Conference Transcript - CXT 2025-08-11

Aaron Saak, CEO

Hello to everyone. Thanks for joining us today for the Oppenheimer Conference. I'm 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 Saik, I'm the President and CEO of Crane NXT. And Christina, I'll hand it over to you for a brief introduction.

Christina Cristiano, CFO

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

Aaron Saak, CEO

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 fare for discussions like this. So let's talk a little bit about Crane NXT, a premier industrial technology company that is really two and a half years old since our separation in April of 2023 from Crane Company. And really we positioned the company over these last two and a half 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 2.6 times 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 two reportable segments, security and 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. A 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 two segments security and authentication technologies this year will be about 735 million in sales with two operating companies crane currency and now the new crane authentication that we've just put together with our two acquisitions that we've done over the last year and a half 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 number one or number two 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 1st, to form this unified portfolio. And it's really focused in three 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 their consumers. Then we have government solutions. You can see in this picture, these are rolls 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 three 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 two 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 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 looked 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, net leverage at 2.6 times 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, you know, high conviction that we're pivoting as we exit 2025, actually midway through 2025 into higher growth and operating improvements in OP, grade-free cash flow in position for grade 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.

Christina Cristiano, CFO

Oh, you're on mute, Ian.

Ian, Analyst — Cantor Fitzgerald

Thanks for doing that. That was very helpful, and hopefully you can hear me now. So, thanks for the overview, especially on the product portfolio. So, you know, if I was to kind of summarize this, you know, how do you think about just, like, your overall growth strategy, um you know across brands and commercial and um government ideas how do we kind of like synthesize that that strategy into um you know what you're doing going forward yeah and i assume

Aaron Saak, CEO

me and you're you're specific to create authentication with that yes yes because yeah opsec and and delarue etc yeah well i i think about them in these three pillars or these three 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 in 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, you know, 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, you know, 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, Ian, 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

Ian, Analyst — Cantor Fitzgerald

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

Aaron Saak, CEO

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 valued products want increasing authentication you know take the example of like a Aaron Judd bat versus a keychain you're going to have very different levels of authentication security on those uh why 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 uh 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, you know, 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

Ian, Analyst — Cantor Fitzgerald

appreciate here in the U.S. Okay, and I know you've referenced, you know, the CBS of a bunch already, but can you maybe give us some, like, tangible examples? Maybe we pick on either OPSEC or Delarue, you know, what are you doing? Like, where's CBS helping you, and what's the real potential for that? And what are the levers? Well, I'll give you two examples. They'll both

Aaron Saak, CEO

be operational in nature. One is in OPSEC, where we posted several Kaizans 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 UK. And so each of those Kaizans 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, You know, what that's doing is driving several points of incremental productivity inside of the factory, particularly on the manufacturer 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 two 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 two 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. uh and those happen over and over in the company we're going to do over 100 kaizans this year inside of crane nxt so imagine that a week of people's time out to simply drive continuous improvement in the process uh that's just the dna of the company and i'd say and that's not always true as many folks on on this line probably know that's not true of every company so we get into an OPSEC that's not used to that, we can drive real meaningful improvements in the operating

Ian, Analyst — Cantor Fitzgerald

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 are the revenue opportunities look like you know by year like what's going to be the biggest opportunity what's going to be really kind of the ho-hum opportunity and and also maybe when you talk about that talk about

Aaron Saak, CEO

margins as well amongst the different yeah maybe i'll start christina and hand it over to you sure you know the way the u.s currency program works just for a little uh 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, you know, two to two and a half times 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, you know, flat, low single digit volume growth over the next five or 10 years. However, the amount of technology adding in to this is going to get, you know, not just incrementally higher, but when you look at the step up from the redesign, design, it's a real opportunity for us, to your point, to drive both revenue and margin growth. So let's take the $10 bill, Ian, 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 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, you know, almost double depending on the exact design that gets chosen. So what we see happening is this accelerator every two years as a new bill is launched, that the incremental improvement over the prior bill is going to bring, you know, 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'll be coming. But if you follow what's happened in our international currency business over the last four or five years, I think that's a very good proxy for what's going to happen in the US 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

Ian, Analyst — Cantor Fitzgerald

the next four or five 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? You know, how do we, how does that work?

