Q1 2023 Crane NXT Co Earnings Call
As many of you know this is our first earnings call for Crane, NXT and I'd like to thank all of our associates for their hard work and dedication as we executed our separation and at the same time delivered a very strong start to the year.
Starting on slide five we reported 97 of adjusted EPS for Q1, driven by 3% core sales growth with strong adjusted EBITDA margin of approximately 27%.
Additionally, we had significant growth in our backlog increasing by 34%.
Overall the results were ahead of our expectations.
The outperformance was led by Crane payment innovations, which delivered stronger than expected core sales growth of 10% accompanied by more than 400 basis points of margin expansion with adjusted segment margins just over 30%.
Consistent with our culture. These results were driven by the disciplined execution of the crane business system, and our dedication to continuous improvement.
Crane Currency's results were consistent with our expectations, we remain very confident in our full year performance targets for currency, given the strong order rate and backlog growth in the quarter with core orders up 36% and backlog up 132% compared to last year.
Our cash flow performance was also strong and in line with the normal seasonality of the business.
We remain confident in our plan to achieve approximately 100% adjusted free cash flow conversion this year.
Given the strength of our first quarter results, we're raising the midpoint of our full year adjusted EPS guidance by <unk> 10 since to the range of $3 75 to 405.
Well those are the highlights of the quarter and Kristina will walk you through in more detail our financial performance in a few minutes.
Now as I mentioned earlier. This is our first earnings call and given this I'd like to focus on why we have such an exciting investment thesis here at Crane NXT.
As shown on page six NXT as an industry leader, providing trusted technology solutions to secure detect and authenticate what matters most to our customers. We have two industry, leading businesses crane currency, which provides proprietary technology to secure currency and other high value <unk>.
<unk> products and crane payment innovations or CPI for short, which offers detection equipment and systems aftermarket services and connectivity solutions focused on detecting and authenticating payment transactions.
We finished 2022 with our strongest year in company history with revenue of $1 3 billion, approximately 40% of which comes from reoccurring and recurring revenue.
Adjusted operating margins of 28% and adjusted free cash flow conversion of 116%.
This is the financial profile, you would expect of any Premier Industrial Technology company and I believe our Q1 results certainly reinforced this position.
As we discussed at our March 9th Investor Day.
Our core business is resilient with mid single digit growth through multiple economic cycles.
Additionally, we have very clearly demonstrated our ability to drive operational improvements through the deployment of the crane business system over many years.
This is truly a hallmark of the company and has resulted in best in class financials, and very strong free cash flow conversion.
And that financial profile is built upon a number of core strengths and capabilities, including our technology leadership demonstrated through launching new and innovative products.
For example, during the first quarter Crane currency launched its next generation of banknote security technology named rapid vision, the world's first multi color micro optics security thread for bank notes.
This product retains the eyecatching movement proven durability and EZ print ability of crane currency's existing line of products, while also providing a broader range of fully customizable multicolor movement effects.
The design possibilities with rapid division or even larger counterfeit resilience, even stronger and verification by the public is even easier.
We launched this product at a recent conference in March held at our state of the art banknote printing facility in Malta.
This event was attended by more than 100 central bankers and industry partners from 45 Nations.
That event along with the features of this product have already generated a strong pipeline of customers for rapid vision with one central bank already specifying the product and its top denominations.
Rapid vision is a further extension of the product portfolio, we have built and commercialized over the last 15 years, starting with motion switch technology that is most well known to many of you for its use on the U S $100 Bill.
And that culture of innovation is just as strong at CPI with differentiated capabilities in the design and manufacturing of detection systems and image recognition software built on advanced algorithms to authenticate products.
For example, in the first quarter CPI deployed the new Aleo Pro terminal for processing credit card and mobile payment transactions paired with our simplified cloud management platform for electric vehicle charging applications in Europe we.
We successfully integrated the solution with EV EV charging Oems and we're launching a program involving a major hotel chain in the U K.
These are both examples of the continued focus we have an NXT of extending our technology leadership and developing products that solve our customers' most important challenges.
Another hallmark of our company is our disciplined operational execution built on the tools and resources of the Crane business system.
It's with this same focus on operational excellence that we developed our formula for shareholder value creation as shown on slide seven.
It starts at the top of this image built on a foundation of a very resilient core business growing at mid single digits.
We continue to deploy CBS to increase margins and improve productivity in the core.
This generates our strong free cash flow conversion of approximately 100%.
We put this free cash flow to work through our disciplined capital allocation strategy. This includes investment into the core business paying a competitive dividend and deploying to M&A targeting higher growth and resilient end markets.
