Q4 2022 CompoSecure Inc Earnings Call
Speaker 2: The conference will begin shortly, to raise and lower your ha-
Speaker 3: Good day and thank you for standing by. Welcome to the Compose for Care fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker 3: To ask a question during the session, you'll need to press star 1 1 on your telephone and you will then hear an automated message advising you your hand is raised. To withdraw your question, press star 1 1 again. Please be advised that today's conference is being recorded.
Speaker 3: Up and down, I'd like to hand the conference over to your speaker today, Steve Fedder, General Counsel and Corporate Secretary. Please go ahead.
Speaker 4: Good evening and thank you for joining us to review compost secure fourth quarter and full year 2022 financial results with me on the call tonight is John Wilk compost secures chief executive officer and Tim Fitzsimmons chief financial officer. They will begin with prepared remarks and then we will open the call for Q and a.
Speaker 4: During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing and acquire new customers, as well as other statements regarding our plans and prospects.
Speaker 4: Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements.
Speaker 4: forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10-K .
Speaker 4: other reports filed with the SEC which are available in the investor relations section of our website at compos secure.com and on the SEC's website at SEC.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures including adjusted EBITDA, adjusted net income, and adjusted EPS.
Speaker 4: The company believes these non- GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations.
Speaker 4: These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with US GAAP and may be different from similar title non-GAAP measures used by other companies. A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation available in the investor relations section of our website.
Speaker 4: Thank you, and with that said, let me turn the call over to John to discuss fourth quarter and full year earnings. Thank you for joining us.
Speaker 4: And with that said, let me turn the call over to John to discuss fourth quarter and full year earnings. Thank you, Steve.
Speaker 4: Good evening everyone and thank you for joining us for our fourth quarter and full year 2022 conference call. I'm excited to announce that we achieved a record of growth and profitability in 2022 while closing out the year on a high note with strong results for the fourth quarter.
Speaker 4: This year we shipped approximately 30 million metal cards, up 36% from 2021.
Speaker 5: And I want to recognize and thank all of our employees for their ongoing commitment to our success.
Speaker 5: Before I go into further financial details, I want to spend a few moments contextualizing this remarkable year for Composecure with 41% net sales growth and 33% adjusted EBITDA respectively. We have previously stated that we anticipate our business to grow on average by the end
Speaker 5: of increasing customer acquisition.
Speaker 5: and taking greater share of their customers' spend with the cards becoming top of wallet.
Speaker 5: Over the past eight years, the audience for metal cards has greatly expanded, beginning with high net worth individuals, moving to the mass affluent, and now becoming a highly sought after product for millennial and Gen Z consumers.
Speaker 5: Second, we continue to demonstrate the value of our deep client relationships, best in class products and strong sales execution.
Speaker 5: These factors combined with our capacity to deliver the scale and high quality required by our clients is simply unmatched. Lastly, following two years of COVID, there was pent-up demand for consumer spending which provided a tailwind for our clients.
Speaker 5: and thus our own business. It's worth noting that we see consumers around the world demanding branded experiences that support and amplify their own identity.
Speaker 5: Our financial and FinTech clients are turning to Composecure to incorporate innovative form factors as a component of the unique value proposition they can deliver to their customers.
Speaker 5: Now, onto our financial results on slide 3. As a reminder, our original guidance for 2022
Speaker 5: million in EBITDA.
Speaker 5: with our last range being net sales of $370 to $380 million and adjusted EBITDA of $130 to $137 million. I'm pleased to share that we achieved the top end of both ranges. During the year, we achieved net sales of $300 to $380 million.
Speaker 5: domestically, internationally, and with fintech customers. We also saw a 33% increase in adjusted EBITDA to $136.2 million.
Speaker 5: Our outperformance on the top and bottom line in 2022 was exceptional driven by continued product innovation.
Speaker 5: deep and expanding customer relationships, consistent execution, economies of scale, and managing our investment in Arculus.
