% and 30%. CPI ended the quarter with a backlog of approximately $144 million. Most notably, gaming orders were up approximately 10% sequentially and up by approximately 30% year-over-year. Our gaming OEM customers are at normal inventory levels, and we expect gaming to have a strong double-digit growth in the third quarter. Turning to security and authentication technologies on Slide 8, in the second quarter, sales grew approximately 32% year-over-year, including acquisitions. Core sales increased approximately 9% year-over-year driven by higher international currency volumes. As a reminder, our U.S. currency business resumed production in Q2 after successfully completing the technology upgrades that will support the new currency series, which we expect to begin release in 2026. This was a significant milestone, and we are very proud of the accomplishments of our team. As Aaron noted, our international currency business continues to perform well with a new record high backlog of approximately $400 million in the second quarter. We continue to expect mid-single-digit growth for the full year despite the tough comparison to a strong second half of 2024. Finally, adjusted operating margin of approximately 21% reflects acquisition dilution as expected. Moving to our balance sheet on Slide 9, net leverage at the end of the second quarter was approximately 2.6x, reflecting the term loan used to fund the De La Rue Authentication acquisition. Importantly, our strong free cash flow generation will enable us to continue to invest in organic growth while also paying down debt. We expect to end the year with net leverage of approximately 2x, which provides flexibility for additional M&A. Moving now to Slide 10, we are reaffirming our full year guidance. We continue to expect SAT sales growth to be between 19% and 21%, including approximately $80 million to $90 million of De La Rue sales in 2025. We expect CPI full year sales growth to be between negative 2% and flat. Adjusted segment operating margin is anticipated to be in the range of 25.5% and 26.5%, reflecting dilution from De La Rue, offset by our continued strong focus on pricing and productivity. Finally, we are maintaining adjusted EPS in the range of $4 to $4.30. Now I'll turn it back to Aaron for his closing remarks.

Thanks, Christina. Moving to our final slide, I want to highlight a few key points. First, we continue to drive strong operational execution. Our Q2 performance was in line with expectations, and we are utilizing CBS to drive productivity initiatives throughout the company. This includes accelerating the realization of synergies with the integration of Crane Authentication and continuing to drive high free cash flow conversion. Additionally, we continue to build momentum in our strategic growth areas, led by our technology leadership. In Q2, we achieved another record high backlog in our international currency business, providing confidence in our full year sales outlook and giving us strong momentum heading into 2026. Also, as Christina mentioned, the U.S. currency redesign program continues to be on track for a 2026 launch. We are also launching new products across the portfolio, extending our technology leadership position. These include the new Fortress product in Authentication and the JetScan Ultra in CPI. And finally, our M&A funnel is active, and our strong balance sheet gives us ample capacity to continue building our portfolio of differentiated technology solutions, delivering long-term value for our shareholders. So thank you again for your time this morning, and I'd also like to thank our dedicated team around the world for their commitment to our customers, our communities, and all of our stakeholders. And with that, operator, we're ready to take our first question.

Our first question will come from the line of Matt Summerville from D.A. Davidson.

A couple of questions. First, you gave some really helpful color on orders and demand with respect to gaming. Can you go through sort of a similar analysis of the other main CPI verticals? And then maybe comment around how your level of conviction that you can see CPI returned to a sustained positive organic trajectory? And then I have a follow-up.

