Earnings Call Transcript - CXT Q3 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Crane NXT Q3 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Christina Cristiano, CFO. Please go ahead.

Christina Cristiano, CFO

Thank you, operator, and good morning, everyone. I want to welcome you all to the third quarter 2024 earnings call for Crane NXT. Before we begin, let me remind you that the slides we will reference during this presentation can be accessed via the Investor Relations section of our website at cranenxt.com, and a replay of today's call will also be available on our website. Before we discuss our results, I encourage all participants 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 Form 10-K and subsequent filings pertaining to forward-looking statements. During the call, we will also be using non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the 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. With me today is Aaron Saak, our President and Chief Executive Officer. On our call this morning, we will discuss our Q3 financial and operational performance and provide commentary on recent M&A transactions. We will also provide an update on our 2024 guidance. After our prepared remarks, we will open the call to analysts for questions. Now let me turn the call over to Aaron.

Aaron Saak, CEO

Thank you, Christina, and good morning. I appreciate everyone joining the call to discuss our third-quarter results. As we begin, I'd like to take a moment to acknowledge our associates, particularly those who were impacted by the recent hurricanes and other global events. I know many associates are still working through those challenges. Our teams did an excellent job ensuring that our colleagues and their families were safe, which is always our priority and aligns with one of our core values that people matter. I would also like to extend a big thank you and my gratitude to all NXT associates around the world for their hard work and efforts every day, but especially in times like these. The last few months have been very busy for NXT as we continue to execute our strategy to grow and diversify our portfolio of technology solutions that secure, detect, and authenticate. Specifically, we announced two acquisitions. We continue to successfully integrate OpSec, and we delivered strong results in the third quarter. Starting with our results, our third quarter performance was in line with our expectations. Sales increased over 14% versus the prior year, reaching approximately $400 million. Excluding OpSec, core sales growth was approximately 5% with adjusted EPS of $1.16. In addition, we also had several exciting M&A announcements this quarter that will drive future growth in the business and shareholder value. These include our announcements to acquire De La Rue Authentication Solutions and Tru Tag's Smart Packaging technology. Both transactions are great examples of how we are expanding our portfolio of market-leading technologies that secure, detect, and authenticate. We also continue to integrate OpSec into our business, and this process is on track with our expectations. It's been about five months since we closed the OpSec acquisition, and we are already driving operational improvements in manufacturing and back-office processes utilizing the Crane Business System. Additionally, we're actively engaged with our customers as we expand the portfolio of authentication technologies we offer, and the response continues to be very positive. In the third quarter, we also published our first ESG report. This report highlights our commitment to philanthropy, sustainability, and good governance anchored in our Crane NXT values. This is an important step in our journey as a new public company, and I am very appreciative of the work from the teams across NXT to drive meaningful progress in this area. I encourage all of you to take a moment to read the ESG report, which you can find in the Investor Relations section of our website. Finally, I'd also like to once again welcome Aleta Richards to the Crane NXT team as the President of Crane Currency, reporting to Sam Keayes, who is now leading the Security and Authentication Technologies segment. Aleta is on the road visiting our sites and customers, and we welcome her leadership and enthusiasm that she brings to the company. It was a busy quarter, and I remain excited about the opportunities ahead as we continue to drive operational execution, diversify our portfolio, and add talent to our team. Turning to Slide 4. In October, we signed a definitive agreement to acquire De La Rue Authentication Solutions, a leading global provider of digital and physical authentication technologies. This transaction aligns well with our strategy of expanding our leadership in the growing $3 billion authentication market. De La Rue Authentication goes to market with three strategic platforms, as shown on this slide. First, government revenue solutions provide digital and physical tax stamp technologies that link unique identifiers to products, enabling the full traceability of goods and enabling governments to collect tax revenues. Second, identification security solutions provide products to secure the government-issued identity documents of individuals, including 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 summary, the acquisition of De La Rue Authentication builds on our acquisition of OpSec earlier this year to provide advanced protection for ID documents, tax stamps, and security labels. Like OpSec, De La Rue Authentication has an attractive financial profile comprised of a high percentage of digital and recurring revenue, long-standing customer relationships, and a stable and growing revenue base, generating mid-single-digit revenue growth year-over-year. Turning to Slide 5. We also recently announced the acquisition of Tru Tag's Smart Packaging technology, which enhances the ability of brand owners and consumers to assure the authenticity of their products. This patented technology utilizes a proprietary, transparent coating that can be applied on a label or directly on the surface of a product, making it ideal for authentication in both consumer and industrial end markets. Once scanned by a smartphone using a proprietary app, the article can be instantly authenticated. Tru Tag's Smart Packaging technology is a natural fit for our portfolio and will drive commercial synergies when linked with OpSec software, which provides serialization and track-and-trace capabilities. This is an exciting expansion to our offerings and further enhances our ability to provide differentiated and innovative solutions to our customers. It also represents our disciplined approach to M&A, first focusing on markets with secular tailwinds, identifying companies with differentiated technologies, and having a clear path to value creation. We expect the Tru Tag Smart Packaging acquisition to deliver a high double-digit return on investment by year three. The acquisition of OpSec earlier this year, the recent acquisition of Tru Tag's Technology, and the planned acquisition of De La Rue Authentication Solutions are clear steps forward in the execution of our strategy to grow NXT and build a resilient portfolio aligned with secular tailwinds. We continue to explore additional M&A opportunities to diversify our business, and our funnel remains very healthy. With that, let me now hand the call over to Christina to provide more detail on our third quarter financial and operational performance as well as updates to our 2024 guidance. Christina?

