Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Christina Cristiano, Chief Financial Officer. Ma'am, please go ahead.
Thank you, operator, and good morning, everyone. I am Christina Cristiano, Chief Financial Officer of Crane NXT, and joining me is Aaron Saak, our President and Chief Executive Officer. Thank you for joining us today to discuss Crane NXT's signing of an agreement to acquire De La Rue's Authentication Solutions business. 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 at the conclusion of the call. I encourage all listeners to review the legal notice on slide two, which explains the risk of forward-looking statements. Additionally, we refer you to the cautionary language at the bottom of the announcement release issued this morning and 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, Christina, and good morning to everyone joining us today. Earlier this morning, we announced an agreement for Crane NXT to acquire De La Rue's Authentication Solutions business, a global leader in security and authentication technologies. I would like to note that this acquisition does not include the currency business of De La Rue. De La Rue's Authentication Solutions business complements the authentication and online brand protection solutions of OpSec, which we acquired earlier this year, and expands Crane NXT's portfolio to include technologies for securing government-issued identification documents and credentials. As shown in slide three, Authentication Solutions is a leading global provider of digital and physical security and authentication technologies for governments and leading brands. The business is focused in three key areas: Government Revenue S olutions, Identification Security, and Brand Protection.
Government Revenue Solutions provides digital and physical tax stamps that link unique identifiers to products, enabling the full traceability of goods that enables governments to collect tax revenues. Identification Security Solutions provides products to secure the government-issued identity documents of individuals, and this includes polycarbonate passport pages with embedded security features. Finally, brand protection products provide serialized, highly secure physical labels, combined with software to track and trace products through the supply chain and provide critical consumer insights to brand owners through data analytics. In total, these three offerings are highly complementary to our growing authentication business by further expanding our customer base, technology, and product portfolio. Additionally, the business has an attractive financial profile, with revenues of approximately $130 million in fiscal 2024, much of which is reoccurring and recurring revenue, and an EBITDA margin of approximately 20%.
Upon completion, this acquisition will add approximately 500 employees to Crane NXT. Now, let me move on to slide 4 to tell you a little bit more about why we believe this acquisition is an excellent strategic fit. First, De La Rue's Authentication Solutions business is aligned with our strategy to provide trusted technology solutions that secure, detect, and authenticate our customers' most important assets. This business will expand our market reach, giving us greater access to the $3 billion authentication technologies market. This end market is robust and bolstered with strong secular trends, including the continuous rise of counterfeiting, the proliferation of online marketplaces, the continued growth in online content, and the need to ensure people's identities are secure. Given this dynamic, we expect the market to continue to grow at mid-single-digit plus levels in the years ahead.
De La Rue Authentication's offerings will expand our portfolio to the identification end market, where De La Rue's security solutions, including polycarbonate passport, data pages, and ID cards, are critical in protecting identities by preventing the counterfeiting of sensitive documents. Additionally, the business builds on Crane NXT's long heritage as a trusted partner to governments through long-tenured relationships with approximately eighty countries. Approximately five months ago, we closed the OpSec transaction, enabling Crane NXT to significantly expand our channel to market with OpSec's premier base of customers, combining our expertise in micro-optics and OpSec's broad portfolio of physical and digital capabilities. Now, with the acquisition of De La Rue's Authentication Solutions business, our portfolio will further expand to include advanced solutions that track and authenticate items across the supply chains and unique surface technologies to provide advanced protection to ID documents, tax stamps, and security labels.
We are also well-positioned to accelerate growth and expand margins, utilizing our proven expertise with the Crane Business System by executing a clear set of commercial and operational synergies. Through a combination of revenue growth, application of CBS to improve productivity, and execution of our synergies, we expect a double-digit ROIC by year five. Moving to slide five, I want to walk through our M&A framework that we introduced at our Investor Day last March. The acquisition of De La Rue's Authentication Solutions business continues our commitment to follow a disciplined approach to M&A. This starts with ensuring a clear strategic fit to Crane NXT in niche markets, growing at mid-single digit plus, targeting companies with clear differentiation, and having a clear path to delivering a strong return for our investors. De La Rue's Authentication Solutions business aligns with all aspects of our M&A criteria.