Christina Cristiano, CFO

You're not going to see any kind of cliff in 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.

Ian, Analyst — Cantor Fitzgerald

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

Christina Cristiano, CFO

That's correct.

Ian, Analyst — Cantor Fitzgerald

that that that makes sense um and then you know i know we did talk about international a little bit um you know especially on the league side but is there any other opportunities internationally to to grow i know that's actually been a big driver of some of the margin expansion opportunity or that you've recognized already but maybe talk a little bit more about the the international opportunity um and how we think about you know recurring versus new wins and then you know

Christina Cristiano, CFO

just adoption of micro optics? Yeah, maybe I'll start that one, Aaron, and then you can jump in. You know, 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 percent 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 you know this is a very sticky business. And so once you've got your technology specced 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 if we're going to shift

Ian, Analyst — Cantor Fitzgerald

to CPI, maybe give us an around the world of the different segments, what you're seeing as far as order patterns and um inventory levels and just sort of overall or underlying market growth in

Aaron Saak, CEO

those you know yeah yeah uh well thanks ian you know i 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 uh investors that's been a question mark for us as we've come through the covid uh inventory normalization cycle. We said a few quarters ago now, probably about a little less than a year ago, we thought inventory would get normalized somewhere in the second quarter, third quarter. We start to see 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, you know, the in-market is healthy, growing, call it low single digits. Our OEMs are healthy. They've drawn down their inventory. And we're the number one provider still with leading technology position. So now the orders are just, you know, following the recovery from this very high level of 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. 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 pricing increases, 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, you know, doing what we thought for the balance of the year, no change, same for financial services. You know, when you back up, I think, Ian, you look at CPI as a technology leader, number one 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 it frames CPI, but feel good, really, where we're

Ian, Analyst — Cantor Fitzgerald

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's self-checkout going or any other kind of

Aaron Saak, CEO

categories? 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 five to certainly 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 three or four 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. 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 pause 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 number one technology leader. And that's the key to CPI is to maintain that technology leadership. Okay. Speaking of that, maybe touch

Ian, Analyst — Cantor Fitzgerald

upon the competitive dynamics that you're seeing in CPI, market share shifts or anything else along

Aaron Saak, CEO

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 one or two 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 number one 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, not too much changes in share are very incremental just due to the maturity of the

Ian, Analyst — Cantor Fitzgerald

market. Okay. Okay. And then I know you mentioned tariffs, but can you maybe talk about what you're going to mitigate them and what the impact is going to be? I'll let Christina. Yeah. Just a

Christina Cristiano, CFO

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 and 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 calls. So I think overall, you'll see a little bit of noise around the underlying demand as people wait out, you know, what's happening with tariffs, but on a direct basis, fully mitigating with pricing and productivity.

Ian, Analyst — Cantor Fitzgerald

Okay. So, Christina, since I have you here, it just looks like things are on the upward for you here. You know, 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, you know, and anything else, you know, more deals? How are you thinking about that?

Christina Cristiano, CFO

Yeah, I appreciate the question. And I would say you're right. You know, 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 lite, right? So we'll be approximately around 3% of sales in CapEx. Over the last two 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 US. 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'll be a primary focus for us in the future as well. So Aaron, I don't know if you want to maybe end on

Aaron Saak, CEO

that note. No, I think that's right. You know, number one priority is invest in the core. Number two, pay a competitive dividend. And three is M&A. And, you know, we've done two deals in the last year and a half or so. Funnel Ian is as 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, you know, we'll have another deal coming through. But we want to stay disciplined in the framework. 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 in that financial criteria is keeps our net debt below three. You know, that's our target. So those are going to be deals of a hundred, couple 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 three to five 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 uh that we really spend a lot of time on are all cultivated they're not getting shopped around they're things we're in negotiating with the owner uh that we think we can get a very good deal on for our shareholder and add a lot of value

Ian, Analyst — Cantor Fitzgerald

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