This cycle is continuous and over time, it will clearly position NXT as a strong compound or creating significant shareholder value.
Okay.
And as part of this value creation strategy, we've set very clear goals for the business over the next five years.
Through a combination of organic growth and M&A, we plan to grow the business to 3 billion in revenue growing at mid single digit plus will.
We will maintain high 20% operating profit margins, along with free cash flow conversion of approximately 100%.
To achieve this plan will focus on three priorities.
First continuing to invest and grow our core business.
Focusing on operational excellence through Cvs to expand margins and drive our free cash flow conversion and third executing our proven playbook on M&A to further expand and diversify the portfolio into near Adjacencies.
Through the combination of these actions we plan to move from a mid single digit to mid single digit plus growth portfolio.
Additionally, today the company has low leverage of approximately one seven times net debt to EBITDA.
We plan to keep our 11th leverage at less than three times as we execute this strategy.
In total these clear measures of success position NXT, both now and in the future to be a leading industrial technology company and create significant value for our shareholders.
With that let me pass the call over to Christina who will provide additional details on our financial performance in Q1 capital structure.
And our updated full year guidance.
Thank you Aaron and I'd like to thank all of the Crane NXT and Crane company associates for their incredible commitment to complete the separation of our two fantastic companies. We are so appreciative of your hard work.
Aaron mentioned, we have a very strong start to the year as shown on slide nine adjusted EPS of <unk> 97 was ahead of our expectations core sales growth was solid at 3% and we delivered strong margins with 23, 3% adjusted operating margins and 26, 7% adjusted EBITDA margin.
Moving to slide 10, Crane payment innovations had a great quarter with core sales growth of 10% driven by a combination of solid end customer demand and some easing of the supply chain constraints that we've been managing over the last few quarters. The improved supply chain conditions allowed us to ship products out of our backlog earlier than we originally.
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Adjusted segment margins increased 420 basis points to 31%, reflecting strong pricing positive mix from increased shipments of backlog lower inflation and the execution of productivity programs throughout the business.
We had a lot of exciting activity in the quarter, we had great price execution and broad based strength across most vertical markets led by gaming, where we have been very successful with both new casino openings and converting new customers to our solutions a significant part of our success in this market is our ability to pay our best in class.
Payment validation hardware with our comprehensive easy track software solution.
Moving to crane currency on slide 11, the quarter unfolded as we expected as we explained last quarter, we are seeing lower U S production volumes as the Bureau of engraving and printing focuses on the $10 Bill redesign program as well as a higher mix of lower denomination bills.
The international currency business continues to perform very well and you can see that reflected in our 132% backlog growth this quarter, which gives us confidence in our ability to deliver on this year's expectations and in this market Crane currency continues to take new market share with our banknote security features two recent exam.
Those include high value banknote denomination with both Iraq, and Argentina, adopting rapid H D micro optics security threat.
And we were awarded the first Bank note series in the World to feature both motion surface and rapid HD detect together on the same bank notes, which will launch in 2020 for them.
Moving to slide 12 cash flow was solid in the quarter at $33 million consistent with normal seasonality and we are confident in achieving an adjusted free cash flow conversion ratio of approximately 100% this year.
Our capital structure is strong and flexible and slightly improved from our previous guidance as of April 4th we held cash of approximately $270 million and we had total gross debt of approximately $900 million based on that net debt is $630 million and using our adjusted EBITDA guidance net debt to EBITDA is approximately.
<unk> one seven times.
This gives us approximately $1 billion of M&A capacity and substantial flexibility to deploy capital in a manner that best maximizes shareholder returns.
Moving to guidance on slide 13, as Aaron mentioned, we are raising the midpoint of our adjusted EPS guidance by 10 cents to a range of $3 75 to $4.05.
Compared to prior guidance, we are seeing slightly higher interest expense in 2023, now at $50 million given the higher rate environment more than offsetting that however will be a combination of modestly higher margins and core growth that is now likely to be in the upper half of our 2% to 4% range.
The key drivers of the business remain unchanged from what we discussed at our recent Investor day at CPI, We had a strong secular trends supporting investment in automation and productivity and we are seeing some modest improvements in the supply chain.
Segment is off to a better than expected start to the year and should deliver strong core growth and margin improvement in 2023 and beyond at.
At Crane currency, we continue to gain share in the international business and in product authentication. The U S business is performing as expected with somewhat lower production as the U S. Government prepares for a series of newly redesigned bills, which is a very good opportunity for us in the years ahead.