Sure. Matt, thanks for the question. Well, for CPI, I'm very encouraged by where we're at now in gaming. We know this end market continues to remain healthy, the casino and gaming end market, and we feel very confident in our #1 market position as well. Now we're in the position where the inventory at our OEMs has normalized. We talked about that coming out of the last few quarters, we expected this pivot as we got to the second half of the year, and we're seeing it. So we have high confidence here based on the order book and the outlook that we're going to see strong double-digit growth in the second half of the year in gaming, and that's playing out just as we expected. So to go to the other verticals, I think in total, they're playing out largely as we expected and really as we talked about last quarter. So vending, as you know, we talked about headwinds really from the China tariffs slowing some orders. We discussed that in Q1, leading to some headwinds in sales that we see there for the back half of the year. Retail, some positivity, particularly with custom self-checkout. I think it's a mixed bag a little bit among the OEMs, and you could see that in some results earlier this week. Financial services are playing out in line with expectations. I think what's really encouraging here to CPI to get to your second part of your question about the long-term outlook, this is a business always in a #1 or #2 market position and technology differentiation and leadership is key, and we're now in the process of launching new products. We talked about that in some of the prepared remarks. So I feel very good about where we're at with CPI. You can see the corner turned. Long-term, we look at this as a low single-digit growth business going into 2026.

Can you discuss how we should consider the revenue and earnings cadence in the second half of the year, particularly between Q3 and Q4? Additionally, you mentioned the authentication-related division within SAT achieving a 20% operating margin. How does that translate into incremental EPS growth in 2026 compared to 2025 for the acquired businesses?

Yes. Thanks, Matt. Why don't I let Christina take the first one on the phasing in the back half of the year, and I'll take the authentication question.

Yes. It's important to reiterate that we anticipate full-year sales growth of 6% to 8% in the SAT segment, with an operating margin of approximately 25.5% to 26.5%, which remains consistent with our previous guidance. Regarding the timing, we expect a slight increase in core revenue in the third quarter, driven by CPI and a full quarter of DLR in our SAT results, reflecting in our non-organic outcomes. Additionally, we will see higher segment operating profit resulting from pricing and productivity initiatives mentioned by Aaron, along with cost reduction strategies and ongoing operational discipline. The distribution of both revenue and operating profit will be somewhat heavier in the fourth quarter. We are confident in our full-year guidance range and the expected sales growth of 6% to 8%.

Yes. Thanks, Christina. I'd just add, again, think of revenue and OP as Christina said, 1% to 2% kind of weighted to the back half to the fourth quarter versus the third quarter. And to your question on authentication, Matt, I think the work here by the teams have been fantastic deploying CBS very quickly. We're 100 days basically into the acquisition of Da La Rue and integrating that with OpSec. So I'm very encouraged by the speed of that execution. That's where we have line of sight based on the actions we've taken operationally to really exit '26 with an OP margin that's going to be approaching 20%. That's a very nice step-up from where we're going to end this year, which will be in the low teens. Again, that's based on our business case and our execution of our synergy profile. So in terms of what that means for accretion in 2026, I think that's too early to say. We'll make that part of the 2026 guidance, which we'll do in the first part of the year.

Our next question will come from the line of Damian Karas from UBS.

I wanted to ask you about your SAT guidance, holding the sales growth for the year unchanged, despite a really nice solid second quarter. If I'm just accounting for the De La Rue deal and FX, it seems like you're implying kind of like a mid-single-digit year-over-year decline in the back half and a pretty notable step down from the second quarter. Could you just help us understand why maybe you're a little bit less optimistic in the second half of the year for SAT?

Thank you, Damian. We need to review the sequential numbers you mentioned. However, the main takeaway you provided is accurate. We've experienced strong performance, especially in the international currency business, with new orders and a robust second quarter, largely due to project-driven demand from central banks for their currency shipments in that period. Consequently, we aren't changing our full-year expectations; instead, we’re observing a shift in timing, moving some activity into the second quarter and away from part of the second half. This is primarily influenced by our customers' schedules and request dates. Additionally, with international shipments in the second quarter increasing, it has impacted the mix of the SAT margins. For the full year, we still anticipate SAT margins for this segment to be around 21%. Overall, I feel optimistic about our currency performance and the U.S. program staying on track. As for the details of the timing, we can navigate that, but our outlook remains unchanged; it's merely a matter of timing.

Okay, got it. And then this is the first time I'm hearing about Fortress. Aaron, I was wondering if you could maybe just tell us a little bit more about that this customer win and what specifically Fortress is providing them. I'd love to hear kind of like the other relevant applications you alluded to.

