Q3 2024 Crane NXT Co Earnings Call
[music].
Good day, and thank you for standing by welcome to the Crane and X T Q3, 'twenty 'twenty four earnings call.
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Speaker Change: 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 Cristiana CFO. Please go ahead.
Christina Cristiana: Thank you operator, and good morning, everyone I want to welcome you all to the third quarter 2024 earnings call for Crane and equity 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 Crane, NXP Dot com and a replay of today's call.
Christina Cristiana: It will also be available on our website.
Christina Cristiana: Before we discuss our results I encourage all participants to review the legal notice on slide two which explains the risks of forward looking statements and the use of non-GAAP financial measures.
Christina Cristiana: 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.
Christina Cristiana: 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 Crane and X T Dot com in the Investor Relations section.
Christina Cristiana: With me today is Aaron sake, 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 <unk>.
Speaker Change: After our prepared remarks, we will open the call to analysts for questions now, let me turn the call over to Aaron.
Aaron Sake: Thank you Christina and good morning, I appreciate everyone joining the call to discuss our third quarter results.
Christina Cristiana: As we begin I'd like to take a moment to acknowledge our associates, particularly those that were impacted by the recent hurricanes and other global events I know many associates are still working through those challenges.
Christina Cristiana: Our teams did an excellent job ensuring that our colleagues and their families are safe, which is always our priority into line with one of our core values that people matter.
Christina Cristiana: Also I would like to extend a big Thank you and my gratitude to all NXT associates around the world for their hard work and efforts everyday but especially in times like these.
Christina Cristiana: While 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 <unk> and we delivered strong results in the third.
Christina Cristiana: Sure.
Christina Cristiana: 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.
Christina Cristiana: Excluding <unk> core sales growth was approximately 5% with adjusted EPS of $1 16.
Christina Cristiana: In addition, we also had several exciting M&A announcements this quarter that will drive future growth in the business and shareholder value.
Christina Cristiana: These include our announcement to acquire dealer re work dedication solutions and true tags smart packaging technology.
Christina Cristiana: Both transactions are great. Examples of how we are expanding our portfolio of market, leading technologies that secure detect and authenticate it.
Christina Cristiana: We also continue to integrate <unk> into our business and this process is on track with our expectations.
Christina Cristiana: It's been about five months since we closed on the <unk> acquisition, and we are already driving operational improvements in manufacturing and back office processes utilizing the crane business system <unk>.
Christina Cristiana: Additionally, we are actively engaged with our customers as we expand the portfolio of authentication technologies, we offer and the response continues to be very positive.
Christina Cristiana: In the third quarter. We also published our first ESG report.
Christina Cristiana: This report highlights our commitment to philanthropy sustainability and good governance anchored in our crane NXP values.
Christina Cristiana: 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 the NXT to drive meaningful progress in this area.
Christina Cristiana: And 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.
Christina Cristiana: Finally, I'd also like to once again welcome a liter Richards to the Crane NXP team as the president of Crane currency reporting the same Keyes, who is now leading the security and authentication technologies segment.
Christina Cristiana: Our leaders on the road visiting our sites and customers and we welcome her leadership and enthusiasm that she brings to the company.
Christina Cristiana: 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.
Christina Cristiana: Turning to slide four.
Christina Cristiana: In October we signed a definitive agreement to acquire <unk> dedication solutions, a leading global provider of digital and physical authentication technologies.
Christina Cristiana: This transaction aligns well with our strategy of expanding our leadership in the growing 3 billion dollar authentication market.
Christina Cristiana: As a reminder, daiwa re authenticate and goes to market with three strategic platforms as shown on this slide.
Christina Cristiana: First government revenue solutions provides digital and physical tax stand technologies that link unique identifiers to products, enabling the full traceability of goods that enable governments to collect tax revenues.
Christina Cristiana: Second identification security solutions provides products to secure the government issued identity documents of individuals', including polycarbonate passport pages with embedded security features.
Christina Cristiana: 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.
Christina Cristiana: In summary, the acquisition of dealer re authenticate and builds on our acquisition of <unk> earlier. This year to provide advanced protection for I'd documents tax stamps and security labels like op Zac Taylor <unk> indication as an attractive financial profile comprised of a high percentage of digital and <unk>.
Christina Cristiana: <unk> and recurring revenue longstanding customer relationships and a stable and growing revenue base generating mid single digit revenue growth year over year.
Christina Cristiana: Turning to slide five we also recently announced the acquisition of true tags, smart packaging technology, which enhances the ability of brand owners and consumers to assure the authenticity of their products. This patented technology utilizes our proprietary transparent coding that can be applied on a label or directly on the surface.
Christina Cristiana: Of our product, making it ideal for authentication in both consumer and industrial end markets.
