Greetings and welcome to the Crane NXT call announcing the agreement to acquire OpSec Security. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Rima Hyder, Vice President, Investor Relations for Crane NXT. Thank you. You may begin.
Thank you, Melissa. Good morning, everyone. Thank you for joining us today to discuss Crane NXT's signing of an agreement to acquire OpSec Security. On our call this morning, we have Aaron Saak, our President and Chief Executive Officer, and Christina Cristiano, our Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will open the call to analysts for questions. A replay of today's call and the slides we will reference during this call will be available on our website. I encourage all listeners to review the legal notice on slide 2, which explains the risk of forward-looking statements. Additionally, we refer you to the cautionary language at the bottom of the announcement issued this morning, and also in our Forms 10-K and 10-Q filings pertaining to forward-looking statements. Now let me turn the call over to Aaron.
Thank you, Rima, and good morning, and thanks to everyone joining us today. What we're excited to discuss is our first M&A transaction with all of you. This morning, we announced that we have reached an agreement to acquire OpSec Security, a global leader in brand protection and authentication solutions, for $270 million. This acquisition is an exciting opportunity to expand our capabilities across the entire authentication value chain and create a leading brand and product authentication platform. It also extends our leadership in the authentication market to include software solutions that provide tracking and tracing capabilities through the supply chain, customer analytics, and online brand protection solutions. As shown on slide 3, OpSec is a leading global provider in brand protection technologies, software, and services. The company offers full end-to-end solutions to secure the physical and digital assets of the world's most recognized brands.
This acquisition will complement our growing business in physical product authentication by expanding our customer base and product offerings, enabling Crane NXT to serve the entire product and brand authentication value chain. OpSec goes to market with two strategic platforms, as shown on this slide. Through its authentication solutions platform, OpSec provides technology which enables digital and physical authentication of products, including monitoring, tracking, and tracing of goods through supply chains as they are used by the consumers. Through its online brand protection platform, OpSec provides online monitoring for counterfeit goods, anti-piracy of content, and fraud protection services. OpSec Security has an attractive financial profile with a stable and growing revenue base. In 2024, we expect OpSec to deliver full-year revenues of approximately $130 million or mid-single-digit growth year-over-year, and generate approximately $20 million in Adjusted EBITDA.
Additionally, OpSec's businesses boast resilient, long-standing customer relationships with an average customer tenure of 20 years among its top customers. Moving to slide 4, let me tell you a little bit more about OpSec and why we believe this is an excellent fit to Crane NXT. OpSec Security is a global leader in protecting brands, products, and digital content online. It has a proven track record of bringing innovation to the way in which enterprises create and safeguard the significant intangible value that is embodied in their brands and products. One of the exciting capabilities OpSec brings to NXT is the combination of digital and physical authentication solutions. We see this as a key differentiator for the company. And as shown in the first chart on this page, approximately 60% of OpSec's revenue includes digital services enabled through proprietary software.
The physical offerings include a variety of labels containing anti-counterfeiting technology. In fact, OpSec has more than four decades of expertise in optical security technology development and is recognized as one of the pioneers of microlithography. It also has scalable software platforms that enable the traceability of products, manage the licensing of brand properties, and detect and enforce against online brand abuse and content infringement. As shown in the middle pie chart, the majority of OpSec sales come from customers with long-standing contracts. We refer to this as recurring revenue, and it represents approximately 65% of sales. The remainder of revenue is primarily recurring in nature, from contracts with durations of one or more years that have very high renewal rates. With a global footprint spanning North America, Europe, and Asia, OpSec has differentiated geographic strengths that are essential to supporting the leading global brands across numerous end markets.
As shown on the right, the company has a diverse customer base, including customers in sports and media, consumer goods, technology, industrial and pharmaceuticals, as well as government agencies and financial institutions. The combination of OpSec's digital and physical offerings, high recurring and reoccurring revenue, and diverse set of global end markets further adds new capabilities and increased resiliency to Crane NXT. As summarized on slide 5, OpSec is an excellent fit for the company. OpSec's solutions are aligned with our strategy to provide trusted technology solutions that secure, detect, and authenticate our customers' more important assets. OpSec will expand our addressable market, giving us access to the $3 billion digital and physical authentication market. This market's robust and is bolstered by secular megatrends, including the continuous rise of anti-counterfeiting, the proliferation of online marketplaces, and the continued growth in online content and social media.
