Q4 2024 Summary
Published Feb 13, 2025, 6:18 PM UTC- CXT's international currency business is expected to be a point of strength in 2025, with growth coming from both existing sticky contracts (approximately 70%) and new wins (approximately 30%). Management has high confidence based on new orders already in hand and a strong sales funnel.
- CXT is uniquely positioned in the market due to its technology leadership and ability to offer a full suite of authentication solutions, bolstered by recent acquisitions like OpSec and the anticipated De La Rue Authentication Solutions. This positions the company for share of wallet expansion with customers and opens up opportunities in new segments.
- In the gaming market, despite a temporary slowdown due to OEM inventory adjustments, CXT maintains a unique leadership position and expects orders to inflect positively in Q2 2025, leading to growth in the second half of the year. Management is encouraged by the health of the end market and improved lead times.
- Significant Decline in U.S. Currency Sales Expected in 2025: The company anticipates a high double-digit decline in U.S. currency sales in Q1 2025 due to production stoppages for equipment upgrades, leading to the lowest revenue quarter and segment operating profit margins of approximately 20%, down from the usual high 20s percent. Additionally, for the full year 2025, they expect a decline of approximately 20% in U.S. government sales due to actions by the Federal Reserve and BEP, impacting revenues and margins in the SAT segment. ,
- Continued Softness in Retail End Market Leading to Sales Declines: The company continues to see softness in orders in the retail end market, expecting this trend to continue throughout 2025. They project a high single-digit decline in retail sales year-over-year due to retailers considering solutions other than traditional self-checkout offerings from OEMs and reduced OEM volumes. This ongoing softness in the CPI segment could negatively impact overall growth. ,
- Margin Dilution from OpSec Acquisition Persisting into 2025: The acquisition of OpSec has been dilutive to margins, reducing the SAT segment operating margin by approximately 250 basis points in 2024, with similar impact expected in 2025. The lower-margin profile of OpSec may continue to pressure overall margins until synergies are realized, which may not fully materialize until after 2025.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Sales Growth | FY 2025 | no prior guidance | 1% to 3% | no prior guidance |
Adjusted EPS | FY 2025 | no prior guidance | $4.00 to $4.30 | no prior guidance |
Segment Margins | FY 2025 | no prior guidance | 26% to 27% | no prior guidance |
Corporate Expenses | FY 2025 | no prior guidance | $55 million | no prior guidance |
Non-Operating Expenses | FY 2025 | no prior guidance | $43 million | no prior guidance |
Adjusted Free Cash Flow Conversion | FY 2025 | no prior guidance | between 90% and 110% | no prior guidance |
U.S. Currency Business | FY 2025 | 18% decline | 20% decline | lowered |
CPI Margins | FY 2025 | no prior guidance | improve by 10 to 20 basis points | no prior guidance |
Tariffs | FY 2025 | no prior guidance | does not include any potential impacts from new tariffs | no prior guidance |
Segment Operating Margin | Q1 2025 | no prior guidance | approximately 20% | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
International currency backlog and growth | Consistently strong backlog growth: up 13% in Q1, 65% in Q2, over 40% in Q3. High confidence in full-year revenue based on visibility of shipments and new wins. | Ended 2024 with a US$248M backlog. Core sales grew over 7%, with continued optimism for mid-single-digit growth in 2025. | Positive ongoing momentum; strong backlog supports 2025 growth. |
U.S. currency sales decline | Q1 noted lower U.S. volumes due to equipment upgrades. No mention in Q2. Q3 highlighted a double-digit decline for 2025 from Federal Reserve print orders. | Expected to decline by ~20% in 2025, driven by lower Federal Reserve volume (down ~18% YoY), skewed to lower denominations. | Bearish near-term outlook due to lower Fed orders and production shifts; long-term redesign opportunities remain. |
Softness and recovery in gaming market | Q1 had softness, expecting inventory drawdowns to clear by Q2/Q3. Q2 noted normalization, though modest inventory overhang. Q3 indicated slower recovery from OEM inventory corrections, with improvement expected late Q4. | Softness persisted through 2024, with recovery expected in 2H 2025. Gaming sales anticipated to grow in the low single digits for 2025. | Still weak near term; gradual recovery shaping up for mid-2025. |