Yes, I appreciate that. Fortress joined our portfolio as part of the De La Rue acquisition, which made us very enthusiastic about the technology they offer. It has recently launched and is new to the market with its first customer. Essentially, it is a materials technology that can be applied to a label or product surface, allowing for a unique identifier. When photographed with a smartphone camera using our specialized app, it can trace the product back to its origin and manufacturing, or the moment the marker was applied. The advantage, Damian, is that it provides provenance all the way back to the manufacturing line in an easy-to-use manner, primarily for B2B customers purchasing the product. This technology is fundamentally based on materials and is straightforward to use. It fits into our technology portfolio, especially in our authentication applications, where it stands out as a high-end solution. The pipeline for this technology is promising, as it can be applied across various end markets, including food and beverage and consumer goods. We've recently rolled it out to a significant customer in one of our emerging markets, and I'm excited about its potential. I would be happy to demonstrate it for you when we meet in person, Damian.

One moment for our next question. The next question will come from the line of Mike Halloran from Baird.

You got on Pez, on for Mike. Just hoping you could help a little bit with the margin phasing in the back half. It feels like a pretty meaningful swing, Aaron. I know you mentioned the stress of the margin from the international shipments that came in in 2Q. But can you help us a little bit maybe with the puts and takes, specifically to the margins in the back half?

Certainly. I’ll begin and then hand it over to Christina. I'll discuss CPI. We had a great quarter with strong top line sales, largely driven by vending. Customers placed orders, and we shipped within the quarter to stay ahead of our tariff price increase. However, vending has a lower margin compared to the rest of our operations, leading to some margin compression. Considering the developments in gaming and the shifting of vending from the third quarter to the second, we expect a natural improvement in margins, along with the pricing strategies and productivity enhancements we've implemented. I’m confident that on a full-year basis, our CPI margins will end between 29% and 30%. Christina, over to you.

And just bridging the gap to SAT, we expect SAT margins to be in the low 20s percent for the full year, as Aaron said, in terms of currency, continued strong performance driven by international, and the year was pretty evenly weighted. It will be slightly more weighted towards the second half. In terms of margin, as Aaron said, we had a little bit of unfavorable mix coming through in the quarter that will kind of resolve itself before the end of the year. As you know, we're seeing dilution from the acquisitions about a few hundred basis points, which was expected. And now with the closing of the De La Rue transaction, as Aaron discussed earlier, we're accelerating the realization of operating synergies. That will drive margin accretion in the second half in the Authentication business. There's also some normal seasonality in OpSec, where revenue and OP are typically just a little bit more weighted towards the second half. Considering all those factors, we have high confidence that we'll get to that OP margin target of 21% for the full year with a step-up in the second half, driven mostly by the actions that we've already taken in Q2.

Excellent. That's super helpful, color. I appreciate that. Switching gears a little bit on the M&A front. Obviously, as we continue to work through the Crane Authentication and the integration of the assets, maybe talk a little bit about how some of the vectors of opportunity have changed if at all, and maybe some technologies that are more interesting than they were 2 years ago. Lastly, maybe just give us a little color on how you view the funnel. I know, Aaron, you said you feel confident about closing a deal in the next 12 months, but maybe more broadly talk about how you feel about the funnel.

Yes. Thanks, Pez. I'll start with the last part: I feel very optimistic, as I said, and confident that we're going to have another deal in the next year, just based on the strength of the funnel, the activity we have going on, things where we've looked at and continue to prosecute. So it's as healthy as it's ever been for us in the last 2.5 years, so that feels very good. And as you saw in Christina's remarks, the balance sheet is in very good shape with our free cash flow. We have sufficient firepower to do exactly what we said we were going to do. I think the key here, and maybe to the first part of your question is we want to continue to apply the same framework, right? This is a hallmark that has got to be disciplined M&A that's focused on a very clear framework that we put out that I think will serve us well. So we don't want that to change. That's around assessing the market, first of all, and looking at technology leadership positions. To your point, with the new acquisitions that we now have with Authentication, that opens up new near adjacencies that we couldn't have said 2 years ago when we started the company. There's a broader adjacency set that's fueling our funnel. We look at these companies, right? That's step 2, to make sure they have wide moats with defensible IP, and we could be better or very good owners of those companies. Third, the criteria is around value creation. We've got to find a path that we can always apply CBS and synergies to generate very good returns. We'll continue to be prudent, opportunistic as we see targets emerge and keep on this very clear framework we've established that I think is going to serve us well and be consistent in this approach.