Christina Cristiano, CFO

Thank you, Aaron, and good morning again. I would like to echo Aaron's appreciation of our global associates for their continued strong execution this quarter. Starting on Slide 7, as Aaron mentioned, we delivered third quarter results that were in line with our expectations. Sales grew approximately 14% year-over-year with core sales growth, which excludes the OpSec acquisition of nearly 5%, driven by international currency. Adjusted segment operating margin of approximately 27% reflects continued dilution from OpSec and an unfavorable product mix year-over-year. Adjusted free cash flow conversion was approximately 89% and was impacted by the timing of shipments, which skewed toward the end of the quarter and increased our working capital requirements at quarter end. Finally, we achieved adjusted EPS of $1.16. Moving to our segments. CPI reported core sales growth of 1.5% in the third quarter, reflecting mid-single-digit growth across all end markets outside of gaming. Adjusted segment operating margin grew 170 basis points year-over-year to approximately 31%, reflecting disciplined pricing execution and productivity initiatives driven by CBS. Looking across our end markets, while gaming performed as expected in the quarter, order rates have not accelerated as anticipated, driven by pushouts from our OEM customers. Outside of gaming, our other end markets are performing as anticipated, and we continue to expect full year revenue growth in the non-gaming verticals to be in the mid-single digits. In total, we expect CPI revenue for Q4 to be approximately flat year-over-year. Moving to Security and Authentication Technologies on Slide 9. Sales grew 36%, including OpSec, which is executing as planned. Core sales were up over 10%, driven by higher international currency shipments. Adjusted segment operating margin was approximately 22% in the quarter, reflecting dilution from the OpSec acquisition and an unfavorable mix in currency. We continue to have a very healthy backlog, up approximately 57% year-over-year, with currency up over 40%. Given this position, we have very high confidence in our full year revenue projections for the segment. During the third quarter, we had several exciting developments across SAT. In Crane Currency, which continues to win share with leading and differentiated technology, we were pleased to partner with the Centrale Bank Curaçao and Sint Maarten on the launch of their new series of banknotes, the Caribbean guilder, which will be released to the public in March 2025. Not only are the notes beautifully designed, but they are the first banknotes in the world to feature two Crane micro-optics technology features on each banknote. We are very proud to partner with the Central Bank on this important milestone. At OpSec, this quarter, we began a pilot with a major sporting league to implement a new on-field authentication program where OpSec will supply secure tags embedded with RFID technology and software to track and trace game-worn articles. This will allow these highly sought-after items to be more accurately authenticated by consumers. This is an exciting extension of our product offering, and we are enthusiastic about its potential for application with other sports leagues. Moving to our balance sheet on Slide 10. We repaid approximately $65 million of outstanding debt in the quarter, ending with net leverage of approximately 1.7x. Our strong free cash flow generation allows us to continue to focus on investing in organic growth, paying down debt, and paying a competitive dividend while maintaining flexibility to deploy capital for future strategic M&A. After the anticipated close of the acquisition of De La Rue Authentication Solutions in the first half of 2025, we estimate our net leverage ratio will be approximately 2.3x. Turning to our 2024 guidance on Slide 11. We are narrowing our sales guidance range to plus 6% to plus 8% growth based on our strong backlog in currency and performance of OpSec, offset by headwinds from the gaming end market in CPI. Additionally, we are narrowing our full year adjusted EPS guidance to $4.22 to $4.30 from $4.20 to $4.35, reflecting mixed headwinds with growth in currency more than offset by continued softness in gaming, which comes at a higher margin. Considering the timing of certain international currency shipments, which are now expected to happen later in Q4, we are lowering our adjusted free cash flow conversion guidance to approximately 70%, given that collections on these shipments will be in early 2025. Finally, given the recent announcement by the U.S. Federal Reserve on their expected 2025 currency orders, I wanted to provide an update on the new U.S. currency program. As many of you know, the U.S. is in the process of redesigning its currency with the release of the new $10 note scheduled for 2026, followed by a new banknote release every two years thereafter, ending with the launch of a redesigned $100 bill in 2034. As the sole supplier of U.S. currency paper for almost 150 years and the supplier of the blue micro-optic strip on the current $100 bill, we remain very confident in our positive relationship with the U.S. government. Like all countries redesigning their currency, we anticipate that the U.S. will continue its leadership in utilizing market-leading anti-counterfeiting features in the new notes. We look forward to the public announcement on the specifics of the design of the new $10 bill in late 2025 or early 2026. As discussed in prior earnings calls, we are upgrading certain papermaking equipment at our Dalton, Massachusetts facility in Q4 2024, which will extend through Q1 2025. This project is on track and represents the final step in our preparations for the new U.S. banknotes. Additionally, in late September, the Federal Reserve published its 2025 print order, which indicated that volume would be down approximately 18% year-over-year and that the mix would be skewed toward lower denominations. As a reminder, order volumes are set entirely at the discretion of the Federal Reserve. The reduction in demand was attributed to the normalization of inventory volumes post-COVID and the shared commitment of the Fed and the Bureau of Engraving and Printing to allocate production capacity to essential projects, including the new banknote series. As a result, we expect volume for U.S. currency to decline double-digits in 2025, consistent with the Fed's anticipated orders. We remain highly confident about the long-term growth prospects for Crane Currency from this significant program undertaken by the U.S. government. We are very proud to partner with the Fed and the BEP on this journey and look forward to the launch of the new $10 bill in 2026. We will provide additional updates on the U.S. currency program as well as our 2025 full-year guidance in more detail during our Q4 earnings call.