Moving on to slide six, I want to walk through the timeline and key elements of the agreement. The purchase price is GBP 300 million, which represents a multiple of approximately 13.7 times fiscal 2024 Adjusted EBITDA. After synergies, we expect this multiple to be approximately 9.5 times. We expect to finance the transaction through a combination of cash on hand and existing banking facilities. Additionally, once completed, we expect the transaction to be accretive to EPS in its first full year. We expect to close the transaction in the first half of 2025, pending the completion of the separation of the Authentication Solutions business from De La Rue. Given this timeline, there will be no impact to the financial results of Crane NXT in 2024. Upon closing, De La Rue Authentication Solutions will be combined with OpSec within our Security and Authentication Technology segment.
At the close of the transaction, we expect our net leverage to be approximately two times, and given our strong balance sheet position and robust cash flow generation profile, we expect to have ample capacity 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. De La Rue's Authentication Solutions business is a global leader in security and authentication technologies, and its solutions are essential to protecting governments and citizens, as well as many of the world's leading brands. The combination of this business with OpSec will expand Crane NXT's capabilities across the entire authentication value chain, further solidifying our position as a technology leader, providing solutions that secure, detect, and authenticate what matters most to our customers.
Also, I would like to thank the teams across both Crane NXT and De La Rue that have worked diligently on this project for several months. I look forward to welcoming the Authentication Solutions team to Crane NXT when we close the transaction. Going forward, we remain focused on executing our strategy to create value for our shareholders. We're continuing to invest in and grow our core business, drive operational excellence to increase productivity with best-in-class free cash flow conversion. As you can see with today's announcement, we also continue to cultivate and execute disciplined strategic M&A to further expand and diversify our portfolio. The announcement of the acquisition of De La Rue's Authentication Solutions business is another important step in our journey to become a $3 billion company by 2028. With that, operator, we're now ready for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment as we move on to our first question. And our first question is going to come from the line of Matt Summerville with D.A. Davidson. Your line is open. Please go ahead.
Thanks. Hey, Aaron, I was wondering if you could maybe do a little bit more comparing and contrasting OpSec's technology offering versus that of De La Rue. In addition, how maybe their passport technology differs from your core passport technology. I'm just kind of wanting to do a little bit more of a compare and contrast relative to what you have in the portfolio today, what the real addition is that you're planning to acquire.
Sure, Matt. Good morning. Thanks for the question. You know, I think that's what makes us particularly excited here about combining the portfolio that we have. When you think about what we received or will receive upon close from De La Rue Authentication, the government revenue portion of this business is, you know, significantly larger and more substantial than where OpSec played. You know, in converse, OpSec really is the leader in brand protection for commercial brands, that's both physical and online. So you can see here, we've added to the channel and the end markets, serving two very different types of customers, government, in the case of tax stamps, and obviously, brand protection or commercial brands. And then what De La Rue really brings to us as well is this identification security business that I would say is different than OpSec's.
You know, we're making or they're making inside of De La Rue, polycarbonate pages and then embedding security features into those. That's not really a capability or any type of product that OpSec has. So this is a really nice new adjacency for us to enter into, and one where we think, you know, that market is growing and other types of security features we can take advantage of with our portfolio, both of the OpSec technology and our micro-optics technology to complement what De La Rue has. So I really focus here on these three markets, two of which De La Rue strengthens. Brand is obviously something where OpSec's the lead. And then underneath that, as you look at the technologies, there's some complementary both physical and digital technologies.