Challenges and potential in CPI segment | Q1: 7% core decline, but retail performing mid-single digits. Q2: OEM retail slowdown, mid-single-digit growth in other verticals. Q3: flat Q4 revenue, gaming weakness offset by steady non-gaming channels. | Continued retail softness (high single-digit decline), offset by custom self-checkout and solid vending growth. Low single-digit gaming rebound expected. | Mixed: retail challenges persist, offset by vending strength and custom solutions. |
OpSec acquisition integration and synergies | Q1: ~US$8M synergies by 2026, margin dilution anticipated. Q2: margin dilution (~23% SAT margin) but on track for synergy capture. Q3: integration proceeding well, ~22% SAT margin reflecting dilution. | Margin dilutive by ~250 bps, but CBS initiatives driving operational and commercial synergies. Expect margins to move into low 20s over time. | On track; near-term margin drag but synergy execution remains positive. |
Ongoing M&A strategy (De La Rue, Tru Tag) | Not explicitly mentioned in Q1 and Q2 regarding these targets. Q3: agreement to acquire De La Rue Authentication Solutions; Tru Tag technology for product authentication. | De La Rue Authentication Solutions expected to close in Q2 2025; Tru Tag Smart Packaging acquired. Expands authentication offerings and recurring revenue. | Growing into broader authentication markets; diversifying portfolio with high recurring revenue. |
Free cash flow conversion difficulties | Q1 referenced lower FCF due to timing in Currency business, seasonality; target ~100% conversion for full year. No mention in Q2. Q3 lowered FCF guide (~70%) because of late-quarter shipments. | Adjusted FCF conversion of 76% for 2024, impacted by late shipments pushing collections into Q1 2025. | Short-term timing drag but management remains confident in long-term FCF conversion. |
Expanded technology leadership in authentication | Q1 focused on OpSec acquisition for digital+physical offerings; share-of-wallet growth potential. Q2: positive customer response, funnel building. Q3: brand protection and polycarbonate solutions fueling pipeline growth. | Showcased micro-optics + digital authentication on new perfume-label contract; sees opportunities to scale across product lines. | Strengthening leadership in brand/authentication solutions; cross-selling drives share expansion. |
Uncertainty and lumpiness in currency tendering | Q1 and Q3 references were mostly about project-based variances in FCF. Q2 specifically mentioned tender lumpiness but no fundamental market change. | No explicit mention in Q4 regarding tendering uncertainty beyond the strong backlog outlook. | No direct Q4 update; typical project lumpiness but stable near-term. |
U.S. banknote redesign program | Q1: equipment upgrades through 2024–2025, decade-long growth opportunity. Q2: next upgrade in Q4 → Q1 2025. Q3: new $10 note in 2026, major margin impact near term. | Final equipment upgrades on schedule. Fed’s 2025 orders reduced ~18% as capacity readies for new designs. | Significant modernization effort impacting near-term volumes; poised for long-term gains as redesigns roll out. |
-
U.S. Currency Shutdown Impact
Q: How will the U.S. currency business shutdown affect margins in Q1?
A: The shutdown of our U.S. currency business, ongoing from Q4 through all of Q1, will lead to a high double-digit decline in the U.S. government side of our currency business in Q1. This will result in segment operating profit, including CPI and SAT, of approximately 20% in Q1, our lowest revenue quarter. However, we expect a step-up in Q2, leveling off in the second half, with margins returning to the high 20s percent for the rest of the year. -
Margin Outlook and Acquisitions
Q: How are acquisitions and mix impacting SAT margins, and when will margins improve?
A: The OpSec acquisition has been dilutive to SAT margins by about 250 basis points in 2024, and we expect a similar impact in 2025. OpSec entered our portfolio at a lower margin, but we're implementing CBS to drive margins up to the low 20s percent over time through synergies. 2025 is a transition year, with margins impacted by unfavorable mix due to the U.S. currency program and OpSec dilution. We anticipate margins to improve once the new U.S. currency is launched and expect margins to return to prior levels and be accretive as we move forward. -
Leverage and M&A Plans
Q: What are your leverage expectations post-De La Rue acquisition and future M&A plans?