Christina Cristiana: <unk> by a smartphone using our proprietary app the article can be instantly authenticated.
Christina Cristiana: Through tax smart packaging technology is a natural fit to our portfolio and we will drive commercial synergies when linked with <unk> software, which provides serialization and track and trace capabilities.
Christina Cristiana: This is an exciting expansion to our offerings and further enhances our ability to provide differentiated and innovative solutions to our customers.
Christina Cristiana: It also represents our disciplined approach to M&A first focusing on markets with secular tailwind identifying companies with differentiated technologies and having a clear path to value creation.
Christina Cristiana: We expect the true tax smart packaging acquisition to deliver a high double digit ROIC by year three.
Christina Cristiana: The acquisition of <unk> earlier in the year. The recent acquisition of <unk> technology and the planned acquisition of <unk> authentication solutions are clear steps forward in the execution of our strategy to grow in XD and build a resilient portfolio aligned with secular tailwind.
Christina Cristiana: We continue to explore additional M&A opportunities to diversify our business and our funnel remains very healthy.
Christina Cristiana: With that let me now hand, the call over to Kristina to provide more detail on our third quarter financial and operational performance as well as updates to our 2024 guidance Kristina.
Kristina: Thank you Erin and good morning, again, I would like to Echo Aaron's appreciation of our global associates for their continued strong execution this quarter.
Kristina: Starting on slide seven as Aaron mentioned, we delivered third quarter results that were in line with our expectations sales.
Kristina: Sales grew approximately 14% year over year with core sales growth, which excludes the <unk> acquisition of nearly 5% driven by international currency.
Kristina: Adjusted segment operating margin of approximately 27% reflects continued dilution from <unk>, and then unfavorable product mix year over year.
Kristina: Adjusted free cash flow conversion was approximately 89% and was impacted by the timing of shipments, which skewed towards the end of the quarter and increased our working capital requirements at quarter end.
Kristina: Finally, we achieved adjusted EPS of $1 16.
Kristina: Moving to our segments CPI reported core sales growth of one 5% in the third quarter, reflecting mid single digit growth across all end markets outside of gaming.
Kristina: <unk> segment operating margin grew 170 basis points year over year to approximately 31%, reflecting disciplined pricing execution and productivity initiatives driven by CBS.
Kristina: Looking across our end markets, while gaming performed as expected in the quarter order rates have not accelerated as anticipated driven by push outs from our OEM customers.
Kristina: Outside of gaming or 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.
Kristina: In total we expect CPI revenue for Q4 to be approximately flat year over year.
Kristina: Moving to security and authentication technologies on slide nine sales grew 36%, including <unk>, which is executing as planned.
Kristina: Core sales were up over 10% driven by higher international currency shipments adjust.
Kristina: Adjusted segment operating margin was approximately 22% in the quarter, reflecting dilution from the <unk> acquisition, and an unfavorable mix and currency.
Kristina: 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 this segment.
Kristina: During the third quarter, we had several exciting developments across FHA and crane currency, which continues to win share with leading and differentiated technology. We were pleased to partner with the Central Bank of course out in St. Maarten on the launch of their new series of Bank notes, the Caribbean Gilder, which will be released to the public in March 2002.
Kristina: 25, not only other notes beautifully designed but they are the first bank notes in the world to feature to Crane Micro optics technology features on each bank note. We are very proud to partner with the Central Bank on this important milestone.
Kristina: At <unk> this quarter, we began a pilot with a major sporting leagues to implement a new on field authentication program, where <unk> 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.
Kristina: By consumers. This is an exciting extension of our product offering and we are enthusiastic about its potential for application with other sports leagues.
Kristina: 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 one seven times.
Kristina: 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.
Kristina: After the anticipated close of the acquisition of Delaware authentication solutions in the first half of 2025, we estimate our net leverage ratio will be approximately two three times.
Kristina: 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 and currency and performance of <unk> offset by headwinds from the gaming end market in CPI.
Kristina: Additionally, we are narrowing our full year adjusted EPS guidance to $4 22 to $4 30.
Speaker Change: From $4 20 to $4 35.
Speaker Change: <unk> mixed headwinds with growth and currency more than offset by continued softness in gaming, which comes at a higher margin.
Kristina: 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.
Kristina: 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.
Kristina: 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 our redesigned $100 Bill in 2034.
Speaker Change: As the sole supplier of U S currency paper for almost 150 years and the supplier of the Blue micro optics strip on the current 100 dollar Bill we remain very confident in our positive relationship with the U S government.
Speaker Change: Like all countries redesigning their currency, we anticipate that the U S. We will continue its leadership in utilizing market, leading anti counterfeiting features in the new notes.
Kristina: We look forward to the public announcement on the specifics of the design of the new $10 Bill in late 2025 or early 2026.
