Q1 2024 Earnings Summary
- Resumption of CPI orders in Q3 and revenue build in Q4, with expected mid-single-digit revenue growth by year-end, indicating recovery in the gaming segment and consistent strong performance from other verticals such as retail and vending.
- Strong performance in the International Currency business, with backlog up 13% year-over-year and ongoing wins in new denominations (5 new wins in Q1), supporting revenue growth into 2024 and 2025.
- Successful acquisition of OpSec Security, expanding Crane NXT's position in the $3 billion authentication market, providing opportunities for growth and synergies, while maintaining a strong financial position with net leverage at 1.8x, allowing capacity for further M&A.
- Short-term headwinds in key business segments: The CPI segment is experiencing a backlog drawdown in the gaming market, expected to continue through Q2, leading to lower volumes and revenue in the near term. While management expects orders to resume in Q3, there is uncertainty about the timing and strength of the recovery, potentially impacting near-term financial performance.
- Free cash flow conversion may be under pressure: Free cash flow was lower in Q1 due to the timing of working capital, specifically in the Currency business, and higher CapEx investments related to the U.S. banknote redesign program. The company's guidance of 100% free cash flow conversion relies on significant improvements in cash flow in later quarters, which may not materialize, potentially affecting overall cash flow generation for the year.
- Margins are being diluted by the OpSec acquisition: The acquisition of OpSec Security is expected to dilute the company's adjusted segment operating margin in 2024, decreasing it to 26% to 28% due to OpSec's lower EBITDA margins of 15%. Additionally, OpSec will not be accretive to adjusted EPS until 2025, while the acquisition adds $10 million of additional interest expense in 2024 due to debt used to fund the acquisition, potentially impacting net earnings and return on investment in the near term.
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Gaming Inventory and Currency Outlook
Q: What's the outlook for gaming inventory and Currency revenue?
A: Management stated that the gaming segment is performing as expected, with a continued burn down of the gaming backlog in Q1. They anticipate orders resuming in Q3 and building again in Q4. Other verticals within CPI are on track, expecting to end the year with mid-single-digit revenue growth. In the Currency segment, they project stronger performance in the middle part of the year, particularly skewed into Q3, due to upgrades. Margins are coming in line with expectations. -
OpSec Acquisition Synergies and Growth
Q: How will the OpSec acquisition impact growth and synergies?
A: Management views the OpSec acquisition as a strategic fit, aligning with their focus on secure, detect, and authenticate markets. They anticipate $8 million in synergies by 2026, with $3 million from commercial synergies and $5 million from operational synergies. The company is confident in achieving these synergies and plans to invest in OpSec to spur further growth, targeting mid-single-digit plus growth for the business. -
Free Cash Flow and Working Capital
Q: Can you explain the lower free cash flow in Q1 and confidence in full-year guidance?
A: The lower free cash flow in Q1 was due to the timing of cash used for working capital related to the Currency business and higher CapEx investments in the new series. Currency is a project-based business with quarter-over-quarter lumpiness impacting working capital. Management expects free cash flow to be on track for approximately 100% conversion for the full year. -
International Currency Wins and Outlook
Q: How is the international Currency business performing?
A: The company had five new denominational wins in Q1, putting them on pace for 10–15 new denominations annually, consistent with expectations. The international backlog is up 13% year-over-year, providing confidence in 2024 and into 2025. Management sees continued strong performance and growth opportunities internationally. -
Growth Across Other CPI Verticals
Q: What is the outlook for CPI's other verticals beyond Gaming?
A: The Retail segment is on track, with major retailers moving ahead with upgrades, particularly in self-checkout, driven by labor scarcity and automation trends. They expect Retail to grow mid-single digits this year. The vending business also continues to perform strongly, having grown at mid-single digits last year and expected to do the same this year. -
Capital Expenditures on Currency Upgrades
Q: What investments are being made in Currency equipment upgrades?
A: The company is investing in the U.S. new series, leading to CapEx being higher this year at closer to 3% of sales, up from the historical 2%. These investments are critical for long-term growth linked to the U.S. Currency program upgrades. There are no significant upgrades planned internationally of the same magnitude.