Again, the digital track and trace that De La Rue brings in the government business is not something that's strong in OpSec , and likewise, OpSec has a higher concentration and strength in brand protection for commercial brands. So, again, I think these fit together nicely, Matt, and are highly complementary and additive to each other.
Understood. As a follow-up, just, and this is back of the envelope. I literally just had a few seconds to calculate it, but it looks like based on your synergized multiple of nine and a half times, that implies that you think you can generate, you know, 13-14 million in EBITDA synergies. How much of that would be commercial versus, you know, more operational or cost driven, and over what timeframe are we talking about? Thank you.
Yeah. Yeah, Matt, I think that's probably a little high on the synergy number when you take account for we see this as a mid-single digit plus growth business. So, you know, and that's why we're excited about it too. The underlying growth of the business is healthy. So when I think about synergies, I think about what are we going to do in the actions we have line of sight to take. Most of those, in this case, are gonna be operational and productivity synergies that will play out over the next three to four years. So that's the timeframe we're looking at. And again, I think that number for us is, you know, more in terms of productivity synergies, more in, like, a $8 million type range.
Got it.
We can walk you through the math.
I'll get back to you.
Yeah, we can walk you through the math on that, in a follow-up.
Perfect. Thanks, sir.
Sure.
Thank you. And one moment as we move on to our next question. And our next question is gonna come from the line of Bob Labick with CJS Securities. Your line is open. Please go ahead.
Good morning. Congratulations on the news.
Hey, Bob. Good morning. Thank you.
Yeah, absolutely. It's exciting. First question, can you kind of talk about the, I guess, maybe the structure of the revenue here? And, you know, how much of this is, like, physical products sold versus, you know, kind of software or back end? And just for example, you know, in OpSec , we've talked obviously about, you know, the MLB, you have the holograms, but you also have all of the software behind it-
Yeah.
and the stickiness that that brings. And how does De La Rue's business model and revenue structure, you know, compare in that context?
Yeah, thanks, Bob. I'll take part of it, and then I'll hand it over to Christina to go a little deeper. But to the last comment you made, it's very similar. I think that's why we like these businesses. If you've got both physical authentication technology, but you're selling a software or you're adding on a software component, that's very sticky and creates wide moats around the business. That's true of both of these assets. And it's also true, particularly in government revenue solutions and brand protection, inside of De La Rue.
If you think about those three segments of De La Rue, for us, you know, at the time of closing, and going forward in 2025, we expect government revenue to be about 45%, approximately, of revenue, the identification security segment to be about 30%, and then brand protection to be about 25%. So that just hopefully gives you some size and scale on it. And then in terms of recurring, reoccurring revenue, Christina, I'll hand it over to you.
Yeah, it's almost entirely recurring and reoccurring, Bob, which relates to the digital offering, which would be like a SaaS offering, similar to what OpSec does in online brand protection. So very exciting uplift to us for the digital piece of the market.
Okay. Yeah, that's great. And then kind of looking back, this business has grown materially over the last four or five years for De La Rue. I don't know how much of that may or may not be acquisitions or whatnot, but what has been the growth of the business and what's, you know, kind of their visibility or your visibility going forward with some of the new contracts they just signed, you know, for growth going forward?
Yeah. Thanks, Bob. You're right, and you can look back certainly at the public filings for De La Rue, the parent organization on this segment. The growth is not acquisitions per se, it's growth in the core business and then significant growth in their ID solutions business that came from some particular customers. We expect that business to normalize as we go forward, but the underlying market growth, both in tax stamp revenue and brand protection, we see as mid-single digit plus. So the... You know, again, we think it's a very resilient set of end markets with a strong position that's got tailwinds well into the future. And that's where we arrive at long-term averages of mid-single digit plus growth.
Okay, super. Congratulations again.
Hey, thanks, Bob.
Thank you. One moment for our next question. Our next question comes from the line of Damian Karas with UBS. Your line is open. Please go ahead.
Hey, good morning, everyone. Congratulations.