Speaker Change: As discussed in prior earnings calls, we are upgrading certain paper, making equipment at our Dalton, Massachusetts facility in Q4, 2024, which will extend through Q1 2025.
Speaker Change: This project is on track and represents the final step in our preparations for the New U S Bank notes.
Speaker Change: 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 will be skewed towards lower denomination.
Speaker Change: As a reminder, order volumes are set entirely at the discretion of the federal reserve.
Speaker Change: The reduction in demand was attributed to normalization of inventory volumes post COVID-19 and a shared commitment of the fed and the bureau of engraving and printing to allocate production capacity to essential projects, including the new banknote series.
Speaker Change: As a result, we expect volume for U S currency to decline double digits in 2025, consistent with the fed's anticipated orders.
Speaker Change: 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.
Speaker Change: We will be providing additional updates on the U S currency program as well as our 2025 full year guidance in more detail during our Q4 earnings call.
Speaker Change: Now, let me turn the call back to Eric to provide some closing remarks.
Eric: Thank you Christina in closing Q3 has been very busy for the cranium XD team. We continue to execute our strategy. We are building a resilient business focused on market, leading technologies that secure detect and authenticate customers most valuable assets our team executed well in.
Eric: Q3, delivering double digit sales growth and core sales growth of approximately 5%.
Speaker Change: We continue to utilize CBS to improve productivity and drive margin expansion.
Speaker Change: And we also continue to deploy our capital to M&A utilizing a disciplined framework to build upon our market leading positions in growing markets.
Speaker Change: I am confident that as we continue to execute this strategy, we will see significant shareholder value creation.
Speaker Change: 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.
Speaker Change: And now operator, we're ready to take our first question.
Speaker Change: Thank you at this time, we will conduct the question and answer session.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question. Please press star one one again please.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Our first question comes from Matt Summerville with D. A Davidson <unk> co. Your line is now open.
Matt Summerville: Thanks, Good morning.
Speaker Change: Good morning, Matt.
Speaker Change: Maybe Aaron Kristina if we can maybe talk about CPI for the first question, let's talk a little bit more detail around how we should at a high level thinking about the verticals for 2025, what what sort of change with respect to the go forward gate cadence.
Speaker Change: 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 price.
Speaker Change: Capture growing.
Speaker Change: 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 wanted to make sure I understand that fully and then I have a follow up.
Speaker Change: Yes, thanks for that Matt and good morning.
Speaker Change: As we discussed in our prepared remarks.
Speaker Change: As we look at CPI this year, certainly vending financial services retail performing as expected.
Speaker Change: And we're going to end this year in those verticals growing at mid single digits.
Speaker Change: For gaming.
Speaker Change: 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 margin. So we really like that business.
Speaker Change: We have seen in Q3 is that order rates were slower than we expected and this was after some green shoots as you remember in Q2 that we talked about last quarter.
Speaker Change: And what we're seeing them as 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-19. So theyre improving their working capital and at the same time actually our supply chain performed very well and our lead times have significantly improved they are now.
Speaker Change: Round about four to eight weeks for gaming components. So when you put those two together what we've done here both for the fourth quarter and to your question. 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.
Speaker Change: And this is whats, giving us CPI revenue in total for Q4 that we expect to be approximately flat year over year.
Speaker Change: And again the rest of the markets are the rest of the end market verticals growing and indeed in 2024 with mid single digit growth.
Speaker Change: And as a follow up.
Speaker Change: Just talking about the currency business.
Speaker Change: How should we be thinking about.
Speaker Change: You mentioned USG revenue.
Speaker Change: Volume I should say is going to be down double digits revenue may be down a little bit more than that just given that youre going to have.
Speaker Change: Microptic headwind on mix.
Speaker Change: So I guess im trying to understand what are you doing to kind of mitigate that impact and this huge international driven backlog you have and currency is that enough to sustain respectable growth for the.
Speaker Change: Business organically and.
Speaker Change: In 2025.
Matt Summerville: Yes, Thanks, Matt I think you were framing that up correctly.
Speaker Change: <unk> D. The volumes will be down as Kristina mentioned double digits, just simply based on the fed order right now thats 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 uptick now in.
Speaker Change: The segment and that will come in and start to lap in may.
Speaker Change: The core business. So I think in total for some guidepost here when we look at <unk> for 2025 I think.
Speaker Change: When you add in the headwind from the U S currency and you look at the rest of the portfolio I think revenue is going to come in about flat in 2025.
Speaker Change: And we're obviously continuing to take action driving productivity and cost through CBS, which you can see in the performance of CPI This quarter and we're going to execute on the <unk> synergies those are going very well. So I would expect 25 to have segment adjusted operating margins in the same range that we saw.
Speaker Change: This year offsetting the dilution that we'll see from offset the headwinds from the U S government mix.