Aaron Saak, CEO

Thank you, Christina. In closing, Q3 has been very busy for the Crane NXT team. We continue to execute our strategy. We are building a resilient business focused on market-leading technologies that secure, detect, and authenticate our customers' most valuable assets. Our team executed well in Q3, delivering double-digit sales growth and core sales growth of approximately 5%. We continue to utilize CBS to improve productivity and drive margin expansion. We also continue to deploy our capital to M&A, utilizing a disciplined framework to build upon market-leading positions in growing markets. I am confident that as we continue to execute this strategy, we will see significant shareholder value creation. Thank you again for your time this morning, and I would like to also thank our associates around the world for their commitment to our customers, our communities, and all of our stakeholders. And now operator, we're ready to take our first question.

Operator, Operator

Thank you. At this time, we will be conducting the question-and-answer session. Our first question comes from Matt Summerville with D.A. Davidson & Co. Your line is now open.

Matt Summerville, Analyst

Thanks. Good morning.

Aaron Saak, CEO

Good morning, Matt.

Matt Summerville, Analyst

Maybe, Aaron, Christina, if we can maybe talk about CPI for the first question. Let's talk in a little bit more detail around how we should, at a high level, be thinking about the verticals for 2025. What sort of changed with respect to the go-forward cadence in gaming, number one? And then number two, just again, kind of big picture, these are a collection of businesses we generally think about inclusive of price capture growing at mid-single digits. And it sounds to me like that may need to be reined in a little bit next year, because of what's happening in gaming, but I want to make sure I understand that fully. And then I have a follow-up.

