Q3 2024 Summary
Published Jan 13, 2025, 5:34 PM UTC- Crane NXT's strategic acquisitions, including De La Rue Authentication Solutions and Tru Tag Technologies, are diversifying and strengthening its authentication business, positioning the company to outperform market growth through share-of-wallet expansion, introduction of new technologies, and providing greenfield opportunities with attractive margins.
- The company maintains a disciplined capital allocation strategy focused on shareholder value, including ongoing M&A activity—with plans to execute 1-2 deals per year—and continues to pay competitive dividends, enhancing confidence in long-term growth prospects.
- Despite temporary softness in the gaming sector, Crane NXT holds a unique leadership position in this high-margin market and expects order rates to improve as inventory levels normalize, signaling potential upside as demand recovers.
- Softness in the gaming end market is leading to slower order rates than anticipated. OEM customers are pushing out orders, and the company now expects CPI revenue for Q4 to be approximately flat year-over-year, with recovery taking another quarter or two.
- Free cash flow conversion guidance has been lowered to approximately 70% due to timing of shipments in the international currency business. Collections from significant projects are now expected in Q1 2025 instead of Q4 2024, impacting cash flow and increasing working capital requirements at quarter end.
- The U.S. Federal Reserve's 2025 print order indicates a volume decline of approximately 18% year-over-year, with a mix skewed toward lower denominations. This is expected to result in a double-digit decline in U.S. currency volume for 2025, which may impact revenue in the Security and Authentication Technologies segment.
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2025 Revenue Outlook
Q: Is Crane NXT's revenue expected to be flat in 2025?
A: Yes, the company anticipates total revenue to be approximately flat in 2025, including a full year contribution from OpSec but excluding any impact from the De La Rue acquisition. This outlook factors in declines in the U.S. currency business, offset by strong growth in international currency and OpSec, and low single-digit growth in CPI as it recovers from gaming headwinds. -
U.S. Currency Business Decline
Q: Will U.S. currency volumes decline significantly in 2025?
A: U.S. currency volumes are expected to be down double digits in 2025 due to lower Federal Reserve orders. The mix is skewed heavily towards lower denominations, leading to margins near historical lows. Normalization is anticipated in 2026, potentially boosted by the release of a new $10 bill with higher security features. -
Gaming Segment Outlook
Q: What is the outlook for the gaming segment in CPI?
A: The gaming market remains healthy with strong margins, but Q3 order rates were slower than expected due to OEMs reducing inventory levels below pre-COVID norms. Recovery is expected to take another quarter or two, with low single-digit growth anticipated as they exit 2024. -
Margin Expectations for 2025
Q: Can margins be maintained despite mix shifts in 2025?
A: Crane NXT expects to maintain segment-adjusted operating margins between 26% and 28% in 2025, similar to this year. Productivity initiatives and cost actions, particularly in CPI, along with OpSec synergies, are expected to offset headwinds from the U.S. currency mix and OpSec dilution. -
Authentication Business Growth Strategy
Q: How will the authentication business grow post acquisitions?
A: With the acquisitions of OpSec and De La Rue's authentication business, Crane NXT aims to leverage a strong core to build upon, adding technologies like Tru Tag to accelerate growth. The combined business will focus on government tax stamps (45%), ID documents (30%), and brand protection (25%). There's potential to outperform the market's mid-single-digit growth, with opportunities in pharma and healthcare , and expansion into new geographies. -
Impact of New $10 Bill
Q: What is the potential benefit of the new $10 bill redesign?
A: The new $10 bill is expected to include advanced security features, potentially increasing its production cost incrementally over the current version. Crane NXT would benefit from providing these security features, contributing to improved revenue and margins in the U.S. currency business over time. -
Free Cash Flow Timing
Q: Why was there an adjustment in free cash flow guidance?
A: Due to the timing of certain international currency shipments occurring later in the period, cash collections will occur in Q1 instead of Q4, impacting free cash flow timing but not revenue. This creates a working capital inefficiency for the year-end but is expected to normalize over time. -
CPI Pricing and Margins
Q: How is CPI maintaining margins despite lower volumes?
A: The CPI team is leveraging the Crane Business System (CBS) to drive productivity, effectively maintaining margins even with lower volumes and unfavorable mix due to gaming. They continue to be price/cost positive through disciplined pricing and expect margin levels to continue, with potential for further improvement next year. -
Growth Opportunities in Authentication
Q: Where are the growth opportunities in authentication?
A: Growth will come from share-of-wallet expansion with major brand protection customers, adding new services and technologies, and expanding into government tax stamps and civil ID markets. The integration of OpSec and De La Rue, along with technologies like Tru Tag, positions Crane NXT to potentially outperform the market's mid-single-digit growth rate. -
M&A Strategy Moving Forward
Q: Will M&A focus remain on authentication businesses?
A: Crane NXT will continue a disciplined capital allocation strategy to create shareholder value, focusing on both authentication and other areas. They aim to execute 1 to 2 deals a year, investing in opportunities that offer high returns and align with their growth strategy. -
OpSec's New Sports Authentication Project
Q: Can you provide details on OpSec's sports authentication project?
A: OpSec is piloting a project with a professional sports league, embedding RFID and software to track and trace game-worn equipment. This test run involves a few teams and could potentially expand to other teams and leagues, offering accurate authentication and tracking of sporting equipment. -
Tru Tag Acquisition Impact
Q: What is the financial impact of the Tru Tag acquisition?
A: The Tru Tag acquisition is not material to the overall financial model, expected to contribute a few million dollars in sales over the next few years. However, it serves as a strategic addition to the authentication portfolio, offering high returns and showcasing the company's ability to integrate innovative technologies. -
Factors Affecting Free Cash Flow in 2025
Q: Will currency shipments impact free cash flow next year?
A: While currency shipments timing can affect quarterly free cash flow due to the project nature of the business, over the long term, Crane NXT expects free cash flow conversion to be approximately 100%. No major factors are anticipated to significantly impact free cash flow conversion in 2025. -
Recovery Expectations in CPI Business
Q: When is growth expected to resume in CPI?
A: With gaming headwinds subsiding, Crane NXT expects the CPI business to exit the year and start growing at low single digits in 2025. Recovery is anticipated as OEM inventory levels stabilize and demand normalizes. -
Productivity Initiatives Driving Margins
Q: How are productivity initiatives affecting margins?
A: Productivity initiatives, particularly in CPI, are helping maintain and potentially improve margins. The company is leveraging the Crane Business System to drive efficiencies and offset headwinds, demonstrating effective execution despite mix shifts.