In this environment, protecting intellectual property and brand identities has unquestionably become one of the defining priorities for leading global enterprises. Given this dynamic, we expect the market to continue to grow at mid-single-digit plus levels. Additionally, OpSec has a highly differentiated offering that leverages its deep industry and domain expertise, providing a meaningful competitive advantage and positioning it to meet the unique needs of customers across all the industries it serves. As I mentioned earlier, OpSec has long-tenured relationships with many of the world's most valuable brands, and it adds significant recurring and recurring revenues to Crane NXT's portfolio. One of the reasons we're excited about OpSec joining NXT is our clear line of sight to both commercial and operating synergies, which will provide significant opportunities to accelerate growth and expand margins, utilizing our proven expertise with the Crane Business System.
And finally, in line with our M&A framework, we expect the transaction to generate double-digit return on invested capital by year 5. For these reasons, we believe this transaction is really a perfect fit with our strategic and financial criteria for M&A. Slide 6 shows the M&A framework that we introduced at our Investor Day last March. The acquisition of OpSec is an example of our commitment to follow a disciplined approach to M&A, starting first with ensuring a clear strategic fit to Crane NXT in niche markets growing at mid-single-digit plus, targeting companies with clear differentiation with revenue above $100 million, and having a clear path to delivering a strong return for our investors. Simply put, OpSec meets all of these criteria. Moving to slide 7, as I mentioned earlier, we have a clear line of sight to both commercial and operational synergies.
Today, as many of you know, we have a small but growing business in physical product authentication where we sell our leading micro-optics technology. With the addition of OpSec, we believe we will significantly expand our channel to market with OpSec's premier customer base. It is very clear to see the commercial synergies of expanding OpSec's solution set to include micro-optics. Upon closing, OpSec will have the industry's most complete portfolio of physical and digital authentication and brand protection solutions. This combination will enable us to fully address our customers' brand challenges, combining our expertise in micro-optics and OpSec's broad proprietary portfolio of physical and digital capabilities. Additionally, we see significant opportunities for margin expansion using our proven Crane Business System to drive productivity improvement in OpSec's supply chain and manufacturing processes.
Moving on to slide 8, we expect to finance this transaction through a combination of using cash on hand and drawing on our $500 million revolver. Given our strong balance sheet position and OpSec's robust cash generation profile, we expect to have ample liquidity following the close of the transaction and expect our leverage to remain below 2x. This leaves us capability for further capital deployment, including investing in organic growth and additional M&A. Before we move to questions, I want to reiterate how excited we are about today's announcement. OpSec Security is a leader in authentication, and their solutions are essential to protecting many of the world's most valuable and recognizable brands. Adding OpSec to the Crane NXT portfolio will allow us to draw on our industry and domain expertise to deliver an even stronger and more highly differentiated offering for our customers.
This acquisition further strengthens our position as a technology leader, providing solutions that secure, detect, and authenticate what matters most for our customers. As we look forward, we remain focused on executing on our strategy to create value for our shareholders. We're continuing to invest in our core business. We're driving operational excellence to expand margins and continue our best-in-class free cash flow conversion. As you can see with today's announcement, we are leveraging our strong balance sheet to further expand and diversify our portfolio through disciplined and strategic M&A. In summary, we're well-positioned to execute on our vision to become a $3 billion company by 2028, and today's announcement is an important step forward in this journey. So with that, Melissa, we're now ready to take our first questions.
Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Matt Summerville with DA Davidson. Please proceed with your question.
Thanks, Morning, Aaron.
Good morning, Matt.
I wanted to talk a little bit about the competitive environment around OpSec's business. Who are the key players, and how is OpSec's technology differentiated versus the other guys? Then I will follow up.
Yeah. Well, I think that's one of the reasons we're so excited here, Matt. As we've talked about before, it's a $3 billion plus market growing in mid-single digits, but it's highly fragmented, with a number of private companies playing across different parts of the market. That includes both competitors in the physical authentication products as well as digital authentication. And some of those are unique to particular verticals. So again, that's why we like kind of this niche market, highly fragmented, growing at mid-single digit plus. And what we really see, and I think OpSec has taken advantage of, of convergence of both the physical and digital solutions that these global brands are needing and wanting both together. So that's part of the key differentiation.