Aaron Saak, CEO

Yes. Thanks for that, Matt and good morning. Well, as we discussed in the prepared remarks, as we look at CPI this year, certainly, vending, financial services, retail performing as expected, and we're going to end this year in those verticals growing at mid-single digits. For gaming, let me start first with the market. And again, we think this is a very healthy end market where we have a unique leadership position, and that comes with high margins. So we really like that business. What we've seen in Q3 is that order rates were slower than we expected. This was after some green shoots, as you remember in Q2 that we talked about last quarter. What we're seeing is our OEM partners are consuming inventory as we expected, but they're really moving to lower levels of inventory, lower than what was on hand pre-COVID. So they're improving their working capital. And at the same time, our supply chain is performing very well, and our lead times have significantly improved. They're now down to about four to eight weeks for gaming components. So when you put those two together for the fourth quarter and to your question about how we think about next year, we've adjusted the forecast in Q4. We now expect orders to continue to improve, but at a slower pace than we originally anticipated. This is what's giving us CPI revenue in total for Q4 that we expect to be approximately flat year-over-year. Again, the rest of the markets are growing and ending 2024 with mid-single-digit growth.

Matt Summerville, Analyst

And then, Aaron, as a follow-up, just talking about the currency business. How should we be thinking about, I know you mentioned U.S. revenue volume, I should say, is going to be down double digits. Revenue may be down a little bit more than that, just given that you're going to have micro-optic headwind on mix. So I guess I'm trying to understand what are you doing to kind of mitigate that impact? And this huge international driven backlog you have in currency, is that enough to sustain respectable growth for the SAT business organically in 2025?

Aaron Saak, CEO

Yes. Thanks, Matt. I think you're framing that up correctly. The U.S. dollar volumes will be down, as Christina mentioned, double digits, just simply based on the Fed order rate. Now that's going to be offset by, again, very strong growth in currency. We feel fantastic about that international backlog and how that business is performing. And then, of course, we have OpSec now in the segment, and that will come in and start to lap in May into the core business. So I think in total, for some guidepost here, when we look at NXT for 2025, I think when you add in the headwind from the U.S. currency and you look at the rest of the portfolio, revenue is going to come in about flat in 2025. We're obviously continuing to take action driving productivity and cost through CBS, which you can see in the performance of CPI this quarter. We're going to execute on the OpSec synergies. Those are going very well. So I would expect '25 to have segment adjusted operating margins in the same range that we saw this year, offsetting the dilution that we'll see from OpSec and the headwinds from the U.S. government mix, as you indicated.

Matt Summerville, Analyst

That statement on flat, Aaron, I just want to make sure I'm interpreting that correctly. Is that flat organic for total SAT? Or are you talking about Crane NXT overall, again, just in the guidepost for '25?

Aaron Saak, CEO

Yes. Thanks, Matt. Just to be clear, I am talking about Crane NXT total company revenue flat, approximately flat in '25. And of course, we're in the middle of our planning process, and we'll have a lot more fidelity on that guidance during our Q4 earnings call.

Matt Summerville, Analyst

Got it. Thank you.

Aaron Saak, CEO

Sure.

Operator, Operator

Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.

Michael Halloran, Analyst

Hey, good morning everyone.

Aaron Saak, CEO

Good morning, Mike.

Michael Halloran, Analyst

Just to follow-up on Matt's question there one last time again. Does that include the acquisition like De La Rue that's not necessarily part of the run rate numbers yet when you talk about flat overall?

Aaron Saak, CEO

Yes. No, Mike, it does not include De La Rue. And just out of, I think, doing the right thing here, we'll assume no contribution from De La Rue until it officially closes. And then, of course, we would update guidance correspondingly.

Michael Halloran, Analyst

Yes, that makes a lot of sense, just making sure. Following up again on the U.S. based business and the overall impact for the currency business, is the thought process that 2026 will become a more normalized year and that the $10 will ultimately vary based on content? In other words, is 2025 expected to be depressed while 2026 is more normalized? How are you thinking about it at this point?

Aaron Saak, CEO

Yes, I think you're exactly correct. I think what we'll look for is the actual release date of the $10. I think that's still the unknown here. It's a positive tailwind to the business. The earlier it's released, the better for us as that will effectively stop the supply of the current incumbent $10 bill and replace it with the new issue, which, again, we believe will have higher technology content on it, and we feel confident about that. So I think it's really normalization in '26, as you said, with the upside of the timing of the release of the $10 that creates a natural glide path to improved revenue and margins in the U.S. business over time.

Michael Halloran, Analyst

And then last one and related on that normalization side. When you think about '25 mix and you put it in historical context for that U.S. based currency business, is this pretty close to the lows in terms of the mix for you guys? Or maybe just give some context on that side of things.