Speaker Change: As you indicated.
Speaker Change: Yes.
Speaker Change: Statement on flat Darrin I, just wanted to make sure I'm interpreting that correctly is that flat organic for total.
Speaker Change: Or are you talking about crane NXT overall again.
Speaker Change: <unk> for 25.
Speaker Change: Yes, thanks, Matt just to be clear I am talking about Crane NXT total company revenue flat approximately flat in 'twenty five and of course, we're in the middle of our planning process and we'll have a lot more fidelity.
Speaker Change: On that guidance during our Q4 earnings call.
Speaker Change: Got it thank you.
Speaker Change: Sure.
Speaker Change: Thank you. Our next question comes from Mike Halloran with Baird. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Morning, Mike.
Speaker Change: Just to follow up on Matts question. There one last time again does that include the acquisition like <unk> Thats not necessarily.
Speaker Change: Part of the run rate numbers, yet talk about flat overall.
Speaker Change: Yes, no Mike It does not include dealer Ru and just out of I think doing the right thing here, we will assume.
Speaker Change: No contribution from dealer <unk> until it officially closes and then of course, we would update guidance correspondingly.
Speaker Change: Yes.
Speaker Change: Makes lot of sense, just making sure and then.
Speaker Change: Following up again on the on the <unk>.
Speaker Change: U S base.
Speaker Change: The overall impact so that the currency business.
Speaker Change: Is the logical thought process for U S based business than that 26 becomes.
Speaker Change: Essentially a more normalized year and then how the 10 ultimately plays out from a content perspective is where the variability comes in in other words 25 suppressed 26 more normalized and how are you thinking about it at this point.
Speaker Change: I think yes, thanks, Mike I think Thats generally correct I think what we'll look for is the actual release date of the 10, I think thats still the unknown here and it's a positive tailwind to the business. The earlier, it's released the better for us.
Speaker Change: As that will effectively stop the supply of the current incumbent $10 Bill and replace it with the new issue, which again, we believe we will have.
Speaker Change: Higher technology content on it and we feel confident about that so I think it's really normalization in 2006 as you said with the upside of the timing of the release of the 10-Q.
Speaker Change: Creates a natural glide path to improved revenue and margins in the U S business over time.
Speaker Change: And then last one and related on that normalization side. When you think about 25 mix when you put it in historical context.
Speaker Change: For that U S based currency business.
Speaker Change: Is this pretty close to the lows in terms of the mix for you guys or.
Speaker Change: Maybe just give some context on that side of things.
Speaker Change: Yes, it's very much near the lows for US if you look at the mix and you just take the mid point is skewed heavily to the lower denomination and if you zoom out and you would say, let's look at Covid through 2025, you kind of get a reversion to the mean on the mix where there was a lot.
Speaker Change: Higher production of $100 bills and <unk> during the early years of Covid. So youre exactly correct. The mix is lower versus normal and we would expect over time to that revert back to kind of a mean of a traditional order volume of hundreds in <unk> and 'twenty going forward.
Speaker Change: Thank you I appreciate it.
Speaker Change: Thanks, Mike.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Bob <unk> with C. J S Securities. Your line is now open.
Speaker Change: Great. Thank you good morning.
Speaker Change: Good morning, Bob.
Speaker Change: So yes, so obviously a lot of exciting announcements over the quarter and I was wondering could you give us.
Speaker Change: On the authentication side, a breakdown of your end markets pro forma the de La Roux assets with your primary sales focus and how should we think about the end markets you will be in pro forma <unk>.
Speaker Change: Yes, that's fantastic so and a great question Bob Thanks for that so again, we have these three call it in markets where segments for dealer Ru.
Speaker Change: Government will be and Thats government tax stamps, primarily will be about 45% of the business.
Speaker Change: And really create a leadership position for us.
Speaker Change: Then we have I'd documents, so think of passports the polycarbonate pages and passports that's going to result in about 30% exposure to call. It the government IV, where civil I'd business.
Speaker Change: Which we're very excited to have a strong position in and then brand protection.
Speaker Change: We will be effectively the remainder so 25% of the business and again, that's more consumer brands.
Speaker Change: Think of sports leagues think of CPE.
Speaker Change: CPG type customer companies and that creates the balance so when you add that together with <unk>.
Speaker Change: What we really like here's this diversification to the end markets of clean NXT that adds a lot of resiliency to the portfolio and it also aligns to secular tailwind, where we see growth in security features and all all three of those kind of segments.
Speaker Change: Okay, Great and then.
Speaker Change: What other end markets and authentication or are you still targeting.
Speaker Change: Pharma is you've talked about I guess in the past and stuff and now that youre going to have.
Speaker Change: A much larger scale.
