Crane NXT, Co. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Q1 Performance: First quarter performance was in line with expectations, with sales growth of 5% and adjusted EPS of $0.54. Core sales excluding OpSec declined 4% due to lower U.S. Currency volumes, but equipment upgrades for the new bank note series were successfully completed and full production resumed.
• Strategic Growth Areas: Crane Currency achieved a record high backlog with a book-to-bill ratio of 2.4. At CPI, a new multiyear contract with a major retailer was won for on-site equipment repair services in ~450 U.S. locations.
• Acquisition: Completed the De La Rue Authentication Solutions acquisition. OpSec and De La Rue Authentication were combined to form Crane Authentication, with synergies expected from combining the businesses.
• Tariff Mitigation: Implemented price increases and supply chain optimizations to mitigate an estimated $25 million impact on operating profit from tariffs.

Segment Performance

• CPI: Core sales declined approximately 2% in Q1, driven by lower volumes in gaming and vending end markets, though there was growth in financial services and retail. Adjusted operating margin decreased 190 basis points. CPI ended Q1 with a backlog of $147 million and a book-to-bill ratio of approximately 1.
• Security and Authentication Technologies: Sales were up 22% compared with the prior year, including OpSec. Core sales were down approximately 8% due to lower U.S. Currency volumes related to equipment upgrades for the new bank note series. Adjusted operating margin was approximately 7%. International Currency had a record high backlog of approximately $370 million and 5 new micro-optic wins in Q1.

Guidance

• SAT Sales Growth: Revised to between 19% and 21%, including approximately $80 million to $90 million of De La Rue Authentication sales in 2025.
• CPI Guidance: Revised from a range of 0% to 2% growth to negative 2% to flat, reflecting demand pushout due to tariffs.
• Adjusted Segment Operating Margin: Expected to be in the range of 25.5% and 26.5%.
• EPS: Maintained the full year adjusted EPS guidance range of $4 to $4.30.

Risks

• Tariffs: The largest impact from tariffs is estimated at ~$20 million from China, primarily affecting CPI components sourced from China. Mitigated by pricing and supply chain actions, but potential demand pushout in CPI, especially in vending, if tariffs remain.
• Demand Uncertainty: Potential pushout of buying decisions in CPI, particularly in the vending end market due to China tariffs.

Question and Answer

Q: Good morning. Aaron, I wanted to talk about -- and Christina, CPI for a minute. Can you give a little bit more granularity in what you expect for the full year in terms of growth rates across the 4 major end markets served by CPI? And how much of the, I guess, this cascade could look like from a pushout standpoint? Are we talking -- it sounds like $20 million round numbers, but I'd like you to kind of verify that. And I'd be curious as to which verticals are most impacted by this deferral.

A: Yes. Thanks, Matt. And just off the bat, I think you have that sized correctly at the $20 million and most of that really in Q2, given what we see happening with the tariffs. But just to back up, our CPI overall performed as expected in Q1. And I would say that, that's true across really all the verticals from what we said last quarter. Going back to kind of your broad question, gaming for us performed right as expected. We continue to see that as a very healthy market and maintaining our position. And as we indicated last quarter, we see orders continuing to come and build as we exit Q2 and return to top line growth as we get to the second half of the year. So still looking at low single-digit growth in gaming for the full year. Retail performed, again, really as expected. There, we're facing this dynamic of OEM sales down. And I think that was confirmed this week with 2 major OEMs reporting sales down in double digits. We're seeing that. But we're seeing that offset with our custom self-checkout offerings, which are performing very well. So net-net, for the full year, still in line with expectations that we mentioned of high single-digit decline in retail. And when you get to financial services, mid-single-digit growth for the full year, performing as expected. And then lastly, vending, and it's really where we see this impact of tariffs. Overall, as Christina mentioned, it's really the Chinese tariffs that are impacting principally CPI, and that's the vast majority is vending. And so we've taken action to mitigate those with price increases. Those are already out to our customers. And we're expecting that to really hold back some demand, particularly in Q2 as they're in a wait-and-see mode. Ultimately, at some point, you have to order your repair parts and enact pricing through the rest of the vending supply chain. And in discussions with our customers, that's what we expect to happen. So really, that would be the change for vending where we now expect that to be a low single-digit decliner for the full year. So net-net, first quarter kind of as expected. The big change in vending, the rest of the verticals, Matt, performing as expected.

Q: Good morning and congratulations. And thanks for taking our questions. So I wanted to start with authentication, the new Crane Authentication. Obviously, congrats on closing the De La Rue. This is -- the whole segment is new to you guys, new to us. So maybe you could kind of take a step back and talk about how the authentication market acts in kind of the unique time we're in with potential inflationary environment, could be a recession, U.S. isolationism? You touched on tariffs, but you may as well throw that in there, too. How is the business positioned in this kind of uncertain world? And what do you expect in terms of growth from it?

A: Well, thanks for that, Bob. Again, as you know, I couldn't be more excited by closing De La Rue and the launch of Crane Authentication as a unified business and brand. And I'd invite everyone to go check out the website and the upgrades that we've made as we've launched the new business. I'd back up for a second, Bob, just you mentioned economic uncertainty and tariffs. And I would say we've taken very deliberate steps. It really goes back many years, with our acquisitions to build resiliency into the portfolio. And that's no more evident now than in Crane Authentication, where about 40% of that business is government contracts that are very resilient through economic conditions. And in fact, that's now with authentication, our tax stamp business and our ID business, passports and National ID. So that really adds a nice foundation for the entire SAT segment, particularly when you add on Currency that tends to perform very well in recessionary environments, particularly with inflation. So we think we've built in some natural insurance and shock absorbers into the portfolio for the economic conditions that we see. Now with that said, take the example in authentication around brands like the NFL, which are franchised brands, fantastic customers that Christina mentioned, a new multiyear deal that's both physical authentication and digital authentication that are services. So that adds a lot of resiliency, too, because those are ongoing recurring services that, in this case, the league bought for the next several years ahead. And there's more deals inside of authentication that look and feel like that, that are contractual, that are resilient to different economic spikes or declines in demand. So I think there's a natural resiliency built into the business just simply due to that portfolio.