Aaron Saak, CEO

Yes, it's very much near the lows for us. If you look at the mix and you take the midpoint, it's skewed heavily to the lower denominations. If you zoom out and look at COVID through 2025, you get a reversion to the mean on the mix, where there was a lot higher production of $100 bills and $50s during the early years of COVID. So you're exactly correct. The mix is lower versus normal, and we would expect over time that that reverts back to a mean of traditional order volume of $100s and $50s and $20s going forward.

Michael Halloran, Analyst

Thank you. Appreciate it.

Aaron Saak, CEO

Thanks, Mike.

Operator, Operator

Thank you. Our next question comes from Bob Labick with CJS Securities. Your line is now open.

Robert Labick, Analyst

Great. Thank you. Good morning.

Christina Cristiano, CFO

Good morning.

Aaron Saak, CEO

Good morning, Bob.

Robert Labick, Analyst

So yes, a lot of exciting announcements over the quarter. And I was wondering, could you give us, on the authentication side, a breakdown of your end markets pro forma the De La Rue assets? Where will your primary sales be focused? And how should we think about the end markets you will be in pro forma De La Rue?

Aaron Saak, CEO

Yes. That's a fantastic question, Bob. So we have these three, call it, end markets or segments for De La Rue. Government will be about 45% of the business and really create a leadership position for us. Then we have ID documents, which will account for about 30% exposure to the government ID or civil ID business, which we're very excited to have a strong position in. The remainder will be brand protection at approximately 25%, which involves consumer brands, sports leagues, and CPG-type companies. When you add that together with OpSec, we like the diversification to the end markets of Crane NXT. That adds a lot of resiliency to the portfolio. And it also aligns with secular tailwinds where we see growth in security features in all three segments.

Robert Labick, Analyst

Okay. Great. And then what other end markets in authentication are you still targeting, like pharma, as you've talked about, in the past and stuff? And now that you're going to have a much larger scale, how do you think about kind of the build versus buy? Or is each end market something you should target buying scale into and then growing it organically? Or how do you think about the next step in continuing to grow SAT?

Aaron Saak, CEO

I think that's a really good question, Bob. I agree with your thesis that now we've created a very strong anchor property and set of properties inside of authentication, particularly when you think post-close as we get into the second half of next year with De La Rue and OpSec coming together. I think that's really a build. We keep building off of that core, and we add in technologies, just like we announced today with Tru Tag, that act as accelerators to that strategy. We have a very healthy funnel of technologies that can become product line extensions off this strong core business. I think you could see more of that coming. We like the technologies we can add in, utilize our channels, and we're getting very good returns off of that. In terms of end markets, you're exactly right—pharma and healthcare are some areas we want to explore further. We have properties in that space, and that's not a strength for us right now. We're prosecuting an M&A funnel that is healthy for us with opportunities. Also, you can think about geographies. OpSec and De La Rue provide us exposure, particularly in Europe and North America, and growing exposure in Asia. This is another geography for Crane NXT to expand where you have demographics and secular tailwinds in those markets. That's how we're thinking about it, Bob, and we feel very confident in the funnel.

Robert Labick, Analyst

That's great. Thank you so much.

Aaron Saak, CEO

Thanks, Bob.

Operator, Operator

Thank you. Our next question comes from Damian Karas with UBS. Your line is now open.

Damian Karas, Analyst

Hey, good morning, Aaron.

Christina Cristiano, CFO

Good morning.

Aaron Saak, CEO

Good morning.

Damian Karas, Analyst

Aaron, I think you hinted at currency margins holding at similar levels in 2025 compared to where they are now. I think that would be a pretty impressive feat just given the mix factors at play and how profitable that U.S. currency business is. Could you just elaborate a little bit? Like is that the case for both the U.S. and international side like you're kind of expecting comparable margins? Or is it more like the international expansion is going to offset some of the dilution in the U.S.? And would you maybe just be able to quantify like the cost actions you're taking to help us out a little bit?

Aaron Saak, CEO

Yes. Thanks, Damian. To be helpful, what I was referring to for segment adjusted margins was for NXT in total for next year. This year, our guidance, as Christina updated, was between 26% and 28%. I think we're going to be in that range again next year. This is a combination of our productivity actions, again, the drive in CBS, which you see in CPI's performance this quarter, and the execution of the OpSec synergies, which are on track, and we have clear visibility. There may be a little headwind in the SAT segment, offset by some improvement in the CPI segment. In total for the NXT portfolio, we'll end in about the same range. I'd like to hold off though, out of courtesy here, Damian, until we give our 2025 guidance on any specifics related to those actions as we progress through the rest of the year and into early next year.