Speaker Change: How do you think about kind of the build versus buyers each end markets something you should.
Speaker Change: Target buying scale into and then growing inorganically or how do you think about the next step in continuing to grow.
Speaker Change: Yes, I think Thats, a really really good question, Bob So I agree with your thesis there now we've created a very strong anchor property and set our properties inside of authentication, particularly when you think post close as we get into the second half of next year with dealer ruin offset coming together I think thats really.
Speaker Change: Build right, we keep building off of that core and we add in technologies, just like we announced today with true Tag that act as accelerators to that strategy and we have a very healthy funnel ups.
Speaker Change: Technologies that become product line extensions off this now a strong core business and I think you could see more of that coming we like the technologies that we can add and utilize our channel and we get very good returns off of that like we're expecting for true tag with high double digit ROIC by year three.
Speaker Change: Think on markets, you're exactly right. If there is one area, where there is some interesting possibilities for us to explore is around pharma and health care more broadly.
Speaker Change: There are properties in that space and that's not a strength for US right now that's really not one of those three or four markets that I discussed and so thats again, where we're prosecuting in M&A funnel and that's very healthy for us in some opportunities I think also.
Speaker Change: Outside of the end markets, you can think about geographies as well so <unk> and.
Speaker Change: Taylor will give us a very nice exposure, particularly in Europe, and North America and growing exposure in Asia, and that's another geography fee for cranium <unk> to further expand into where you have demographics and secular tailwind in those end markets. So that's how we're thinking about it Bob and feel very confident in the funnel.
Speaker Change: That's great. Thank you so much.
Speaker Change: Thanks, Bob.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Damian Karas with UBS. Your line is now open.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Okay.
Speaker Change: Erin I think you hinted at currency margins holding at similar levels in 2025.
Speaker Change: <unk> to where they are now.
Speaker Change: That would be pretty impressive just given the mix factors at play and how profitable that U S currency businesses. So could you just elaborate a little bit like is that is that the case for both the U S and international side like your year.
Speaker Change: As expecting comparable margins or is it more like the international expansion is going to be offsetting some of the dilution in the us.
Speaker Change: Yes would you may be just able to quantify like the cost actions you've taken to help us out a little bit.
Speaker Change: Thanks, Damien and let me, let me get a little more specific to be helpful. What I was referring to for segment adjusted margins was for NXT in total for next year that this year. Our guidance is Kristina updated was between 26% and 28% I think we're going to be in that range again next year and that is a combination.
Speaker Change: Of our productivity actions again, the driving CBS you see that in what's occurring this year and very proud of how the team has executed that particularly in CPI and the execution of the Opex synergies, which are on track and we have clear line of sight too.
Speaker Change: I think there will be as you get into the segment level.
Speaker Change: Specifics of your question there'll probably be a little headwind in the segment offset by some goodness in the CPI segment, I think thats, where in total for the portfolio of NXT will end and about the same range I'd like to hold off though.
Speaker Change: Damian Damian until we give our 2025 guidance on any specifics related to those actions as we will be rolling those out here as we progress through the rest of the year into early next year.
Speaker Change: Understood Thanks for clarifying.
Speaker Change: Maybe I could just ask you about true tag.
Speaker Change: 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.
Speaker Change: So at the end of the year here.
Speaker Change: Yes, Damian it's really not.
Speaker Change: Material adjustment I would certainly make or advised to make to the model. It's more of a signal for us.
Speaker Change: How we can find technologies and add on incrementally to this portfolio. We're building that truly differentiated and utilizes our channel for us it's going to be a few million dollars of sales over the next few years. So again, it's largely de minimis in total to NXT, but it is.
Speaker Change: As a growth driver in <unk> and in the authentication business.
Speaker Change: And again shows I think we're being very disciplined in our approach and we're going to generate very good returns on being able to find technologies like that as a leader now in this industry partnering with small companies and startups and bringing them in and utilizing our channel. We are we have a healthy funnel of other opportunities like this.
Speaker Change: Got it got it that's really helpful and one last one if I if I could just going back to the gaming discs.
Speaker Change: Discussion.
Speaker Change: You did sound a little bit more positive on the orders normalization last quarter. So I'm just curious if maybe like.
Speaker Change: You were seeing some pull forward demand for whatever reason.
Speaker Change: Second quarter third quarter and.
Speaker Change: And and and Thats, what kind of solve a little bit of a tick up and then now you're seeing kind of these OEM push outs could you just maybe talk a little bit more on that and kind of.
Speaker Change: Where are you foreseeing a light at the end of the tunnel here on some of that kind of inventory correction from your gaming customers. Thanks, Yes, yes.
Speaker Change: Yes, Thanks, Damian I think you're framing that right. We did see some green shoots in Q2 and that probably was.
Speaker Change: Within one or two of the Oems.