Overall, our investment thesis is unchanged, we had very solid execution in Q1, and we are optimistic for the remainder of the year let.
Let me now hand, it back to Erin for a few closing comments.
Alright, Thanks Kristina.
We've come to a close of our prepared remarks I want to summarize our key messages that we discussed today about Q1 and that is provided on page 14.
Our performance across multiple metrics was better than expected. This includes orders sales and operating profit. This was driven by our focus on continuous improvement deployed through the crane business system to drive both growth and profitability.
Given our results and outlook, we're raising the full year EPS guidance by 10 cents to the range of $3 75 to 405, and we continue to have very strong balance sheets for future capital deployment as Kristina mentioned.
And with that strong position and start to the year, we're confident in our ability to deliver on our five year goals to grow NXT to $3 billion in revenue by executing our strategy and that's shown on page 15.
We're a leading provider of trusted technology solutions to secure detect and authenticate our customers. Most valuable assets, we have a durable resilient business growing at mid single digits with best in class margins and free cash flow conversion we.
We have a strong balance sheet with substantial capital available for acquisitions, a great track record of disciplined M&A generating high returns and we're focused on expanding the business via M&A to adjacent higher growth end markets.
Our performance in Q1 is a very important step in this journey and it gives us continued confidence in achieving these objectives.
Now before I close I'd again like to thank all of our associates around the world for the hard work that they put in and the.
Dedication to enable a very strong start to the year and a very strong start to crane NXT.
So thank you for your time this morning, and Donna we're now ready to take our first questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time, a confirmation tone will indicate your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Our first question is coming from Matt Summerville of D. A Davidson. Please go ahead.
Thanks, Good morning.
Wanted to spend a few minutes, maybe first talking about currency.
Is there a way to frame up are and how much time. The bep has taken off of the print shops, so to speak to dedicate to the forthcoming redesigned cycle and to that point when she.
Bound orders from the U S as it pertains to.
Of the 10 that I believe is supposed to go into production in their government in your fiscal 'twenty five and then I have a follow up.
Sure sure Hey, good morning, Matt and thanks for that question. So I would say broadly speaking as we've been discussing Matt we're on track with the work with the <unk>, we feel very good about that in our relationship.
As I believe we mentioned in our Investor day.
We'll be looking at some upgrades inside of our facility that starts at the end of this year and beginning of next year to prepare for that $10. So as you can imagine.
That's perhaps relating to some of the.
Changes just in production that I think you're alluding to again I would say, it's going as planned and kind of is what we expected.
In terms of actually.
<unk> seen orders I need to comment that I think as you know well we haven't really received the contract for that we feel very very good about that and given our longstanding relationship, but we'd be looking you know well into 'twenty four 'twenty five as you'd really start to scale up production. So I think it's still many.
Quarters out, but everything is on track and we feel very good about where we're at.
And then as a follow up maybe I'll just move over to CPI.
You provided a little bit of color on the gaming side of the business has been strong in the quarter you talk about four main focus on markets those being gaming retail financial services and vending can you maybe talk about performance more broadly speaking across each one of those four important buckets for CPI and what the outlook is for this year.
Sure sure. Thanks.
Thanks, Matt Yeah, I would just reiterate the remarks Kristina made gaming has been strong for US. This year was strong for us last year or two as you might remember.
Our portfolio.
We think is the best in the industry, both in the hardware and the software.
And we've taken share.
Over the course of the last several quarters, that's continued and we still see strength in that.
Blood read through here in Q1, we're going to see that we believe for the port for the rest of 2023 financial services remained strong for US those are again larger ticket and some smaller ticket equipment and services that remains strong and we're confident in our performance there again driven by the <unk>.
<unk> trends of increased automation in that market.
Retail again, particularly as we think about the long longer term secular trends here of labor scarcity and the drive for more productivity, leading to automation and self checkout, we still believe in that very strongly.
I think both retail and vending would be the two markets that are a little shorter cycle for us and one that we're going to watch closely order rates I think as the year progresses again off to a strong start in Q1, but given that that's the shorter cycle, probably more sensitive part of our business. That's again, we'll look to order rates and what's happening in the back half of the.
This year.
I would say overall, Matt kind of everything in CPI coming in as expected and as Kristina mentioned with some of the improvements we did see in the supply chain things to the team's execution, we were able to convert a little bit more of that backlog in Q1.
Understood. Thank you Sir.
Thanks, Matt.
Okay.
Thank you. The next question is coming from Bob <unk> of CJS Securities. Please go ahead.
Good morning, and congratulations on a great quarter and great start to the new NXT.