Speaker 5: Looking at macro drivers, the outlook for the economy is uncertain in 2023, and that has been factored into our guidance for the year. That said, card issuance trends remain positive as we enter the year. Regardless of how the macro environment evolves in 2023,
Speaker 5: We are well equipped to adapt our playbook accordingly, as demonstrated by our performance in 2020 when faced with significant challenges due to COVID, and our adjustments to Archaeospen in 2022, given the challenges in the digital asset market.
Speaker 5: to deliver strong results for shareholders in both cases. Regarding Arculus, in 2022, we established critical foundational elements, including technology enhancements.
Speaker 5: and brand recognition required for arduous B2B security, authentication, and cold storage solutions.
Speaker 5: We emphatically believe in the product and continue to focus on B2B opportunities in authentication and cold storage to drive market adoption.
Speaker 5: I'll have more to discuss on Arculus later in the call. For the upcoming year, we're providing net sales guidance of 400 to 425 million, which is approximately a 12% increase from 2022 at the top end. For Adjusted EBITDA, we're targeting a range between 145 million.
Speaker 5: investment in Archaealists, which would be below our net Archaealist investment in 2022.
Speaker 5: These expectations also consider some moderation of growth due to uncertainties in the macro It's worth pointing out that our growth expectations for 2023 are on top of a revenue comp of 41 percent and an adjusted evit.com of
Speaker 5: 33% in 2022. Moving on to slide four. Along with our record growth and profitability, we also shipped approximately 30 million cards through the year. We continued to deepen partnerships with our customers.
Speaker 5: has reflected by the launch of multiple new metal card programs, such as Chase launching Disney's 100 Year Celebration Card.
Speaker 5: and Marriott Bonvoy returning to the metal card format for their popular Bonvoy Travel Focus reward card. For Capital One, we had Venture X where we continue to see strong momentum through co-branding with celebrities such as Taylor Swift.
Speaker 5: and they had a commercial which aired during the Super Bowl. And the rebranding of Capital One Spark Travel Elite.
Speaker 5: to venture X business card highlighting a new design. We also had some other exciting launches during the quarter. We had Porsche, the German luxury and sports car manufacturer. AKT is a financial institution operating in the British Indian Ocean Territories.
Speaker 5: that's offering a visa metal card to support payment for essential services with crypto. I'm not doubling to save so that's how you're that het pre Webber by I. I'm not doubling to save so that's how you're that
Speaker 5: and Cloudwalk or Infinite Bank, which is a Brazilian FinTech offering a metal card as part of their Smart Loyalty Reward Program for shoppers and merchants.
Speaker 5: just as a few of the examples on the page. Turning to slide five, on the left-hand side, you'll see that our largest customers continue to report solid purchase volume growth.
Speaker 5: Although this growth has tempered over the past several quarters, it remains in the double digits and is well above 2020 levels. It's worth noting that these are year-over-year comps, so hitting double-digit growth against a 30% comp in Q4 remains very impressive from our standpoint. Overall, we continue to hear positive messages from our clients.
Speaker 5: Card issuers are finding that their fee-based products remain attractive for both new and existing consumers, and that travel and entertainment remain one of the strongest segments of consumer spend. Moving to the right-hand side of the slide, physical cards continue to represent a significantly higher percentage
Speaker 5: of online and in-store forms of payment. This trend reinforces our belief that payment cards will remain the primary transacting method for consumers.
Speaker 5: On 5.6, you can see that American Express continued to report strong card acquisitions of 3 million new customers for the quarter.
Speaker 5: and 12.5 million new card acquisitions for the year. In their recent Q4 earnings report, they stated that acquisitions of US consumer platinum and gold card members, as well as business platinum card members, all reached record highs for the year. Although AMX is Q4, new card acquisitions are lower than Q2.
Speaker 5: and business development spend target for 2022. This is all publicly available information, and we update this chart every quarter to provide insight into our customer's guidance. On slide seven, you can see the positive macroeconomic sentiment expressed recently by a number of our large customers and partners.
Speaker 5: and the general view remains positive but cautious. On slide 8, I want to discuss some of our new and exciting product innovations and security enhancements.
Speaker 5: Our DNA has always been about innovation and growth.
Speaker 5: In 2022, we had some very unique offerings, such as an American Express Delta card made from a decommissioned 747 airplane.