Damian Karas, Analyst

Understood. Thanks for clarifying. Maybe I could just ask you about Tru Tag. How should we be thinking about modeling kind of like the financial impact on an annualized basis? I recognize you said it's not going to have much of an impact on the end of the year here?

Aaron Saak, CEO

Yes. Damian, it's really not a material adjustment I would certainly recommend or advise to make to the model. It's more of a signal for us of how we can find technologies and add on incrementally to this portfolio we're building that's truly differentiated and utilizes our channel. For us, it's going to be a few million dollars of sales over the next few years. Again, it's largely de minimis in total to NXT but it's a growth driver in OpSec and the authentication business. We are being very disciplined in our approach, and we're going to generate very good returns on finding technologies like that as a leader in this industry, partnering with small companies and start-ups and bringing them in, and utilizing our channel. We have a healthy funnel of other opportunities like this.

Damian Karas, Analyst

Got it. That's really helpful. And one last one, if I could. Just going back to the gaming discussion, you did sound a little bit more positive on the orders normalization last quarter. So I'm just curious if maybe like you were seeing some pull-forward demand for whatever reason, second quarter, third quarter, and that's what kind of saw a little bit of a tick-up. And then now you're seeing kind of these OEM pushouts. Could you just maybe talk a little bit more on that and kind of where you foresee the light at the end of the tunnel here on some of that kind of inventory correction from your gaming customers? Thanks.

Aaron Saak, CEO

Yes. Thanks, Damian. I think you're framing that right. We did see some green shoots in Q2, and that probably was within one or two of the OEMs putting in some orders that did not repeat at that level as we got into Q3. We just want to be very prudent here with our forecast as we go forward. The end markets are healthy. We have a leadership position in this market, and the margins are very strong for us in this business. We see the drawdown of inventory occurring. We think, when we look at inventory turns for those OEMs, that it will take another quarter or two to get back to a higher level of run rates. That's why we've adjusted Q4. We would expect low single-digit type growth in that market as we exit 2024.

Damian Karas, Analyst

Got it. Make sense. Really appreciate you taking our questions. Thanks a lot.

Aaron Saak, CEO

Thanks, Damian. I appreciate it.

Operator, Operator

Thank you. Our next question comes from Ian Zaffino with Oppenheimer. Your line is now open.

Isaac Sellhausen, Analyst

Hey, good morning. This is Isaac Sellhausen on for Ian. Thanks for taking all the questions. My question is on CPI. Could you talk a bit about pricing cost and some of the productivity initiatives, maybe how you've helped drive higher margins despite the mix shift there? And then related to that, are you still taking price maybe in some of the end markets outside of gaming and sort of your expectations for segment margins as you work through the balance of the backlog there? Thank you.

Christina Cristiano, CFO

Yes, I'll take that one, Isaac. It's a great opportunity to just congratulate our team who are doing a really great job at executing and leveraging the CBS system to drive productivity. Despite lower volumes, they've been able to hold margins. So it's just excellent work by the entire CPI team. We continue to be price/cost positive. This is due to disciplined execution of pricing. Even though there has been unfavorable mix because of gaming coming at a higher mix in the portfolio, we've been able to mostly offset that through pricing and productivity. Overall, we're feeling really good, the margin levels we expect to continue, and if anything, as Aaron said, there could be a bit of positivity there next year just through initiatives we're driving related to productivity.

Isaac Sellhausen, Analyst

Okay. Understood. Thank you. And then separately, on the free cash flow conversion for the year and I guess, the adjustment given the currency shipments. I know it's still obviously early, but looking out until next year, does currency shipments have a similar impact on free cash flow conversion or any other major factors that we should consider there?

Christina Cristiano, CFO

Yes. It's a great question, Isaac. I'll emphasize that nothing has changed in our business model, and we continue to have high confidence in our ability to generate strong free cash flow. This quarter, we were impacted by the timing of certain shipments, and that's going to play out again towards the end of the year. We knew our revenue was more heavily weighted toward the back half of the year this year, but we have greater visibility now into the timing of specific shipments, which will occur later than anticipated. This is a few significant projects related to our international currency business, and you can expect the collections from those shipments to occur in Q1 as opposed to Q4. I will just caution that Q1 tends to be our lowest quarter in terms of cash flow conversion. So there's still moderate free cash flow conversion in Q1, based on seasonal trends from the rest of the business.