Hey, Thanks, Bob I appreciate that.
Yeah, absolutely. So I wanted to just kind of follow up on an answer from the last question is while you talked a little bit about the upside in CPI coming from improvements in supply chain and inventory and whatnot can you give us a sense are you fully caught up now or are you still restrained what areas.
Our headwinds or how should we think about.
Just the normal cadence of business in CPI and <unk>.
The remaining hangover headwinds from supply chain yeah.
But we still have very strong backlog in CPI.
Like all.
Companies of similar products, particularly where you're relying on Pcbs and electronic sub components of it was a challenging last several years for anyone in that space and we were not immune to that I think the team has done an excellent job, helping us to get caught up and improve the supply chain I would say, it's not getting worse.
It has gotten better for us in the last quarter, but theres still some episodic issues in the supply chain I don't think we're fully through it but it has improved and I think that's what led to in part some of the over delivery in Q1 for CPI.
Okay, great and.
Maybe just to expand up on another point as well if you look back to a year or so ago.
We're almost certain to be in a recession by now.
Obviously things are going okay, I'm not going to make any forward predictions here, but I want to take advantage of that can you tell us about the economic sensitivity you mentioned I think vending and retail have shorter cycle times, just talk about the end markets and which ones are more or less sensitive to the economy and how you view those.
What signals you're getting from them.
Yeah, and maybe I'll take that Bob Thanks for the thanks for the question and just talk about NXT broadly I think it's important to point out a little over 40% of our revenue is reoccurring a recurring that is not sensitive in the near term. Those are the long held currency contracts that we have are our service agreements and.
<unk> the CPI business. So that's a substantial part of NXT in total.
And then when you get to the balance or let's say that 65% or so or excuse me.
The non reoccurring or recurring side.
There is also currency contracts that make up part of that business that we wouldn't classify in recurring or reoccurring and you know we had a very strong order intake in Q1 as you saw a very strong backlog. So I think we feel very good on that for the balance of the year.
And then to the question that Matt asked earlier and you were asking you get into CPI and there are four main verticals again strong performance in gaming.
We don't see.
Necessarily any significant risk there in the balance of the year, a very strong backlog and again I think a winning product portfolio that has us continuing to gain share financial services is strong and then retail and vending again I think our position there is very strong, particularly in self checkout, where we have X.
<unk> relationships with Oems with system integrators that are becoming more important in that market and the end customer as well we had strong orders in Q4, we've seen new lanes go online in Q1, and we feel good about the funnel in that business, but that is the shorter cycle.
Side of the business, along with vending and we'll be watching it but.
But again I think overall CPI performing in Q1 better than our expectations and we see a strong funnel even in the shorter side cycle parts of that business.
Okay, that's great and then maybe showing a little bit here, but I'm sure others could benefit from this question as well could you talk about the backlog in crane currency. It sounds like it was implied it relates.
All too are mostly to international but obviously a huge pickup year over year, how should we view the backlog in general and crane currency as a forward indicator and what was the big <unk>.
This year over last year.
Yes, Thanks, Bob I'll take that one we had a significant growth in the backlog and currency as you saw and you're right to say it was largely related to to the international side of the business. So really just timing of international orders as you know the business can be a little bit lumpy and so we just saw a strong a strong increase in Q1.
<unk> related to a few big customers and so that's.
For the full year, we've got a very strong backlog and orders lined up for the full year is very solid but that timing can vary from quarter to quarter.
Okay, Great and then maybe one more for me and I'll jump back in queue, but.
It relates to capital allocation and M&A, it's probably too soon to talk too much more but you know.
As you just standing up the company, but maybe.
In this forum.
Criteria for M&A in your pipeline and give us a sense of <unk>.
General timing, if if you could time things I know, that's not always in your control or anyone's control, but how youre thinking about it.
Broadly would be would be great.
Sure sure Bob well I'll take that last comment.
Timing is everything and I don't think I've never been in a place where you can time at that price.
Certainly I won't comment on anything specific in terms of targets or actions on M&A, but I'd go back to kind of our process here.
Wanted to start first with the market.
Focused on.
Areas that we think can really accelerate the strategy so call that a strategy first approach around secure detect and authenticate.
Then look at the company itself that could be a potential target and make sure that there is differentiation in their technology brand or channel the right size to give us some scale and then most importantly at.
At the end of the day that we can be good owners of that business and generate a strong return for our shareholders I think about that as the criteria with that said, we feel very good about the funnel.