Speaker 5: Going into 2023, it will be no different. Some of our recent advances include an LED card, which will illuminate the bank's logo when a contactless transaction is completed.
Speaker 5: We're currently in pilot with US bank. We also expect to be the first to manufacture the lux glass card, a transparent payment card made of corning gorilla glass that has a metal bezel. We added the echo mirror card to our portfolio.
Speaker 5: which is a durable buffed stainless steel card featuring a wide variety of customization options with a mirror-like finish. We are also introducing a biometric card which includes a fingerprint sensor to verify transactions at the point of sale terminal.
Speaker 5: eliminating the need to physically type in a pin. This delivers both an improved experience and enhanced security at the point of a transaction. And finally, we're adding a new dynamic CVV technology on metal cards as an added security feature.
Speaker 5: On slide 9, I want to switch gears to Arculus. I think it's important to provide further context on the Arculus value proposition for those newer to our story. Arculus is a security and authentication platform that has broad applicability across many areas and industries. Arculus is a security and authentication platform that has broad applicability across many areas and industries.
Speaker 5: The first application for us was a digital asset cold storage wallet for both B2B and B2C. At its core, ArcGIS authentication capabilities can deliver secure login, secure authentication,
Speaker 5: or step-up authentication incorporating seamless, multi-factor authentication. Think about how you log into your bank account.
Speaker 5: It's with a password which is a growing security concern for organizations. Since 2017, there were over 500 million passwords stolen.
Speaker 5: And 81% of hacking-related breaches used stolen passwords and or weak passwords. While many institutions offer some additional security for their customers in the form of UB keys or SMS codes.
Speaker 5: We don't believe those methods are the best way to evolve security and deliver great customer experiences.
Speaker 5: The synergy with our metal card business is that we can add functionality to a metal payment card making that same physical card an authentication token to store private keys and ensure user authentication. So let's say a bank or FinTech wants to authenticate a user for login purposes.
Speaker 5: or for high value or riskier transactions. With arculus-secure multifactor authentication, all the customer would have to do is tap their payment card to the back of their phone and use their biometric end or a unique six-digit pin that's different than your phone. Turning to the chart on 510, you can see
Speaker 5: all the time. We think this can deliver big value for our clients and believe the market opportunity for secure authentication is just as big or even greater than the opportunities within the digital asset market. Moving on to some arculus highlights for the year on slide 11.
Speaker 5: We are initiating a payment plus authentication pilot in partnership with a bank and as a service provider from global crypto exchange with over 1 million card holders.
Speaker 5: In addition, CoinZoom, a US-based crypto exchange with customers in 194 countries,
Speaker 5: announced a partnership with these last year and will leverage their partnership to allow customers to convert crypto.
Speaker 5: and send their fiat to eligible debit cards in real time. They plan to combine their current metal payment card, which we provide with FIDO2 authentication capabilities. Meld is working with compost secure to issue a metal debit card that will double as a cold
Speaker 5: The meld branded debit card provides a safe and easy way to store a crypto and NFTs while interacting with the world of D5.
Speaker 5: In addition, we'll be partnering with IC payments, a fintech program manager, and H-WAY, a financial platform that provides banking services.
Speaker 5: They will launch two separate programs this year, the first, the debit card powered by Arctulus authentication, which enables their customers to tap their cards to their mobile phones to authenticate as a way to enable money transfers.
Speaker 5: And two, a payment card plus Arculus cold storage, which will provide customers with a safe and easy way to store their digital assets. These opportunities in addition to continuing to advance our work with clients like Invesco and Change.
Speaker 5: continue to demonstrate the strength and capabilities of the Arculus platform. As you turn to slide 12, you can see how some of the customers I just mentioned are now actively marketing and promoting Arculus as their cold storage wallet, including Change, Invesco, and Meld. With that, I'll hand it over to Tim for a deeper discussion on our financials.
Speaker 5: is on a year-over-year basis. As John mentioned, for the full year 2022, net sales increased 41% to 378.5 million, compared to 268 million.
Speaker 5: The increase was driven by continued strong sales execution and growth of our metal car business domestically and abroad for both new and existing customers.