Hey, Damian. Good morning.
Morning, morning. Hey, so first I just wanted to ask you, I mean, obviously, you've been competing with De La Rue in the currency business for quite some time, and, you know, it's no, it's no secret that they've had some struggles over there at that company with, with legal issues and, and what have you.
But I was wondering if you could maybe just give us a sense, like, how this deal came about. Has this authentication business been on your radar for some time, or did this just kind of manifest more recently? Would love to just kinda hear how it all came about.
Yeah. Thanks, Damian, and you're right, and we wish, obviously, the rest of the De La Rue business all the success in the world, albeit, you know, we are in the currency market as a competitor with them. But I would just go back, Damian, to the time of separation and our investor day, where we talked about what we said we were going to do to grow Crane NXT to a $3 billion company and diversify the portfolio all around technologies that secure, detect, and authenticate. And we said we had a very robust list of targets from day one that we were going out to cultivate, and that list has only grown over the last, you know, year and a half since we've been separated.
De La Rue was always on that list, quite frankly, but with the caveat that we were always interested in the authentication business and not currency, and so, you know, we have been in discussions for some time with the team at De La Rue, and we're very, very excited that as all things go we were in alignment to get this deal over the finish line. You know, we think that this is a fantastic asset, naturally fits the strategy, has fantastic moats around it, right in the range of the revenue and profile we discussed, and we can generate good returns for our investors, double-digit ROICs by year five. That's the disciplined approach that we've been taking, we're gonna continue to take, and hey, we still love our currency business. In fact, we're excited by it.
That's why we're investing in it. We've got great growth in our international currency business and, as you know, significant opportunities in the U.S. over the next many years ahead. So we're gonna stay focused on this business too, and continue to invest and grow and feel the portfolio now under security and authentication technologies, is really taking shape and is a fantastic set of long-term assets for the company.
That's really helpful context, and then I wanted to ask you, so about the 95% recurring, reoccurring, could you just give us the breakout on that, and remind us how you're defining recurring and reoccurring? And just curiously, you know, how much of that is, you know, specifically software sales?
Yeah, I'll take that one, Damian. So you could think about their solution overall. They're really augmenting physical authentication with software for this large volume supply chain track and trace capability. And so about half of the solutions they offer are physical, and then the other half, a combination of hybrid, digital and physical, where you're leveraging the physical authentication with a digital component. And so based on that, you know, most of the revenue is with long-term customers that have multiyear contracts, and that's a reoccurring revenue stream. So that means, you know, it's a contract that has to be, it doesn't automatically renew, but it's likely to renew based on the long-standing relationship with the customer, and that's really the majority of the revenue.
And then another, a smaller piece of it would be just a recurring, renewable, auto-renew type contract, and that's a purely digital solution.
Got it. And then I'm just curious, you know, how much backlog or kind of orders visibility do you, you know, have in this business coming in with? I did see back in July that, you know, they announced a substantial multi-year contract, I guess four contracts, I think saying revenue of, like, up to GBP 350 million. So, can you just give us a sense for like, you know, how much forward-looking visibility you have in the business?
Yeah, I think that's why we're excited about it, Damian. It's very similar to the OpSec business, as Christina mentioned, where we have these long-standing customers that have a very high renewal rate. So we have good visibility, it is the simple answer into certainly 2025, and where you have these multiyear larger contracts, that'll play out longer. So that again is similar to the other businesses and makes us feel good about both the mid-single digit plus growth profile we're talking about and the opportunity to continue to add more to that. Then, you know, fundamentally, the resiliency of the business, which is what's exciting when you get into this high percent of recurring and reoccurring revenue, which I think is the nature of your question. So yeah, it feels very good.
Great. Thanks again. Good luck, and we'll talk to you in a few weeks.
Hey, thanks, Damian.
Thank you, and one moment for our next question. And our next question is gonna come from the line of Bobby Brooks with Northland Capital Markets. Your line is open. Please go ahead.