We talked about we had a funnel coming in to the separation that we have paused through the separation and that it was very public we werent going to do any M&A during that period of time and since then we're seeing opportunities we're out actively cultivating.
And again, we will first and foremost take a very disciplined approach to this so patients here is a key word we want to make sure. It's on strategy. So right asset we can be good owners and we can deliver value. So.
With that said I also know probably due to the nature of your question. This first deal for US is very important.
So again, it speaks to discipline and patience and that's that's how we're executing.
The play here of how we think about when and.
Exactly which target to execute on so hopefully that gives you a little more color Bob.
Absolutely Yeah, that's great. Thank you I'll jump back.
Okay.
Thank you. The next question is from Matt Summerville of D. A Davidson. Please proceed with your follow up question.
Okay.
Otherwise you can look back at the history of the old payment and merchandising technology segment.
Given that the.
The business to your point can be a bit lumpy from quarter to quarters or anything you can do to kind of help us out with respect to how we should be thinking about kind of the go forward earnings linearity from quarter to quarter from the for the balance of the year anything that you'd like to point us to.
Yes, Thanks, Matt and Youre right and certainly this year Q1, we had a tough comp on the currency side as you know and we've been talking about.
And that read through here are kind of in line as I said with expectations.
I think when you think about the linearity first maybe think about the revenue linearity of the year, we're going to be slightly weighted to the second half of the year. This year.
It depends on the year, but I think I'd think about it that way for this year, but we're going to see some improvement in margin rates likely driven out of the currency side of the business just due to mix.
As as Kristina mentioned, we started to execute.
<unk>.
A different part of the international backlog.
Outside of the currency business continues to provide a little bit of headwind as we've seen the mix to the lower denomination. One dollar bills, we expected that coming into the year volume and mix has largely been on target.
So.
Nothing fundamental there, but really this driver if you kind of.
Work that math through.
Would suggest again will incur.
Increasing margin.
As the year progresses, that's consistent with also our updated guidance that we gave today, Matt of saying, it's 27% plus margins. Obviously, that's margin improvement from where we ended Q1 and that's driven by really the increased mix, we expect out of currency.
With that said the headwind that Kristina pointed out as an interest expense nonoperational for us.
But one that is going to read through simply due to the higher rates street rates that have rolled forward. So hopefully that gives you a little color Matt.
Yeah for sure maybe.
Maybe then just for.
My final question. If you can maybe talk strategically a little bit and updated views on authentication the growth trajectory, what's needed to really break into it unlock that Tam I don't have the deck in front of me, but I thought.
Identified it as a $5 billion Tam growing at healthy double digits. So what's the playbook look like there.
Yeah, well I think similar to the rest of the business. Thanks. Thanks for the question on that one as well Matt.
We're bullish on that market, we think that's.
Where our core technology and micro optic sits we have very unique defensible position with wide moats around it.
In a market that's continuing to grow from secular drivers around the need for an anti counterfeit technology, whether that's in luxury goods.
<unk> stamps.
Unit you name it.
For us to unlock it it's going to take two things one it starts with our organic efforts, which we've set up a team dedicated to product authentication and as we mentioned in our last quarter, we expect that business, while small silver have very high growth this year.
And we feel very very confident in that high growth in 2023, I think to really unlock that part of the market. It goes back to a prior question around M&A and that's where we're spending time in developing the funnel cultivating opportunities.
And would be one of the areas, we've highlighted where to really gain scale and create a bigger moat for NXT in this market, we will need to deploy M&A.
And if I can maybe I'll just logged in one other one here what I'm thinking about it within crane currency.
Talk a little bit about the competitive behavior you are seeing in the market I mean, it's been pretty widely publicized that one of your larger competitors is struggling a bit to say the least from a financial perspective.
Yeah.
Think again Curt currency continues to perform very well you know, it's a tale of two businesses.
The U S government side, which.
It is in some ways given the nature of the contract has a very wide moat around it.
And again is in line with expectations to the question you asked earlier and we feel bullish on that long term. When you think about the international side that team has been executing very well for the last several years and that continued.
In Q1, and you can see that by the backlog growth to Kristina mentioned earlier, so we wish certainly no. It will on anyone in the market, but I would first say, we look in the mirror at ourselves and provide the best product.
With very high quality out of <unk>.
Both in Malta and in our other factories around the world, whether that's paper, making her with our micro thread World class operations.
That continued to have us gaining share so again feel very good about the positioning of that business and I'd have to leave.
Comments to two others in the market for those folks to answer.
Thanks, guys.
Thank you this brings us to the end of the question and answer session.
I'd like to thank you for your participation in today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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