Speaker Change: Putting in some orders that did not.
Speaker Change: Repeat at that level as we got into Q3, and that's where we just want to be very prudent here with our forecast is as we go forward.
Speaker Change: I'd go back to the fact that the end markets are healthy we have a leadership position here in this market and the margins are very strong for us in the business we see.
Speaker Change: The.
Speaker Change: Drawdown of inventory occurring we think when we look at now what inventory turns are probably going to be for those Oems as they proceed forward and the strength of our lead times being shorter it's driving to lower inventory holding at those Oems. So we think it's going to play out as expected.
Speaker Change: Good.
Speaker Change: Directionally, but it's going to take another quarter or two to get back to a higher level of run rates and that's why we've adjusted Q4 and I think we would expect lower low single digit type growth in that market as we exit 2024.
Speaker Change: Got it makes sense really appreciate you taking our questions best of luck, Hey, Thanks, Damian I appreciate it.
Speaker Change: Thank you our.
Speaker Change: Our next question comes from Ian Zaffino with Oppenheimer. Your line is now open.
Speaker Change: Hey, Good morning. This is <unk> on for Ian Thanks for taking all the questions.
Speaker Change: My question is on <unk>.
Speaker Change: Hi, My question's on CPI could.
Speaker Change: Could you talk a bit about pricing cost some of the productivity initiatives.
Speaker Change: Maybe how you've helped drive higher margins, despite the mix shift there.
Speaker Change: Then related to that are you still taking price maybe it's some of the end markets outside of gaming.
Speaker Change: Have your expectations for segment margins as you.
Speaker Change: Work through the balance of the backlog there. Thank you.
Speaker Change: Yes, I'll take that one Scott so it's a great opportunity to just congratulate our team who is theyre just doing a really great job of executing and leveraging the CBS system to drive productivity and even despite lower volumes as <unk> seen <unk> been able to hold margin. So it's just really excellent work by the.
Speaker Change: The entire CPI team, we continue to be price cost positive and so that's just again, just very disciplined execution of pricing and even though theres 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.
Speaker Change: So overall feeling really good the margin levels, we expect to continue.
Speaker Change: If anything as Aaron said, there could be a little bit of positivity. There next year just through the initiatives that will be driving related to productivity.
Speaker Change: Okay understood. Thank you and then separately on the free cash flow conversion.
Speaker Change: For the year I guess the adjustment given the currency shipments.
Speaker Change: I know, it's obviously early but looking out until till.
Speaker Change: Till next year, I mean, just currency shipments have a similar impact on free cash flow conversion or any other major factors that we should consider there.
Speaker Change: Yes, it's a great question, Isaac and I will take the opportunity to emphasize that nothing's 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 toward the end of the year. We knew our revenue was more heavily weighted towards the back half of the year.
Speaker Change: This year, but we have greater visibility now into the timing of certain specific shipments and the shipments are later than anticipated. So it's creating working capital inefficiency now thinking thinking longer term. This is a project currency as a project based business as you know in over quarter to quarter, there could be some variation, but if you look.
Speaker Change: Get it over a long period of time and for NXT in total we expect that the conversion will be approximately 100%.
Speaker Change: Okay, great. Thank you Christina.
Speaker Change: Got it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Bobby Brooks with Northland capital markets.
Speaker Change: Hey, good morning, guys. Thank you for taking my call.
Speaker Change: Good morning, Bobby.
Speaker Change: Hey, I'd like to get some color on the growth strategy for product authentication.
Speaker Change: I think its clear through what Ive wrote on your guidance.
Speaker Change: It is a really major opportunity for <unk> and.
Speaker Change: And you guys now have oxide for a couple of several months <unk> product authentication coming in the first half of 'twenty five and the smaller tree type technology acquisition last week, So we're getting to a pretty sizable business there.
Speaker Change: Where do you think the growth opportunities come I know these businesses you've acquired are.
Speaker Change: Mid single digit plus growth rate range, but do you think the combined portfolio you're building, you'll be able to drive that sort of call. It a high single digit plus range.
Speaker Change: Well, hey, thanks, Bobby and two to your point, we couldnt be more excited about the deployment here of capital into this segment and we think it's going exactly as anticipated with the integration of <unk>.
Speaker Change: And so when you back up to your point do you think about why we're excited where we're going to grow I would point to what Christina talked about in the prepared remarks of some really interesting new.
Speaker Change: Opportunities, we have our share of wallet expansion with some of our major brand protection customers, where we're incorporating new technologies in offering a higher value prop to them and to their consumers and that comes at attractive markets margins and is truly greenfield right, we're adding in new services and new offerings that did not.
Speaker Change: This before.
