Crane NXT, Co. (NYSE:CXT) Q4 2023 Earnings Call Transcript

Crane NXT, Co. (NYSE:CXT) Q4 2023 Earnings Call Transcript February 15, 2024

Crane NXT, Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Crane NXT Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The lines will be open for your questions following the presentation. Please note that this conference is being recorded. I would now like to hand the call over to Rima Hyder, Vice President of Investor Relations to begin the presentation. Rima, you may begin.

Rima Hyder: Thank you, operator, and good morning, everyone. I’m Rima Hyder, Vice President of Investor Relations, and I want to welcome all of you to the fourth quarter 2023 earnings call for Crane NXT. Before we begin, the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com. A replay of today’s call will also be available on our website. Before we discuss our results, I encourage all listeners 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 in our Forms 10-K and 10-Q filings pertaining to forward-looking statements.

During the call, we will also be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, both of which are available on our website at cranenxt.com in the Investor Relations section. On our call this morning, we will discuss 2023 highlights, our financial results and 2024 guidance as well as our goals and strategy for this year. For this discussion with me today are Aaron Saak, our President and Chief Executive Officer; and Christina Cristiano, our Senior Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to analysts for questions. Now, let me turn the call over to Aaron.

Aaron Saak: Thank you, Rima, and good morning. We appreciate everyone joining the call to discuss our fourth quarter and full year 2023 results as well as our outlook for 2024. 2023 marked the start of Crane NXT’s journey as a premier industrial technology company and I wanted to take a moment to reflect on that year and thank all of our associates around the world, who made 2023 so successful. One of our shared values is people matter, and I couldn’t be more proud and grateful to be part of this outstanding team. In April, we successfully launched the company, built out our new corporate leadership team, and continued our disciplined approach to operating our core business. We also established our five-year vision to grow the company to $3 billion, building from our strong position as a trusted partner providing technology solutions that secure, detect and authenticate what matters most to our customers.

As we announced yesterday, we delivered strong operational performance, growing revenues organically by 4% with adjusted segment operating profit of 28% and delivering adjusted EPS above our guidance. A hallmark of our company is our strong free cash flow. We ended the year with adjusted free cash flow conversion of over 100%, allowing us to further pay down our debt and giving us confidence as we move forward with an increase to our dividend by 14% for 2024. And finally, we developed the strong M&A pipeline. And we are on track for our first acquisition in 2024. I’m very proud of our accomplishments during our first year as Crane NXT and believe we have set up the company for long-term success. Moving to our full year 2023 financial results.

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Q&A Session

We executed very well to close out this year, delivering results at or ahead of our guidance on all key metrics. We had revenue of $1.4 billion, with core sales growth of 4% in line with our guidance and improved segment operating profit margin by 30 basis points over 2022 and above our guidance. Adjusted EBITDA was $388 million, which was also above our guidance and adjusted EPS of $4.16 exceeded the high end of our outlook. Adjusted free cash flow conversion for the full year was 111%. Our very strong cash conversion enabled us to pay down $245 million of debt in 2023, lowering our net leverage ratio to 1.1 times. We will continue to focus on this disciplined execution in 2024, utilizing the power of the Crane business system. And as you saw in our earnings release yesterday, we’re starting the year with core sales growth guidance of negative 1% to plus 2% over 2023, and adjusted EPS of $4.10 to $4.35, which we believe is an appropriately risk-adjusted guidance, given the dynamics in our businesses.

With that, I’m now going to hand the call over to Christina, to walk us through in more details our Q4 and full year 2023, financial performance as well as provide more details on our guidance. Christina?

Christina Cristiano: Thank you, Aaron. What a great close to this extraordinary year where we celebrated the launch of Crane NXT. Our significant accomplishments in this short period of time, are a testament to the hard work and dedication of our global associates and I would like to thank and congratulate everyone. Starting on Slide 5. We had a strong fourth quarter, with core sales growth of approximately 4% adjusted segment operating margin of 27% and adjusted EPS of $0.99. As Aaron mentioned, adjusted free cash flow conversion was over 100%, in line with our expectations demonstrating our consistent focus on operational excellence. For the full year, we also had over 4% core sales growth 28% adjusted segment operating margin, which is an expansion of 30 basis points year-over-year; and adjusted EPS of $4.16 which beat the top end of our guidance.

Overall, we are pleased with the results for Q4 and 2023, which were underpinned by continued disciplined operating execution by both segments. Moving to our segment. CPI reported a decline in core sales of 7% in the fourth quarter as expected. And adjusted segment operating margin decreased 260 basis points to 29% year-over-year, reflecting lower volumes and an unfavorable product mix, offset by strong pricing execution. As we discussed last quarter, this decline was driven by softness in new orders, primarily in our gaming end market, where customers continue to draw down on their inventory overstock and in our retail end market where projects have been delayed. While our backlog has come down significantly since the beginning of the year, we are still at approximately 1.5 times, what we would consider normal.

We are working with our customers to assess the timing of their demand while also managing our inventory levels very closely. For the full year, CPI core sales grew at 2%, in line with our expectations and we delivered adjusted margin expansion of 190 basis points, driven by continued disciplined pricing, which more than offset inflation. Moving to Crane Currency. The quarter was well ahead of our expectations, with core sales growth of 29% driven by strength in the international currency business. Adjusted segment operating margin improved 230 basis points year-over-year, reflecting favorable mix. Backlog was up 26% from the prior year, as we continue to see new orders in our international business. This includes a significant multiyear banknote order secured in the fourth quarter which will contribute to elevated backlog levels through 2026.