It's both best-in-class physical product, as I mentioned, driven by this many decades of development of microlithography, which brings together very, very high-end hologram-type technology that you'll see in many of their products, combined with the track and trace capability, the software to use and track the product through the full value chain. So that's really where the differentiation comes. It's in both sides, both in the physical product and in the digital product. And the moat becomes wider, and the moat becomes very deep with the combination of both of these capabilities, where you don't see them in these smaller private fragmented companies around the world.
Thanks for that. And then just as a follow-up, I want to try and understand a little bit. I'm not hugely familiar with microlithography, so forgive me. But is micro-optics your core technology? Does that cannibalize their physical authentication capability, or is it complementary? And then I wanted to ask, is there something structural about this business that would inhibit it from generating CXT-like margins down the road?
Yeah. Let me take the first one more on the technology, and really happy to go into some more detail there as you learn more about OpSec and the market does. It's an and, Matt. It's a continuation of different levels of technology between the microlithography strengths that OpSec has in developing their holograms with what we have in micro-optics, which, again, is just a different level of anti-counterfeiting technology. And the truth is, the market, like many markets, plays at different levels. And so what this does is gives us a full portfolio. It gives OpSec, in fact, and their channel a full portfolio of solutions that range from their core products, including now what we envision as our micro-optics. So we see it as highly complementary.
That's, in fact, the word we've been using internally, is this is now the most complete set of physical authentication technologies in the market that, quite frankly, no one will touch with this breadth. So that's particularly why we're excited. And of course, you add in the digital capabilities. It really becomes, again, a wide moat around the combined company. In terms of structural question on the financial profile, I would liken this, Matt, to exactly what you've seen in our prior acquisitions, Cummins Allison and Crane Currency, going back to the last two. We're buying with the intention here of closing on OpSec, as we say in Q2, to a company that's operating at mid-teens EBITDA margins where we see a clear path structurally to walk those up to north of 20%, both due to commercial synergies, as I mentioned, and operational synergies.
There's nothing inside the company we see inhibiting it from accelerating even expansion. That's one of the reasons we're excited about the acquisition.
Great. Thanks, Aaron.
Thanks, Matt.
Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.
Good morning. Thanks and congratulations. This looks exactly like what you guys have been targeting.
Hey, thanks, Bob. I appreciate that.
Yeah. So I think you mentioned mid-single-digit growth this year for OpSec. Can you give us a sense, a breakdown, I guess, in order of magnitude, where the growth comes from between new customer wins, volume growth at existing customers, or pricing? I'm sure it's a little of each, but what's the order of magnitude of where the growth is coming from?
Yeah. You're exactly right, Bob. It's a little bit of both. I think one of the hallmarks of the company is this high recurring and reoccurring revenue, particularly from the top customers that have been with the firm for many, many years, in fact, over two decades. And so what you continue to see there is just expansion of share of wallet as those customers grow and new capabilities are added in on top of what was sold in the last contract renewal. That could include, similar to our currency business, more sophistication in the labels. It's also more sophistication in the track and trace capabilities. So I would say, effectively, it's balanced between the two, Bob, of new customer acquisition but also share of wallet expansion.
Okay. Great. I'm just trying to get a sense of what percent of revenue comes from the top 10 customers, meaning how diversified is their customer base, and what are the top five goods they are currently protecting?
Well, yeah, the tail, if you will, of the customers, it's actually a very diverse number of customers. I think that's why we like the resiliency as well of the business. Similar in many ways, Bob, to our currency business, we can't disclose all of the customers of which they protect. There's some probably obvious reasons for that that you can imagine. I would say it's safe to say when you think of some of the leading brands in sports and media, in technology, if you would go look at apparel representing those brands or industrial products that have some type of hologram tag with a QR code on it, there's a very high probability that's an OpSec product. But I think we can't, and even going forward to set that expectation, disclose precisely who all the customers are for the confidentiality in those contracts.
Okay. Fair enough. I'll jump back. Thank you.
Thanks, Bob.
Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.
All right. Great. Thank you very much and congratulations.
Hey, thanks, Ian.
I wanted to just and I know you talked a little bit about the kind of margin march to north of 20%, but can you maybe give us an understanding of what incremental margins might be? How much of a cost out is this versus incremental growth? And any other kind of components you could give us to help us kind of understand and get a little confidence on that margin walk? Thanks.
