CXT - NYSE

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. [Operator Instructions]. 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.

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.

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 that 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 align with one of our core values that people matter. 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 every day, but especially in times like these. Well, 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 on 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. 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. 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. As a reminder, De La Rue Authentication goes to market with three strategic platforms, as shown on this slide. First, government revenue solutions provides digital and physical tax stamp technologies that link unique identifiers to products, enabling the full traceability of goods that enable governments to collect tax revenues. Second, identification security solutions provides 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 reoccurring 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 to 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 ROIC by year three. The acquisition of OpSec earlier in the 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?

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 2 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 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 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. Now let me turn the call back to Aaron to provide some closing remarks.

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. And 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.

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

Thanks. Good morning.

Good morning, Matt.

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.

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. And this was after some green shoots, as you remember in Q2 that we talked about last quarter. And what we're seeing then 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, actually, 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, 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. And this is what's giving us CPI revenue in total for Q4 that we expect to be approximately flat year-over-year. And again, the rest of the markets or the rest of the end market verticals growing and ending 2024 with mid-single digit growth.

And then, Aaron, as a follow-up, just talking about the currency business. How should we be thinking about, I know you mentioned USG revenue is 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?

Yes. Thanks, Matt. I think you're framing that up correctly. The USD, the 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, I think revenue is going to come in about flat in 2025. And we're obviously continue 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 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.

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?

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.

Got it. Thank you.

Sure.

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

Hey, good morning everyone.

Good morning, Mike.

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?

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.

Yes. Just -- that makes a lot of sense, just making sure. And then following up again on the U.S. based and then the overall impact for that -- for the currency business. Is the logic or thought process for U.S. based business then that '26 becomes a 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 depressed, '26 more normalized? And how are you thinking about it at this point?

Yes, I think -- yes, thanks, Mike. I think that's generally correct. I think what we'll look for is the actual release date of the $10. I think that's still the unknown here. And 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.

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.

Yes, it's very much near the lows for us. If you look at the mix and you just take the midpoint, it's skewed heavily to the lower denominations. 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 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 revert back to kind of a mean of a traditional order volume of $100s and $50s and $20s going forward.

Thank you. Appreciate it.

Thanks, Mike.

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

Great. Thank you. Good morning.

Good morning.

Good morning, Bob.

So yes, so obviously, 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?

Yes. That's fantastic. So -- and a great question, Bob. Thanks for that. So again, we have these three, call it, end markets or segments for De La Rue. Government will be -- and that's government tax stamps primarily will be about 45% of the business and really create a leadership position for us. Then we have ID documents. So think of passports, the polycarbonate pages in passports, that's going to result in about 30% exposure to call it, the government ID or civil ID business, which we're very excited to have a strong position in. And then brand protection will be effectively the remainder, so 25% of the business. And again, that's more consumer brands, think of sports leagues, think of CPG-type companies, that creates the balance. So when you add that together with OpSec, what we really like here is this diversification to the end markets of Crane NXT. That adds a lot of resiliency to the portfolio. And it also aligns to secular tailwinds where we see growth in security features in all three of those kind of segments.

Okay. Great. And then what other end markets in authentication are you still targeting, like pharma, as you've talked about, I guess, 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?

Yes. I think that's a really, really good question, Bob. So I agree at least 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, right? 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. And we have a very healthy funnel of technologies that become product line extensions off this now strong core business. And I think you could see more of that coming. We like the technologies that we can add in, utilize our channel, and we get very good returns off of that like we're expecting for Tru Tag, with high double-digit ROICs by year 3. I think on markets, you're exactly right. If there's one area where there's some interesting possibilities for us to explore is around pharma and health care more broadly. There are properties in that space, and that's not a strength for us right now. That's really not one of those 3 or 4 markets that I discussed. And so that's, again, we're prosecuting an M&A funnel, and that's very healthy for us in some opportunities. I think also outside of the end markets, you can think about geographies as well. So OpSec and De La Rue give us very nice exposure, particularly in Europe and North America and growing exposure in Asia. And that's another geography for Crane NXT to further expand into where you have demographics and secular tailwinds in those end markets. So that's how we're thinking about it, Bob, and feel very confident in the funnel.