Speaker 5: Gross profit for 2022 increased 52% to $220 million, or 58% of net sales, compared to $145 million, or 54% of net sales.
Speaker 5: Throughout the year, we benefited from higher card issuance volumes as well as operating efficiencies as we scaled business, which was partially upset by higher supply chain costs in the back half of the year versus the first half.
Speaker 5: Net income for 2022 increased 58% to 132 million compared to 83 million and adjusted EBITDA increased 33% to 136 million compared to 102 million. The increase was driven by continued strong growth on the top line, gross margin expansion,
Speaker 5: increases from revaluation of the urn out in the warmth. Adjusted eva-jom margin for the year came in at 36% compared to 38%.
Speaker 5: With a decrease driven by a combination of factors, including public company costs.
Speaker 5: a one-time settlement of a dispute through arbitration, which has been consistently disclosed in our quarterly filings, and continued investment in the Oculus platform. As John mentioned earlier, the net impact of Oculus revenue and investments is a huge
Speaker 5: was minus 21 million for all of 2022, and in line with our latest guidance issued last year, and significantly lower than the 33 million and our original projections. This reflect how continued commitment to driving profit were approved at managing our investments. Turn to our balance sheet.
Speaker 5: On December 31, 2022, we had cash and cash equivalents of $14 million and totaled that of $363 million, which includes approximately $233 million of term loan and $130 million of exchangeable notes.
Speaker 5: This results in a total net debt of 349 million. We want to provide both our overall debt leverage ratio and our bank agreement secured that leverage ratio as our bank agreement is calculated with slight differences.
Speaker 5: At December 31st, our overall leverage ratio improved to 2.6 times based on net data of $349 million in trailing 12-month adjusted evita of $136 million. This compares to 3.6 times at December 31st, 2021, with the improvement driven by a combination of paying down debt and growing evita.
Speaker 5: At December 31st, 2022, we had a bank agreement secured debt leverage ratio of 1.6 times based on a net debt of $233 million and trailing 12-month bank adjusted EBITDA of $144 million.
Speaker 5: This compares to 2.4 times at December 31, 2021. Taking a look at our cash flow statement, we generated operating cash flow of 93 million. And we believe our cash balances, cash flow generation and debt facilities provide us with more than adequate working capital to fund our operations.
Speaker 5: Let's turn quickly to fourth quarter results. Fourth quarter 2022 net sales grew 25% to 94 million compared to 75 million the same quarter last year. Gross margin for the quarter increased to 54% versus 52% for the same quarter of the prior year.
Speaker 5: Net income of the fourth quarter of 2022 was up 12% to $22 million. This includes a $4 million net benefit for fair value adjustments associated with the market of warrant and the urnown.
Speaker 5: Adjusted EVA's out for the quarter was 31 million. Up 44% compared to 21 million last year. And adjusted EVA's out margin in Q4 improved to 33% compared to 28% in the fourth quarter of 2021. Oculus revenue and investment.
Speaker 5: resulted in a net impact of approximately minus 6 million for the fourth quarter. Let's take a look at our net sales trends. Taking a closer look at the sales trends, we continue to generate strong growth both in the U.S. and internationally.
Speaker 5: with them up 35% and 68% for the full year of 2022 respectively. URF's growth was once again driven by the strength of our sales execution and favorable industry trends, while international was up due to the expansion of our international sales team, continued to distribute the growth and strong customer demand.
Speaker 5: Turning to earnings per share has discussed last year, we adopted a method on the gap for calculating basic and diluted EPS, which allows us to allocate changes in fair value adjustments of market to market instruments among the public company and the operating subsidiaries that better reflect the actual economic impact.
Speaker 5: of conversion of such instruments on our net income and our presale basis. The reason we are doing this is that we believe this method better reflects the economic impact shareholders. Our Q2, Q3 and Q4 EPS figures as reported are consistently calculated under this gap measure.
Speaker 5: Having said that, let me run throughout EPS calculations. GAP EPS for the 12 months ended December 31, 2022, was at $1.21 per basic share and the $13 per diluted share.