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

I wanted to start with Crane Authentication. Now with De La Rue closed, you've very rapidly built this segment up to scale. Could you talk about the core drivers for this business going forward and maybe break it down between the physical security and tags and then the online security, brand management, and digital sales as well? What drives each of those, the physical and the kind of online digital sales for authentication?

Thank you, Bob. I share your enthusiasm for the leadership position we've established and the scale achieved by integrating these two entities along with our core technology from the currency business in micro-optics. The past 100 days since the acquisition have been very busy for me, allowing me to visit most of the major De La Rue sites, engage with the team, and meet with customers, which has been truly rewarding. We've successfully launched the new Crane Authentication brand. To address your question in more detail, I see our business as divided into three key areas. First is brand authentication, which combines physical solutions with track and trace software. This area is growing alongside the market for branded goods, typically seeing mid-single-digit to high single-digit growth, as brands increasingly seek more authentication solutions. The brand segment shows potential for strong single-digit growth with some brands exceeding mid-single-digit growth. Next, we have government solutions primarily focused on tax stamps for governments. This segment is all about expanding our offerings within existing government clients and attracting new clients looking to boost tax revenues. I anticipate a steady mid-single-digit growth here as well, with many commercial synergies with our currency business, as we are already a trusted partner for central banks. You can see the benefits of this in our SAT segment and the initiatives led by Sam Keayes. Lastly, government ID is a new area for us. Responding to a previous question from Pez, I want to highlight our ID portfolio, which presents chances to introduce advanced technology and upsell, similar to our approach in the currency business. This segment opens up opportunities for both organic growth and potential acquisitions. Overall, I see positive trends supporting our business in these three segments, where both organic investment and M&A can play roles.

Okay, great. Shifting gears a little to the 2026 yearly currency order outlook and timing. There's a lot of numbers out there. There's the budget, then there's the currency order itself, which is going to be wide enough to drive a truck through. Ultimately, the final order will come out at some point later, and we'll find out the real number. My question is, can you give us a sense for your expectations towards this? I guess we'll learn the next thing maybe September, October. But give us a sense what you're working towards in calendar '26 in terms of U.S. volumes and how we should think about it?

Yes. Thanks, Bob. So first on the timing, I think you're right. There will be, somewhere in the September, October timeframe. We don't know precisely. We'll find that out when the Fed publishes it. In terms of the outlook, what we're thinking for our base case is volume is probably in the same range as we've been in this year. The key thing we want to look at is mix. That's really the big driver for our business. That's what we're going to have our eyes on is that mix between, call it, the $1 bill and the $100 bill in the varieties, denominations in between. We'll know in the next 60, 90 days where that sits. Mix will be the key for us. Maybe, Christina, if you want to add just about the U.S. currency redesign program, where that sits or any more color on that?

Yes. I mean, we're super excited about the launch, which we're expecting to start next year. As you know, we resumed production in our U.S. currency paper-making processes in the second quarter, which was very successful and a very significant milestone for our team. So I'll take the opportunity to say congrats to our currency team on a job well done. We're feeling really excited about the trajectory of currency.

Our next question will come from the line of Bobby Brooks from Northland Capital Markets.

Aaron and Christina, now that you've had De La Rue under your ownership for about 100 days now and you're on your way to applying or already on your way of applying CBS, you even mentioned accelerating those actions. I was just curious to hear maybe some actions that you've already taken or plan to take to elevate the margins there? Or maybe where you see the most opportunity for enhancements.