That's great. Thank you so much.

Thanks Bob.

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

Hey, good morning, Aaron.

Good morning.

Good morning.

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. So 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 is going to -- expansion is going to be offsetting 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?

Yes. Thanks, Damian. And 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, as Christina updated, was between 26% and 28%. I think we're going to be in that range again next year. And that is a combination of our productivity actions, again, the drive in CBS, you see that in what's occurring this year, I'm very proud of how the team has executed that, particularly in CPI; and the execution of the OpSec synergies, which are on track and we have clear line of sight to. I think there will be -- as you get into the segment level, to the specifics of your question, there'll probably be a little headwind in the SAT segment, offset by some goodness in the CPI segment. I think that's where, in total for the portfolio of NXT, 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 will be rolling those out here as we progress through the rest of the year, into early next year.

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?

Yes. Damian, it's really not a material adjustment I would certainly make 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. So again, it's largely de minimis in total to NXT, but it's a growth driver in OpSec and in the authentication business. 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 start-ups and bringing them in and utilizing our channel. We are -- we have a healthy funnel of other opportunities like this.

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.

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. And that's where we just want to be very prudent here with our forecast as we go forward. I 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 the 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 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 low single-digit type growth in that market as we exit 2024.

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

Hey, thanks, Damian. Appreciate it.

Thank you. Our next question comes from Ian

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.

Yes, I'll take that one, Isaac. So it's a great opportunity to just congratulate our team who -- they're just doing a really great job at executing and leveraging the CBS system to drive productivity. And even despite lower volumes, as we've seen, they've been able to hold margins. So it's just really excellent work by the entire CPI team. We continue to be price/cost positive. And so that's just, again, just a very disciplined execution of pricing. And even though there's 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. So overall, feeling really good, the margin levels we expect to continue. And if anything, as Aaron said, there could be a little bit of positivity there next year just through the initiatives that we'll be driving related to productivity.

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 I mean, looking out until next year, I mean, does currency shipments have a similar impact on free cash flow conversion or any other major factors that we should consider there?

Yes. It's a great question, Isaac. And I'll 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 towards the end of the year. We knew our revenue was more heavily weighted towards the back half of the year this year, but we have greater visibility now into the timing of certain specific shipments, and it's -- the shipments are later than anticipated. So it's creating working capital inefficiency. Now thinking longer-term, this is a project currency, is a project-based business, as you know. And over quarter-to-quarter, there could be some variation. But if you look at it over a long period of time and for NXT in total, we expect that the conversion will be approximately 100%.

Okay, great. Thanks Christina.

You bet.

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

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

Good morning.

Good morning, Bobby.

Hey, I'd like to get some color on the growth strategy for product authentication. I think it's clear through what I've wrote on you guys, I see it as a really major opportunity for Crane NXT. And you've guys now had OpSec for a couple several months, De La Rue's product authentication coming in the first half of '25 and the smaller Tru Tag Technology acquisition last week. So you're getting to a pretty sizable business there. But like 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 portfolio you're building, you'll be able to drive that to, call it a high-single digit plus range?

Well, thanks, Bobby. And to your point, we couldn't 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 OpSec. And so when you back up to your point and 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 of some 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 in, offering a higher value prop to them and to their consumers, and that comes at attractive margins. And it's truly greenfield, right? We're adding in new services and new offerings that did not exist before. So we think the market is growing at this mid-single-digit plus. We have an opportunity, certainly, to your point, to outperform that. We want to be prudent as we are still in the process of integrating the acquisitions. And of course, De La Rue is not really part of the portfolio at this point in time. But I think in every one of these markets, as Bob asked the question, where are you exposed to? Brand protection, we see opportunities, like Christina talked about. In government tax stamps, we see opportunities where we become a leader to add more services into our government customers, similar to what we've done in being a technology leader in currency. And then when you now add on civil ID and the ID offerings where you can incorporate our authentication features with the polycarbonate production capabilities De La Rue brings, it's a really exciting space for us to be in. So we're aligning the portfolio to secular tailwinds, and we're providing best-in-class technology, and we're adding in on top of that things like Tru Tag 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 that's what you're going to keep hearing us talk about as we move forward with the integrations and the closing of the acquisitions.