Speaker 5: GAAP EPS for the fourth quarter was 14 cents for both basic and diluted shares. You could read through the footnotes on the slides that take you through the complexities of the allocation of net income due to the upsea structure and the shares that are included in the basic and diluted calculations. Note that the fair value adjustments in the quarter are not related to the
Speaker 5: and the full year have been allocated among the operating companies to come to pre-allocation net income. Now let's take a look at non-GAP earnings per share.
Speaker 5: On flight 18 and in our MDNA, we're also providing a non-GAP adjusted net income and adjusted EPS that takes out the impact of the non-cash fair value adjustments such as stock base comp, warrant and earn out evaluations.
Speaker 5: We believe that this provides a clearer picture of the economics of the companies operating results. Please note, these non-cash adjustments can have both a positive and a negative impact on how net income.
Speaker 5: With that background, our non-GAP EPS for the full year 2022 was a dollar ten per basic share and 94 cents per diluted share.
Speaker 5: While non-GAAP EPS for the fourth quarter was 23 cents per basic share and 20 cents per diluted share. In the appendix you'll find a reconciliation between GAAP and non-GAAP net income used in these calculations.
Speaker 5: I will now hand it back over to John for a final summary before we take questions. Thanks Tim. Now turning to slide 19, as I mentioned earlier, we're expecting another year of solid growth in 2023 as we anticipate net sales to range between 400 and 425 million.
Speaker 5: and expect adjusted EBITDA to finish between 145 and 155 million. As a reminder, these targets reflect the expectation of continued sales execution and driving economies of scale in our metal car business as well as net investment in Archaealists.
Speaker 5: below our net-archulous investment in 2022. In addition, this guidance takes into consideration some of the continuing uncertainty of the macro-economic environment as outlined earlier. I want to close by touching on our strategic priorities on slide 20. It's been great to reflect on our record 2022 results, and I'm incredibly proud of our team for their hard work and to come in.
Speaker 5: We also continue to innovate our product suite on both metal payment cards as well as Arculus security, authentication, and cold storage offerings.
Speaker 5: while maintaining our prudent approach to capital allocation and driving efficiencies in our business to maximize the bottom line. I want to thank all of you for taking the time to join us today. We very much appreciate your support, and I'll now open it up to questions.
Speaker 3: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker 3: Please stand by while I compile the Q&A roster. Our first question comes from John Todaro with Needham and Company. Your line is open. Hi, this is Dan Lehman actually. I'm filming for John .
Speaker 4: So I've got a few questions. The first one is, so at the midpoint of your sales outlook, guys, 23 or 10% growth year over year, can you just give us some additional color on the level of conservatism you're baking into the outlook assumption and whether you're a little bit more confident on the macro picture now relative to the third quarter?
Speaker 5: Yeah, so I appreciate the question. You know, look, we think we gave an appropriate range on the guidance coming off a year of 40% growth. We've said on average, we think we've got about a 15% growth business. The top end is right about, you know, it's 14% on the top end. And...
Speaker 5: In our view, still remains a lot of macro uncertainty. Mixed data that keeps coming out with inflation higher, raising rates, people with some concern about the back half. But I'd reiterate comments I've made on other calls, which are we've operated in
Speaker 5: top environments before and you know if the back half were to get top we still believe we can deliver growth and you know I don't know we feel like we've laid out an appropriate range there for the top line that recognizes the context of the environment. Got it. Yeah definitely makes sense and thank you so much for the color on that. And then and then in terms of growth margin it looks like the outlook is baking in a thicken.
Speaker 5: So, can you just sort of remind us of the levers that you could pull to achieve your target for full year 23? Thank you. Sure. So, the full year 23 guidance, if you use the low end and the low end and the high end and the high end are around 36.5.
Speaker 5: invest in growing the core mental payment car business, as well as arculus, although we've tried to be clear that net impact we believe should be at or lower than what it was this year. So that's how we're thinking about the revenue and margin story for next year.
Speaker 6: Thanks for coming. Thanks for coming.
Speaker 7: Yes, my first question. I believe one of your key customer contracts expires this year. I guess, well, can you tell us about the negotiations? When does a contract expire exactly? And I guess historically, as contracts have come up, how early did you renew them in the past? And how did she follow up? Thanks.