A: We ended the year at 1.5x net leverage, and with the De La Rue acquisition closing in Q2, we expect to be at about 2.3x net leverage. Our goal is to stay below 3x leverage, possibly flexing slightly above if we can return below 3x within 12 months. We'll continue investing in the core business, paying a competitive dividend (recently increased by 6% year-over-year), and executing disciplined M&A, targeting deals similar in size to OpSec and De La Rue, in the $100 million to $500 million revenue range. We aim for a double-digit ROIC by year five and have a healthy funnel, expecting at least one or two more deals in 2025. -
Earnings Phasing
Q: How will revenue and earnings be phased between the first and second half of the year?
A: Revenue phasing will be slightly more heavily weighted toward the second half, with a little more than half in the second half of the year. Operating profit will be even more weighted toward the second half due to the U.S. currency business and the production stoppage in Q1. Therefore, we anticipate a greater shift of operating profit to the second half. -
International Currency Growth
Q: What's driving international currency growth—new wins or existing customers?
A: Growth is coming from a combination of continued growth from core customers and new wins, approximately 70% existing customers and 30% new wins. We have high confidence in our international currency business based on new orders already in hand in Q1 and a strong sales funnel. The funnel remains robust, and we expect orders ranging from a few million to tens of millions over one to two years. -
Retail Self-Checkout Trends
Q: How has the retail self-checkout market changed, and what's your outlook?
A: While the need for retail automation remains due to labor scarcity, retailers have shifted to exploring new and different self-checkout options beyond traditional forms, diverting capital spend. Concerns about shrinkage related to self-checkout and reluctance to deploy capital due to the macro retail environment have been headwinds. We've seen softness in OEM orders since mid-last year, but this has been offset by growth in the custom self-checkout market, where retailers create custom solutions. We expect this dynamic to continue and have taken a prudent approach to guidance, anticipating continued softness for the balance of 2025. -
Missed SA Guidance
Q: Why did you miss your security authentication sales growth guidance, and what's the outlook?
A: In Q4, currency came in a bit lower than expected due to the timing of international shipments pushing out and softness in the U.S. related to volume and mix changes with the new series. For 2025, we're confident in international currency based on orders on hand and have appropriately risk-adjusted our guidance for U.S. headwinds. We feel good about currency prospects and the SAT segment overall in 2025. -
Tariff Impact
Q: How are potential tariffs affecting your 2025 guidance and operations?
A: Our 2025 guidance does not include any impact from tariffs. We don't see any material impact from tariffs on the horizon. We've taken proactive actions to add flexibility to our supply chain, utilizing our global footprint. We have very little commercial business in China, no impact from Canadian tariffs, and are optimistic about Mexico given recent talks between administrations. We feel we're in a good position and have measures in place to mitigate any material impacts. -
Micro-Optics Win via OpSec Channel
Q: Can you discuss the recent micro-optics win through the OpSec channel?
A: We're encouraged by this first win with a new customer in the luxury perfume industry, validating our strategy of combining OpSec with our technology. It's more than just the label; it includes online brand protection and digital authentication services. Customers are looking to us for a full suite of authentication solutions, and these are sticky contracts with recurring revenue. Our business is built on technology leadership, expanding with micro-optics and, soon, De La Rue's capabilities. The initial engagement covers a few different products, with an opportunity to expand our share of wallet. -
Vending Market Strength
Q: What's driving the strength in the vending market, and how do you view its outlook?
A: We had a very strong year in vending, growing in 2024 in mid-single digits, while the market grew at low single digits. The macro need for automation and convenience retail sales where labor is scarce is driving the vending market. Vending offers a controlled environment with minimal shrinkage, benefiting us. Additionally, the rise of other products in the vending category, such as automated coffee machines in airports and hospitality venues, has been a strong business for us. We expect these tailwinds to continue in a steadily growing market.