Speaker Change: We think the market is growing at this mid single digit plus we have an opportunity certainly to your point to Apple format, we want to be prudent as we are still in the process of integrating the acquisitions and of course <unk> is not really part of the portfolio at this point in time, but.
Speaker Change: I think in every one of these markets.
Speaker Change: As Bob asked the question where are you exposed to brand protection, we see opportunities like Christina talked about and government tax stance, we see opportunities, where we become a leader to add more services into our government customer similar to what we've done and being a technology leader in currency and then.
Speaker Change: When you now add on.
Speaker Change: Civil IV and the <unk>.
Speaker Change: E offerings, where you can incorporate our authentication features with the polycarbonate production capabilities dealer <unk>, it's a really exciting space for us to be and so we're aligning the portfolio to secular tailwind and we're providing best in class technology, and we're adding in on top of that things like to attack.
Speaker Change: Technologies that give us incremental opportunities to grow so I think your thesis is right I think all three of those areas offer these kind of share of wallet and greenfield expansion opportunities and Thats, what youre going to keep hearing us talk about as we move forward with the integrations and the closing.
Speaker Change: On the acquisitions.
Speaker Change: Yes.
Speaker Change: Got it.
Speaker Change: That's really good color and then maybe just piggybacking on those prepared remarks I proceeded gave about.
Speaker Change: On field.
Speaker Change: The on field professional sports.
Speaker Change: Sessional Sports Jersey, with the embedded RFID and software to tracking <unk> gained more items through offsets.
Speaker Change: Maybe you can just talk about how that how that deal and how that project win came about and then also is this just is this something that we're all jerseys in that.
Speaker Change: In that week.
Speaker Change: Throughout the entire season or is it maybe the test run through the first quarter of this season.
Speaker Change: Any more color you could give on that.
Speaker Change: Yes ill start and Aaron do you want to chime in you can jump in at the end.
Speaker Change: Really is just about great relationships that <unk> has with its customer with their customers and they are able to.
Speaker Change: Develop and cultivate new ideas working with our customers in this case partnering with a new way to authenticate and although you're speaking specifically about jersey, it's not it's not specific to jerseys per se, but think about entire entire sporting equipment associated with that league.
Speaker Change: Where you would want to really know what what game was this.
Speaker Change: Merchandise used in.
Speaker Change: And who was involved which sporting teams and Thats, where our authentication is very accurate and timely.
Speaker Change: And so we've got the database that backs it up and now combining this with RFID to track that on an oilfield movement. It makes it even more accurate so it's very exciting.
Speaker Change: And this is a test runs so just to use your words. So this will be a test run with just a few a few teams and we are really excited for the opportunity to potentially expand this not only in the league that we're operating with right now on the on the pilot, but also into other sportingly. So just a really great opportunity.
Speaker Change: Got it.
Speaker Change: That is really exciting.
Speaker Change: And then.
Speaker Change: Just last question for me on M&A, Obviously, you guys have to your long term goal of getting to that $3 billion, Mark and so I'll just kind of.
Speaker Change: M&A is executed this year as we focus on expanding the product application fees. So I'm. Just curious is that going to kind of is that going to continue to be the focus going forward on M&A or maybe doesn't shift to businesses that have fallen there's CPI banner.
Speaker Change: Yeah, Thanks, Bobby why don't I take that one.
Speaker Change: I would say just zoom out on capital allocation in general and in our growth strategy.
Speaker Change: Is all driven around ensuring that we're creating shareholder value and so that's why you want to have a disciplined approach and thats going to continue and I think you see that with offset and data room you see these opportunities like we've highlighted here with true tagged bolt on differentiated technology technologies and generate a higher rich.
Speaker Change: Turn and so that's not going to change in the funnel remains very healthy both in authentication and other areas to your point is just as you know sometimes it's quite episodic what comes across the line at any point in time and you can get closed so really no change our priorities here to drive value.
Speaker Change: For the shareholders.
Speaker Change: Best and drive the core you see that again, we feel very confident particularly in the U S currency business long term, we're going to continue to pay the competitive dividend that we've done since we've separated and then execute on M&A and we've always said, we're going to do one to two deals a year you could argue this year we've done three.
Speaker Change: In this next year and I expect as we go into 'twenty five we'll keep on that pace of one to two deals a year doing exactly what we said we were going to do and I feel very good about that.
Speaker Change: Fair enough. Thank.
Speaker Change: Thank you for the color on returning to you.
Speaker Change: Thanks, Bobby.
Speaker Change: Thank you. Our next question is from Matt Summerville with D. A Davidson your line is now open.
Matt Summerville: Thanks Aaron.
Speaker Change: And I apologize, but I feel like I'm missing something here.
Speaker Change: One I want to make sure I understand when you said big picture high level.
Speaker Change: Flat for total create NXT is that organic.
Speaker Change: That's my first question.
