Crane NXT, Co. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Acknowledged associates impacted by global events and thanked them for their hard work.
• Announced acquisitions of De La Rue Authentication Solutions and Tru Tag's Smart Packaging technology, with both expected to drive future growth.
• Integration of OpSec is on track, with operational improvements in manufacturing and back-office processes utilizing the Crane Business System.
• Published the first ESG report, highlighting commitment to philanthropy, sustainability, and good governance.
• Welcomed Aleta Richards as President of Crane Currency.
• Repaid approximately $65 million of outstanding debt, ending with net leverage of approximately 1.7x.

Segment Performance

• CPI: Core sales grew 1.5% in Q3, with adjusted segment operating margin increasing 170 basis points year-over-year to approximately 31%. Gaming end market order rates have not accelerated as anticipated, and CPI revenue for Q4 is expected to be approximately flat year-over-year. Non-gaming verticals are projected to have mid-single digit full-year revenue growth.
• Security and Authentication Technologies (SAT): Sales grew 36% including OpSec, with core sales up over 10% driven by higher international currency shipments. Adjusted segment operating margin was approximately 22% in the quarter. Backlog was up approximately 57% year-over-year, with currency up over 40%. Crane Currency partnered with the Central Bank Curaçao and Sint Maarten for new banknotes, and OpSec began a pilot with a major sporting league for on-field authentication.

Guidance

• Narrowed sales guidance to a range of +6% to +8% growth based on strong backlog in currency and OpSec performance, offset by gaming headwinds.
• Narrowed full-year adjusted EPS guidance to $4.22 to $4.30 from $4.20 to $4.35, reflecting mixed headwinds.
• Lowered adjusted free cash flow conversion guidance to approximately 70% due to timing of international currency shipments.
• Anticipated net leverage ratio of ~2.3x post-De La Rue Authentication Solutions acquisition close in the first half of 2025.

Risks

• Impact of global events on associates and business operations.
• Uncertainty in the timing of the U.S. $10 bill redesign and its effect on revenue.
• Volatility in gaming end market orders affecting CPI's financial performance.

Question and Answer

Q: Matt Summerville with D.A. Davidson & Co. asked about CPI verticals, gaming cadence, and Crane NXT revenue guidance for 2025.

A: Aaron Saak responded that CPI non-gaming verticals are on track for mid-single digit growth, gaming order rates are slower than expected with OEMs managing inventory, and Crane NXT revenue is expected to be approximately flat in 2025 excluding De La Rue.

Q: Michael Halloran with Baird asked about inclusion of De La Rue in guidance and U.S. currency business normalization.

A: Aaron Saak stated De La Rue is not included in current guidance, and the U.S. currency business is expected to normalize in 2026 with potential upside from the timing of the $10 bill release.

Q: Robert Labick with CJS Securities asked about authentication end markets and build vs buy strategy.

A: Aaron Saak responded that authentication end markets include brand protection, government tax stamps, and civil ID, with opportunities for share-of-wallet expansion and bolt-on acquisitions.

Q: Damian Karas with UBS asked about currency margins, Tru Tag financial impact, and gaming inventory correction.

A: Aaron Saak discussed that segment margins are expected to hold similar levels, Tru Tag is de minimis to financials, and gaming inventory correction will take time but is expected to normalize.

Q: Isaac Sellhausen with Oppenheimer asked about CPI pricing, cost, productivity, and free cash flow conversion.

A: Christina Cristiano responded that CPI is price/cost positive with productivity initiatives driving margins, and free cash flow conversion is expected to normalize over the long term.

Q: Bobby Brooks with Northland Capital Markets asked about growth strategy for product authentication and M&A focus.

A: Aaron Saak stated M&A focus remains on driving shareholder value through authentication growth, with opportunities for share-of-wallet expansion and bolt-on acquisitions.

Q: Damian Karas with UBS followed up on U.S. $10 bill micro-optics and free cash flow guidance.

A: Aaron Saak explained the potential value creation from the $10 bill redesign based on cost differences of existing banknotes, and free cash flow guidance is affected by shipment timing of international currency.