Hey, good morning, guys. Thanks for taking my call.
Hey, Bobby, good morning.
Hey, so is that... You know, you guys talk about this mid-single digit growth profile that they've seen in the past and that you've seen continue you see continue going forward. So I just was curious, is that mid-single digit growth that they've seen historically, has that been driven by customers expanding their kind of wallet share... De La Rue's, or has it been winning new business? And then switching it to looking forward, how would you expect that to trend? Is that mid-single digit growth being driven by new business or standard wallet share?
Yeah, it's a combination of both, as you'd probably expect, Bobby. You know, they tend not to lose customers, just like other businesses, where you have this kind of stickiness in moats around the technology. So you tend to see expansion as the customer's business grow and more security features are added in. And then there is some new acquisitions, right, of customers. In the case of government solutions, it could be tax stamps due to legislation or local laws that have been passed. That's helped with growth in the ID solution business. It's been winning new accounts based on the polycarbonate and security feature technology. I would say it's an equal mix of both, Bobby, and I don't see that changing going forward.
I think this will continue to be a story of high stickiness of the accounts you have, and margin and revenue expansion, with offerings added on to incremental growth of new accounts, as they expand due to a variety of reasons, whether that's share gain, or whether that's simply because of a need to protect against a growing counterfeiting scheme, both of which fuel the growth of the business.
Got it. Thank you for that color. And then, I kind of wanted to circle back. I think, someone asked, you kind of broke it down, government revenues by each category.
Yeah.
And so I think it was like 45% when like 45% of government revenues came from government. I...
Well, I-
Kind of confused on that part. Yeah.
Yeah. Sorry, Bobby. I'd go back to slide three in the prepared-
Yeah.
... remarks, and if you added up the percent of each of those three, which will total 100%, government revenue-
Got it.
... is about 45%, ID is about 30%, brand about 25%, and that's how we're looking at it at the time of close.
Okay. Thank you. Yeah, I misunderstood that. And then, so maybe asking a question differently is: How is it really mostly government, coming from government customers? And is it mostly – am I right to assume that most of the revenues are coming from the U.K., EU, or do they have a North American presence right now as well?
Yeah, Bobby, you're correct that most of the revenue is coming from government customers, right? And that's in both this government end market and ID end market. In terms of where they do business, it's very similar to our operations. It's global. You know, there's a lot of activity in different markets around the world, not just in the U.S. and in Europe, but also emerging markets, similar to the way we operate today.
Okay, cool. And so I was just kind of curious, what are the most exciting synergies that you see with this acquisition? Is it? It seems like it gives you kind of a new entry into a new end market. I know you kind of pointed that out, and that makes sense. So is that kind of what is most exciting, or is it something else that kind of gets you guys more excited with the synergies?
I think that's it. That's it, Bobby. As you know, we've always talked. Our strategy here is to diversify NXT and build off of our core into near adjacencies and I think you see that here very, very clearly, so this takes us into a new direction with the ID security that we can continue to build off of. I think it adds to what was a smaller business in OpSec on government tax stamp revenue and then it brings, you know, additional scale and opportunities into our brand protection business, so you know, we're always looking to how do we deploy capital to align to growing markets, where we can create strong moats around the businesses and build off of that and I think that's, for me, what's particularly exciting when you bring the De La Rue Authentication business into NXT.
Okay, perfect. And then just the last one for me is, what's... So you kind of talked about the historical growth rate, but as a, as historic, have the EBITDA margins the past couple of years stayed around 20%, or have they seen some margin expansion in the past couple of years, maybe through a result of higher technology and the products that they're giving? Just kind of curious on that.
Yeah, they, they've floated around that level. And then, you know, as you look into it, obviously, it's been part of a larger public company with different allocations into the segments. But the way we're looking at it, it's been a resilient, you know, approximately 20% Adjusted EBITDA margins for the last few years.