Great. Hey, Ian, it's Christina. I'll take this one. As Aaron said, this is a very exciting opportunity for us when you think about how we can leverage CBS to improve the already good margins and march them up, though, to expand to the level that is consistent with the rest of Crane NXT. And when you think about the acquisitions that we've done in the past in Cummins Allison and in Currency, that's exactly what we did. So when you think about the margins today, they're in the mid-teens% today, and we would expect them to expand to the low 20%. And the synergies we'll drive there will be both commercial and operational. And so just to put some numbers around it, you can expect about $8 million of synergies over the next 3-4 years.
That'll be a combination of operational through CBS, which will be about $5 million of synergies, and commercial synergies as well of approximately $3 million. So we're looking forward to working with the OpSec team now to just drive that strategy and expect to get to those low 20% margins in the next few years.
Okay. Great. And then I guess you guys reiterated kind of your targets for how large you want the company to be. So how does this deal now impact M&A, I guess, either in the near term? How frequently will we now see these types of acquisitions? And then how are you thinking about capacity to do further acquisitions? Thanks.
Yeah, Ian, let me take that one. So I think similar to the slide, and it was in our prepared remarks, our M&A framework, it's the exact same slide, as I mentioned, that we used at our investor day. And if there's one thing I always want to reinforce is that we're doing exactly what we said we were going to do. And I think you see it here today in this acquisition. If you recall, we said we're looking to do 1-2 acquisitions a year. Back in our last quarter update, I said, "I feel very confident we'll do an acquisition here in 2024 and that the size is going to be north of $100 million to kind of walk us to the $3 billion targets in these niche markets where we can get double-digit ROICs." So OpSec represents that.
I think it's squarely in the center of the bull's eye, down the middle of the fairway, if you will, for that framework. I said, and we'll continue to say, "1-2 a year." That's never precise. As you know, they're opportunistic. But I feel as confident as ever that we are executing on the journey we laid out, and we are on track to march to a $3 billion company as we exit 2028, which is, again, doing exactly what we said we were going to do, Ian.
Thank you. Ladies and gentlemen, our final question comes from the line of Damian Karas with UBS. Please proceed with your question.
Good morning, Damien.
Oh, excuse me. I was on mute. Good morning, everyone. Congrats on the deal.
Hey, thanks, Damien. Appreciate that.
So a follow-up question on the synergies here. Well, first, could you let us know so what are the gross margins of OpSec that they're coming in at? And could you just maybe further expand on the synergies? What are the main opportunities that you see through the Crane Business System? And is there any lower-hanging fruit that you'd expect to achieve sooner rather than later? Or should we kind of be, from a model standpoint, be thinking about those $8 million in synergies kind of linear fashion over the next five years?
Hey, Damien. Good morning. So in terms of gross margin, it's about approximately 50%. And as we were talking about, we'll expect to see some margin accretion over time as we drive those synergies and productivity through the Crane Business System. I think you can expect that, as you said, we're going to keep that at a high level now. You can expect that to be linear. And when we come back in our second quarter earnings call, we'll provide further guidance for the company along with an update to our overall NXT guidance.
Okay. Makes sense. Thank you. And then I was wondering if you could maybe help us to better understand kind of the revenue streams that are recurring as well as the recurring piece. And I think you had mentioned that 65% you view as recurring. I was curious if you could give us a sense for kind of the range on these contractual contracts that you have with the customers there, what maybe the average contract life is, and what is the renewal rate?
Yeah. Happy to discuss that, Damien. And I think that's where we really like the frame of our currency business is a very good way to think about this. So the recurring, the 65% are these longstanding customers who typically renew every year or have a multi-year contract that renews. They've been with the firm in the case of years or decades. And they range from $several hundred thousand to $several million in terms of the contract value. So I wouldn't say that there's one unique look and feel to those. I think that's, again, some of the resiliency of this business. But think about those as clients with longstanding, a high rate of renewal, well above 90% of these kind of contracts. When you get to recurring, this is really where the software element of the business plays in.
Think about this as a traditional type SaaS model where OpSec is selling a digital service offering with a standard renewal rate that, again, is well above 90% and has with that your typical SaaS-type provisions of price escalations, etc. So that's how we think about those two. Again, the recurring, the digital side's about 30%. Recurring, which are a combination of digital and physical but with customers who renew for many, many years, is the bulk of the business, that 65%. Hopefully, that's helpful, Damien.
Very helpful. Appreciate it. Best of luck, everyone.
Thanks, Damien.
Thank you. Ladies and gentlemen, this concludes our Q&A session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.