Speaker Change: Yes, so that would be assuming Matt.
Speaker Change: <unk>.
Speaker Change: Full year contribution of <unk> next year going forward. So that's offset all in for next year and of course the currency in CPI businesses. It does not include anything for David Roux authentication.
Speaker Change: Okay. So the first that includes the first four months of the year worth of contribution from Opex. So that is so that's included in that flat sales comment I guess correct.
Speaker Change: Okay.
Speaker Change: There is some disconnect Aaron either something CPI is misaligned with life thinking for next year or the drag on currency is going to be even bigger than I would've thought can you help me try and kind of piece that together a little bit.
Speaker Change: Right.
Speaker Change: Yeah. So so to your point on currency in the U S. We expect those those declines.
Speaker Change: Due to the U S. We expect.
Speaker Change: Very strong mid single digit mid single digit plus type growth coming out of <unk> and international combined and then when we look at CPI.
Speaker Change: We're expecting that business with the headwinds we're seeing in gaming.
Speaker Change: As we just discussed to exit the year and start back growing at low single digits in 2025.
Speaker Change: Okay got it thank you.
Speaker Change: Hopefully those triangulate then Matt in your model.
Matt Summerville: Yes, Thank you Eric.
Speaker Change: Thank you.
Speaker Change: Our final question comes from Damian Karas with UBS. Your line is now open.
Speaker Change: Hey, guys just following up here.
Speaker Change: Aaron you did sound very positive.
Speaker Change: I'd say increasingly positive on the chances that this $10 redesign is going to include micro optics. So that's great to hear.
Speaker Change: The Devil's in the details on what exactly the U S government decides where the bills, but is there a simple way to think about the upside opportunity on that $10 note with micro optics.
Speaker Change: <unk> without it.
Speaker Change: Yeah.
Speaker Change: Just to be clear Damien we do feel very confident on our relationship it would be far.
Speaker Change: And premature and presumptuous of me to talk in any more specifics about that.
Speaker Change: In terms of the way to think about the value creation from the change if you look at the current U S $100 Bill that cost about 17 since.
Speaker Change: Cost of goods for the federal reserve that state of a publish so that's public information depends on the year, a little bit, but it's around 17.
Speaker Change: When you look at the $1 Bill the lowest in terms of security features Thats about seven.
Speaker Change: And you can safely assume the difference the delta between those costs are due to technology in counterfeiting features.
Speaker Change: So I would expect the.
Speaker Change: The new 10, assuming it has more technology features to be.
Speaker Change: Incrementally above the current cost of the existing 10, and you can probably use those those two numbers I gave you is kind of goalpost.
Speaker Change: For how to how to model out.
Speaker Change: The difference in cost and certainly we will benefit and.
Speaker Change: Much of that cost or some of that costs can be attributed to us in the security features we provide hopefully that helps a little bit, but again I can't get into the specifics of the particulars of the design of the 10, but again, we feel very confident it will include advanced security features.
Speaker Change: No I totally got it that's helpful. Thank you and then just one 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 maths right. So we're talking kind of like $55 million to $60 million. So could you just as our math.
Speaker Change: Right.
Speaker Change: One single project shipment of that magnitude, that's just kind of slipping a little bit and.
Speaker Change: Do you have visibility into recovering that.
Speaker Change: They're collecting on that early.
Speaker Change: In 25 or is it kind of a.
Speaker Change: Multiple a multitude of projects that are just kind of seeing that same.
Speaker Change: Same trend.
Speaker Change: Yeah. Thanks, Simeon let me just clarify that this was not a delay in shipment. There is no change to our revenue forecast, but because of 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.
Speaker Change: A few significant projects related to our international currency business and you can expect that the collections from those shipments will now happen in Q1 as opposed to Q4 I will just caution, though and I think you know this Q1 tends to be our lowest quarter in terms of cash flow conversion and so although these shipments will move in.
Speaker Change: You will still see pretty moderate free cash flow conversion in Q1, and Thats just based on seasonality of the rest of the business.
Speaker Change: Okay understood. Thanks, a ton.
Speaker Change: You bet.
Speaker Change: I am showing no further questions at this time I would now like to turn it back to Aaron for closing remarks.
Aaron Sake: Alright. Thank you very much I would again like to thank all of our NXT team members for their very strong efforts here in Q3.
Aaron Sake: It was certainly a busy quarter and we continue to execute our strategy operating the businesses driving productivity executing on M&A doing exactly what we said we were going to do so thank you again for everyone and their questions today, who joined the call. We look forward to our Q4 earnings as we <unk>.
Aaron Sake: Board at the beginning of 2025, Thank you again and have a great day.
Speaker Change: Thank you for your participation.
Speaker Change: In today's conference. This does conclude the program you may now disconnect.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].