Thank you very much, guys.
Hey, thanks, Bobby.
Thank you, and one moment for our next question. And our next question is going to come from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.
Hi, great. Thank you very much. Congratulations on the deal.
Hey, thanks, Ian.
Thanks, Ian.
Yeah. You know, as far as any of these products or what De La Rue kept, is there any opportunity or is there any technology that could then be translatable into, you know, expanding your currency authentication portfolio? Or is there a way to cross-sell what you have now into whatever De La Rue kept? You know, just kind of your thoughts there on maybe the currency and the micro-optics and other areas like that. Thanks.
Yeah, thanks, Ian. So, you know, we've been very careful on both sides here to make sure what we have in this acquisition allows us to run and grow the authentication business. And, with that said, we want, you know, as you can appreciate, the De La Rue team wants to ensure they can run and grow their currency business, as you would expect. So there is, by virtue of that, no application of the technologies we've acquired through this transaction or will acquire at the time of close, that we would apply to the currency business. And I would tell you, Ian, we feel very good, as you know, about our currency business, about our technology leadership that we already have there.
We feel, again, very, very confident in where we stand with the U.S. government and the growing backlog in international. So, again, this is really about looking forward to grow the authentication segment in business inside of NXT with De La Rue and OpSec , with no look back or, you know, bleeding of that technology into the currency business.
Okay, thanks. Will you be able to tell us, and maybe you touched on this before, but I don't think I heard it. You know, how this deal kind of came about? And then, you know, I guess when we're looking at this, what it's fifteen times pre synergies, I guess eleven and a half times post synergies. Is that kind of the multiples we should start to expect here? And then, you know, finally, it looks like margins are kind of, you know, where you want an OpSec to kind of come up to. Do you think the margins here come up to the high twenties, you know, as we kind of move forward, or kind of how do we think about that?
Yeah. Yeah, let me take kind of three parts to that. Number one, and we can follow up on this, just on the deal multiple. Again, as we said in our prepared remarks, we see this, once you get in and understand kind of the adjustments at the segment at about 13.5 times, and once we execute the synergies and see some growth in the business, that puts us at slightly below 10, and we're happy to follow up with you on that. I think that's the general zip code of where we would see multiples. Again, we want to make sure we can drive double-digit ROIC by year five as our key criteria.
With that, as part of that, Ian, though, to your point, this is a higher margin business, more profitable, than OpSec , and we do see, through the synergies, a way to walk it up into the mid-20% EBITDA margin level, which would be at our fleet, call it, close to our fleet average, today, so that's part of our plan over the next several years, and again, a lot of that is coming out of productivity synergies, so I hope that's helpful. I'm not sure if I answered the first part of your question.
No, this is helpful. I appreciate it.
Sure.
Thank you.
Thank you, and one moment for our next question. And we do have a follow-up question from the line of Bobby Brooks with Northland Capital Markets. Your line is open. Please go ahead. Mr. Brooks, your line might be on mute.
Oh, sorry about that, guys. So could you... I think you guys touched on it a little bit earlier, but I just wanted to see if any more color, but could you maybe give us a sense of, on the digital tracking capabilities, that this will now give your portfolio? Could you maybe give us a sense of how that differs from what OpSec gave you? Or is it more so it's just, again, the end market and maybe the solution is the packaging or the solution is similar to what OpSec 's digital capabilities are? Or is there like, a real technological difference between the digital tracking that you're acquiring versus what you had with OpSec ?
Yeah, it's more the latter, Bobby. Thanks for the question. So it's, you know, the fit for market, fit for purpose type of software that's useful to the governments, slightly different than what's used for the commercial brands. You know, the core functionality and what it does, if you think about the use case, is very similar. And that's also, you know, opportunities for us as we look at productivity and rationalization of those going forward. But it really is kind of an in-market specific type of solution set for both governments and non-governments.