Yes, thank you, Bobby. It has been 100 days, and we are already in the process of applying our initiatives, having prepared to do so from day one, and we are making significant progress. As a reminder, when we merged Crane Authentication, we aimed for about $16 million in combined run rate synergies, which we generally expect to realize by the third year. Most of these synergies will come from operational improvements which will simplify our cost structure. This includes the integration of our sales and marketing teams and management, leading to natural reductions in costs. We have largely executed these plans. Additionally, we are consolidating our facilities; some have already been done while others are in progress, and we have communicated this to our teams and leaseholders. Furthermore, we are rationalizing our product offerings to combine the best of Crane, OpSec, and De La Rue into a streamlined portfolio that offers diverse options for customers at various price points. All these actions align with our focus on deploying CBS, as well as implementing various productivity initiatives and optimizing our product lines. We are confidently expecting to see continued margin growth in the Authentication business through the remainder of 2025 and into 2026, aiming to exit the year with an operating margin around 20%.

That's very informative. Let’s move into the topic of authentication. There was a Wall Street Journal article about a month ago that highlighted the increasing issue of counterfeit luxury handbags, and one key takeaway for me was that LVMH spent around $11 billion on advertising last year, while only investing $45 million in anti-counterfeit measures. With those figures in mind, I believe this supports the idea that product authentication is still in its early stages and presents a significant opportunity for SAT. Do you think my reasoning is valid? Additionally, could you share any further insights or details about how your team is addressing the wider opportunity for product authentication in luxury goods?

Thanks, Bobby. I think that logic is very compelling. In fact, it's the foundation on which this business is built because we observe the same trend. Specifically, as you pointed out, it often takes brands longer to embrace and implement technology than we might expect, despite the statistics you've mentioned. However, we understand the direction this is heading in, as counterfeiting is deteriorating, and counterfeiters are becoming increasingly sophisticated. We hold a strong position as the leading technology provider in this area. We recognize where the market is moving, and we are actively engaging with brands to address the challenges you're highlighting, working closely with them to adopt various features, whether that's embedded technology or covert methods. You are absolutely right, Bobby. This is the direction the market is headed.

Our next question will come from Ian Zaffino from Oppenheimer.

This is Isaac Sellhausen, on for Ian. I just had one question on international currency. I know you're limited on what you can say on customers and activity, but maybe if you could help us understand what's driving growth on the international side in terms of mix and volume if you're seeing higher denominations, and then just overall trends around uptake on micro-optics.

Yes. Great. Thanks, Isaac. We have very high confidence in our full year sales guidance, particularly related to international currency. Some important data points: looking at our core backlog, it's up almost 20% year-over-year, and we expect about 60% of that will deliver in 2025. We expect our backlog to stay in the range of above approximately $300 million for the rest of the year based on our strong orders funnel. What's driving that? It's our differentiated technology. We believe we're the world's leading provider of technology, and we continue to win in the market. This quarter, the growth in the backlog was primarily related to recurring revenue, as we call it, existing customers that continue to order from us because they trust us to provide the world's leading technology. We have a pipeline to expect 10 to 15 micro-optic wins with new customers for the full year, and we have high confidence that we're going to achieve that target. We're super excited about the trajectory, as I said earlier, and the pipeline is very rich for opportunities for the rest of the year.

I'm not seeing any further questions in the queue. I would now like to turn it over to Aaron Saak for any closing remarks.

All right. Thank you, operator. Well, I think you can see from what we provided in the last day that our Q2 was another strong quarter of execution and performance for the Crane NXT team. I again would like to thank all of our associates around the world for their hard work and dedication to the company. I remain confident in our future as we continue to build and grow this company, the leader in technology that secures, detects and authenticates. Thank you again for all the questions this morning. Thank you to everyone who joined us, and we hope you have a great day, and we'll see you next quarter.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.