Got it. That's really good color. And 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 how that project win came about? And then also, is this just -- is this 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 a little bit -- I'm hoping for any more color that you could give on that.

Yes, I'll start. And Aaron, if you want to chime in, you can jump in at the end. This really is just about great relationships that OpSec has with their customers, and they're able to just 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 jerseys, it's not specific to jerseys per se, but think about entire sporting equipment associated with that league that -- where you would want to really know what game was this merchandise used in and who was involved, which sporting teams. And that's where our authentication is very accurate and timely. And so we've got the database that backs it up. And now combining this with RFID to track that on- and off-field movement makes it even more accurate. So it's very exciting. And this is a test run, so just to use your words, right? So this will be a test run with just a few teams, and we're really excited for the opportunity to potentially expand this not only in the league that we're operating with right now on the pilot, but also into other sporting leagues. So just a really great opportunity.

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. And so I was just kind of -- the M&A you've executed this year is just really focused on expanding the product authentication piece. So I was just curious, is that going to continue to be the focus going forward on M&A? Or maybe does it shift to businesses that would fall under the CPI banner?

Yes. Thanks, Bobby. Why don't I take that one? I would say just when I zoom out on capital allocation in general and our growth strategy, it is all driven around ensuring that we're creating shareholder value. And so that's why we want to have a disciplined approach, and that's going to continue. And I think you see that with OpSec and De La Rue. You see these opportunities like we've highlighted here with Tru Tag, these bolt-on differentiated technologies and generate a higher return. And so that's not going to change. And the funnel remains very healthy, both in authentication and other areas, to your point. It's 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 for the shareholders is invest 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 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 in this next year. And I expect as we go into '25, 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.

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

Thanks, Bobby.

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

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 high level sales flat for total Crane NXT, is that organic? That's my first question.

Yes. So 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.

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. That's...

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?

Yes. So to your point on currency in the U.S., we expect those declines due to the U.S. We expect very strong mid-single digit, mid-single digit plus type growth coming out of OpSec and international combined. And then when we look at CPI, we're expecting that business with the headwinds we're seeing in gaming as we just discussed to exit the year and start back growing at low-single digits in 2025.

Okay. Got it. Thank you.

Hopefully, those triangulate then, Matt, in your model.

Yes. Thank you, Aaron.

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

Hey guys. Just following-up here. Aaron, you did sound very positive and I'd say, 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?

Yes. Just to be clear, Damian, we do feel very confident on our relationship. It would be far and premature and presumptive of me to talk in any more specifics about that. 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 $0.17 cost of goods for the Federal Reserve. That's data they publish, so that's public information. It depends on the year a little bit, but it's around $0.17. When you look at the $1 bill, the lowest in terms of security features, that's about $0.07. And you can safely assume the difference, the delta between those costs are due to technology and counterfeiting features. So I would expect the new $10, assuming it has more technology features to be incrementally above the current cost of the existing $10. And you can probably use those two numbers I gave you as kind of goalpost for how to model out the difference in cost. And 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, 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.

Now, I totally get 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 -- some shipment timing going from the fourth quarter to the first quarter. If my math is right, so we're talking kind of like $55 million to $60 million. So could you just -- is our math right is that -- is it one single project shipment of that magnitude that's just kind of slipping a little bit and you have visibility into recovering that or collecting on that early in '25? Or is it kind of a multitude of projects that are just kind of seeing that same trend?

Yes. Thanks, Damian. Let me just 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 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, you will still see pretty moderate free cash flow conversion in Q1, and that's just based on seasonality of the rest of the business.

Okay. Understood. Thanks for the time.

You bet.

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

All right. 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. So 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.