For the full year, Crane Currency had exceptional performance with 8% core sales growth. Adjusted segment operating margin of 26% declined 240 basis points year-over-year reflecting unfavorable mix in the US business where production was more heavily skewed toward lower denomination bank notes. Moving on to our balance sheet. Our adjusted free cash flow was $65 million in the quarter. Given the strong free cash flow we repaid another $70 million of our term loan during the fourth quarter reducing our net leverage ratio to approximately 1.1 times. In total in 2023 we paid down $245 million of our $350 million term loan. We now have over $1 billion of M&A capacity and substantial flexibility to deploy capital toward acquisition opportunities that meet our strategic and financial criteria.

Additionally, we announced an increase to our annual dividend of 14% based on our strong cash flow continuing our commitment to deliver value to our shareholders. Moving to 2024 guidance. We expect to deliver full year adjusted EPS in the range of $4.10 to $4.35 with core sales growth between minus 1% to plus 2%. The midpoint of this range assumes that gaming orders returned to growth in the fourth quarter for CPI. And that in Crane Currency we stay on track to return to normal operations after the planned shutdown of our paper making equipment for upgrades related to the new US banknote series. Given these dynamics, I want to point out that the phasing of revenue in 2024 will be more heavily weighted toward the second half of the year versus our historical performance.

We see opportunity for upside to our guidance based on the potential acceleration of projects in CPI’s retail end market order flow resuming earlier than expected in the gaming market and additional wins in the international currency market. We are guiding to segment margins in the range of 27% to 29% reflecting continued disciplined pricing and driving productivity through the Crane business system. Corporate expenses are expected to be approximately $53 million, an increase from 2023 reflecting a full year run rate of costs for employees that were hired last year. Additionally, we expect non-operating expenses of approximately $37 million reflecting lower interest expense due to the paydown of debt. Similar to 2023 we expect to convert our adjusted free cash flow at approximately 100%.

Let me now hand it back to Aaron for additional details on key drivers impacting our outlook within each segment.

Aaron Saak: Thanks, Christina. Moving on to slide 13. I want to highlight some of the dynamics we see playing out in 2024. At Crane Currency we delivered an outstanding performance in 2023 with 8% core sales growth and increased our international market share driven by further adoption of our micro-optics technology. Now as a reminder, the international business is approximately half of Crane Currency’s revenue. And in this business we added 17 new denominations designed using our micro-optics technology in 2023 to bring our total to 150. And this is a 14% growth rate from 2018 when we acquired the business through 2023. Also we now provide our technology to 48 countries an increase of approximately 12% year-over-year. The launch of RAPID Vision the world’s first multicolor micro-optics technology has generated significant interest from our international customers and will provide growth opportunities in the years to come as new denominations are currently being designed that specify this technology.

And so we ended 2023 with a backlog growth of approximately 26% and this positions us very well for 2024. Now the other half of revenue from Crane Currency comes from the U.S. government, a very important and long-standing customer. And I want to remind everyone about the work we’re doing to prepare for the new US currency program and the impact it will have on the Currency Business in 2024 and beyond. As previously discussed, this is a tremendous long-term tailwind to the business as the U.S., redesigned its banknotes, starting with the $10 note, expected to be released to the public in 2026. And this will be followed by a new note every two years, culminating with the new $100 bill, in 2034. This program remains on track. And we continue to be very optimistic about our position with the U.S. government, as their sole supplier of currency paper, a relationship we’ve held since 1879.

Additionally, we are very optimistic that the U.S. government will continue to be a leader, in Technology and Banknotes, incorporating additional security features in their new designs. Today, only the U.S. $100 bill contains our Micro-Optics Technology. So we see opportunities for additional technology to be incorporated in these new banknotes going forward. As part of this program, and in very close coordination with the U.S. Bureau of Engraving and Printing, we stopped production in one of our papermaking facilities in late Q4 2023, for approximately four months to complete necessary equipment upgrades to accommodate, the new Currency Technology. As a reminder, we recognize revenue for this business when we produce the paper, for the U.S. government.

So given the shutdown and our revenue recognition policy, we expect currency sales to be flat year-over-year in the first half of 2024, and then gradually increasing throughout the year as we produce products in advance of the next scheduled shutdown to begin in late Q4 of 2024. Overall, we’re very excited to continue to be a trusted partner with the U.S. government for this very important program, and look forward to the future growth that will bring Crane Currency both with new technology for paper and the opportunities for increased use of Micro-Optics. Now moving to Slide 15. In 2024, we expect CPI to grow mid-single digits, excluding the Gaming Vertical. We see strength in our Vending business, growing in mid-single digits coming off COVID lows.

We also see momentum in the Financial Services Vertical, particularly with our field service business where we continue to expand our offerings and grow recurring revenue. And in our retail end-market, we’re seeing positive momentum from our OEM customers coming out of 2023. As Christina mentioned, we’re still seeing slower new orders in gaming, as our customers are working down heightened levels of inventory due to the pandemic. We’ve been in very close communication with these customers and now forecast their inventory positions will return to pre-pandemic levels by the end of Q3. This will result in gaming orders returning to growth in Q4. The underlying gaming market is healthy. And we continue to maintain our strong leadership position in hardware, software and services.

Based on the underlying drivers of CPI’s end-markets, including labor scarcity and the need for increased automation, we continue to believe that our business is well positioned to deliver mid-single-digit growth in the long term, as we navigate through the transitory headwinds in gaming. As we look ahead, we’re on track to execute our five-year road map to significantly grow Crane NXT and diversify the portfolio. This includes our continued reinvestment in our core businesses, execution of the Crane business system to drive productivity, simplification and cash conversion, along with disciplined M&A. And in terms of M&A, we believe that the strength of our pipeline and the strategic fit of the targets will enable us to execute on a transaction in 2024 as planned.