Isaac Sellhausen, Analyst

Okay, great. Thanks Christina.

Christina Cristiano, CFO

You bet.

Operator, Operator

Thank you. Our next question comes from Bobby Brooks with Northland Capital Markets.

Bobby Brooks, Analyst

Hey, good morning guys. Thank you for taking my call.

Christina Cristiano, CFO

Good morning.

Aaron Saak, CEO

Good morning, Bobby.

Bobby Brooks, Analyst

I'd like to get some color on the growth strategy for product authentication. It's clear through what I've gleaned you guys, I see it as a really major opportunity for Crane NXT. You've had OpSec for several months now, De La Rue's product authentication coming in the first half of '25 and the smaller Tru Tag Technology acquisition last week. You're building a sizable business there. But where do you think the growth opportunities come? I know these businesses you've acquired are in the mid-single digit plus growth rate range, but do you think the combined strategy you're building will drive that to a high-single digit plus range?

Aaron Saak, CEO

Thanks, Bobby. We couldn't be more excited about the deployment of capital into this segment, and we think it's going exactly as anticipated with the integration of OpSec. When you think about why we're excited and where we're going to grow, I would point to what Christina talked about in the prepared remarks regarding really interesting new opportunities we have for share-of-wallet expansion with some of our major brand protection customers, where we're incorporating new technologies, thus offering a higher value proposition to them and their consumers. This comes at attractive margins and is truly greenfield since we're adding new services and offerings that did not exist before. The market is growing at this mid-single-digit rate. We have an opportunity to certainly outperform that. We want to be prudent as we are still integrating the acquisitions. De La Rue is not part of the portfolio quite yet. However, I think in every one of these markets—brand protection, government tax stamps—we see opportunities to add more services into our government customers, similar to what we've done in being a technology leader in currency. We can incorporate our authentication features with the polycarbonate production capabilities from De La Rue. It's an exciting space for us. We're aligning the portfolio to secular tailwinds, providing best-in-class technology and adding in incremental technologies like Tru Tag that give us opportunities to grow. Your thesis is correct; all three areas offer share-of-wallet and greenfield expansion opportunities, and that will be a message you'll hear from us as we move forward.

Bobby Brooks, Analyst

Got it. That's really good color. Then maybe just piggybacking on those prepared remarks that Christina gave about the on-field professional sports jersey with the embedded RFID and software to track and trace game-worn items through OpSec. Could you maybe just talk about how that deal or project win came about? And then also, is this just something that's for all jerseys in that league throughout the entire season? Or is it maybe a test run through the first quarter of the season? Just hoping for any more color you could give on that.

Christina Cristiano, CFO

Yes, I'll start. Aaron, if you want to chime in at the end, you can jump in. This really is about great relationships that OpSec has developed and cultivated with their customers to create new ideas. In this case, we've partnered on a new way to authenticate. Although you're speaking specifically about jerseys, think about entire sporting equipment associated with that league. You want to know what game this merchandise was used in and who was involved in it, and that's where our authentication is accurate and timely. We have a database that supports this, and now combining this with RFID to track on- and off-field movement makes it more accurate. This is a test run with a few teams, and we're excited about the potential for expansion into other sports leagues as well.

Bobby Brooks, Analyst

Got it. Yes, that is really exciting. And then just last question for me on M&A. Obviously, you guys have the long-term goal of getting to that $3 billion mark. The M&A you've executed this year is focused on expanding the product authentication piece. So, I was curious if that focus will continue moving forward with M&A, or maybe does it shift to businesses that fall under the CPI banner?

Aaron Saak, CEO

Thanks, Bobby. Just when I zoom out on capital allocation in general and our growth strategy, it's all driven around ensuring that we're creating shareholder value. We want to have a disciplined approach, which you see with OpSec and De La Rue. You see opportunities like we highlighted with Tru Tag, looking for bolt-on differentiated technologies that generate a higher return. That's not going to change. The funnel remains healthy in both authentication and other areas. Sometimes it can be episodic in what comes across the line at any point in time that we can get closed. No change. Our priorities to drive value for shareholders by investing and driving the core. We feel very confident, particularly in the U.S. currency business long term. We will continue to pay a competitive dividend that we've done since we separated and execute on M&A. We've always said we'll do one to two deals a year. You could argue this year, we've done three. I expect as we go into '25, we'll keep on that pace of one to two deals, and I feel good about that.

Bobby Brooks, Analyst

Aaron. Thank you for the color. I'll turn it in the queue.

Aaron Saak, CEO

Thanks, Bobby.

Operator, Operator

Thank you. Our final question comes from Matt Summerville with D.A. Davidson & Co. Your line is now open.

Matt Summerville, Analyst

Aaron, I apologize, but I feel like I'm missing something here. One, I want to make sure I understand. When you said big picture sales flat for total Crane NXT, is that organic? That's my first question.

Aaron Saak, CEO

Yes. That would be assuming, Matt, a full-year contribution of OpSec next year going forward. So that's OpSec all-in for next year, and of course, the currency and CPI businesses. It does not include anything for De La Rue Authentication.

Matt Summerville, Analyst

Okay. So the first part includes the contribution from OpSec for the first four months of the year. That's reflected in the comment about flat sales. I guess...

Aaron Saak, CEO

Correct. That's...

Matt Summerville, Analyst

There's some disconnect then, Aaron. Either something in CPI is misaligned with my thinking for next year or the drag on currency is going to be even bigger than I would have thought. Can you help me try and kind of piece that together a little bit?

Aaron Saak, CEO

Yes. To your point on currency in the U.S., we expect those declines due to the U.S. We expect strong mid-single digit growth coming from OpSec and international combined. When we look at CPI, we expect this business with the headwinds in gaming to exit the year and start back growing at low single digits in 2025.

Matt Summerville, Analyst

Okay. Got it. Thank you.

Aaron Saak, CEO

Sure.

Operator, Operator

Thank you. Our next question comes from Damian Karas with UBS. Your line is now open.

Damian Karas, Analyst

Hey guys. Just following-up here. Aaron, you did sound very positive and increasingly positive on the chances that this $10 redesign is going to include micro-optics. So that's great to hear. Obviously, the devil is in the details on what exactly the U.S. government decides for these bills. But is there a simple way to think about the upside opportunity on that $10 note with micro-optics versus without it?

Aaron Saak, CEO

Yes. Just to be clear, Damian, we do feel very confident in our relationship. It would be far and premature and presumptive of me to discuss specifics about that. In terms of the way to think about the value creation from the change, the cost of the current U.S. $100 bill is about $0.17, as data published by the Federal Reserve shows. For the $1 bill, that's about $0.07. The difference between those costs is due to technology and counterfeiting features. I expect the new $10, assuming it has more technology features, to be above the current cost of the existing $10. You can use those two numbers as goalposts for modeling out the cost difference. Certainly, we will benefit, and much of that cost or some of that cost can be attributed to us and the security features we provide. Hopefully, that helps a little bit. But again, we feel very confident it will include advanced security features.

Damian Karas, Analyst

Now, I totally get it. That's helpful. Thank you. One last follow-up on the free cash flow guidance change. Christina, you mentioned that it's basically a shipment timing going from the fourth quarter to the first quarter. If my math is right, we're talking about $55 million to $60 million. So could you just clarify if it's one single project shipment of that magnitude that's slipping a little bit, and you have visibility into recovering that early in '25? Or is it kind of a multitude of projects that are just seeing that same trend?

Christina Cristiano, CFO

Thanks, Damian. Let me clarify that this was not a delay in shipment. There's no change to our revenue forecast. But because the timing of the shipment is happening later in the period, it impacts our ability to collect the cash before the end of the year. It's related to significant projects in our international currency business, and you can expect collections from those shipments to now happen in Q1 as opposed to Q4. I will caution that Q1 tends to be our lowest quarter in terms of cash flow conversion. Although these shipments will move in, you will still see moderate free cash flow conversion in Q1 due to seasonality from the rest of the business.

Damian Karas, Analyst

Okay. Understood. Thanks for the time.

Christina Cristiano, CFO

You bet.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Aaron for closing remarks.

Aaron Saak, CEO

Thank you very much. I'd again like to thank all of our NXT team members for their very strong efforts here in Q3. It was certainly a busy quarter, and we continue to execute our strategy, operating the businesses, driving productivity, executing on the M&A, doing exactly what we said we were going to do. Thank you again for everyone and their questions today who joined the call. We look forward to our Q4 earnings as we report at the beginning of 2025. Thank you again, and have a great day.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.