Speaker 5: Thanks, Reggie. So the JP Morgan contract expires at the end of this year, and we would be negotiating a normal course with any client.
Speaker 5: you know, in that year when when things are expiring there are times when we might renew a contract earlier than that if there's specific reasons to but the normal course would suggest in that final year is the time when we would be renewing. And I said I'd add one comment.
Speaker 5: We've been through multiple renewal cycles on that contract. It's not the first. I think there have been at least three renewal cycles at this point. You know, the AMX contract that there have been at least four, if not more renewals there. Yeah. Got it. That big sense.
Speaker 7: Okay, so you know I appreciate the color on the guidance. What can you tell us about, I guess your order backlog today versus maybe this time last year. Just trying to get some context around what you're seeing right now on the ground versus maybe a year ago. So.
Speaker 5: I'd say it's actually fairly consistent, Reggie, in terms of strong visibility and what we refer to as the pipeline in the backlog. So, that backlog is hardwooders that cover kind of the next three or four months and that the pipeline that goes out further than that. And...
Speaker 5: You know, I think as you look into kind of the back half of the year, I think is when people, there's more uncertainty out there, you know, I think JP Morgan CEO did an interview recently, you know, commenting on the back half and uncertainty still remaining in the back half just in general, but if you look and we put some of the commentary in our deck,
Speaker 5: Generally speaking, our issuer clients believe that we are going to drive growth this year. They're planning for it. That's how we're planning. What we've said is we're prepared if things turn, but we actually believe it could be quite a nice year. Another way to actually help is to allow people to pay longer for a drawing So again, paying out higher costs so to speak like that. With that being said, we are excited toop
Speaker 7: I'm just thinking about your even dog guidance, which is fairly strong. How should we think about debt repayment or use of cash as that even dog number contains to grow?
Speaker 5: So we've stated two priorities. I'll reiterate four folks on the phone. Driving organic growth in the business, and by that I mean the metal payment card business continuing to expand capacity, drive innovation around not just the form factor, but new security technology, things like dynamic CVB, biometrics, the authentication.
Speaker 5: in the integration of Arculus into credit and debit cards as kind of our first priority. And second, paying down debt. We did a very nice job paying down debt this year. And I think him highlighted that in his comments. You know, we're talking about leverage ratios that went.
Speaker 5: from, I think it was 3.6 down, well below three in total debt and secured debt at mid twos down to 1.6. So we are de-levering through a combination of debt and secured debt.
Speaker 5: paying down debt and growing EBITDA. And Regia, I like the fact that we're doing it with both. For me, that's the right way to approach it, but we will continue to pay down debt. Got it. And if I could speak one more, one more in.
Speaker 7: He had some really cool plot of announcements and you've released and that you talked about Earlier in the call how should we think about my house quickly can can those go from you know kind of Launch to like really seeing them out
Speaker 7: all the plot of announcements and your release and that you talked about earlier in the call. How should we think about how quickly can those go from, you know, kind of launched to like really seeing them out in the wild if you will.
Speaker 5: Yeah, I think for us, you know.
Speaker 5: The types of products we talked about would be, second half of this year into the first half of next year, when we start to see those things start to appear. But strong interest from our perspective in a number of those.
Speaker 5: So products we talked about would be, you know, second half of this year into the first half of next year when we start to see those things start to appear. But strong interests from our perspective and a number of those. Perfect. Thank you.
Speaker 5: Appreciate it, Reggie. Thank you. Thank you. And there are no other questions in the queue. Would I could turn it back to Mr. John Wilk for any further remarks? I just want to take a moment and thank all of the people who joined the webcast who are listening to the story. We are excited about the year that we just completed. We think, as our first year as a public company, raising guidance twice, finishing at the top end of that range, I'm extremely proud of what our team has accomplished.
Speaker 3: This concludes today's conference call. Thank you for participating. You may now disconnect.
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Speaker 3: Good day and thank you for standing by. Welcome to the Compose Secure, fourth quarter, and full year 2022 earnings conference call. At this time, all participants are listening only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone and then you will then hear an automated mess.
Speaker 3: Message advising you your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Federer, General Counsel and Corporate Secretary. Please go ahead. Good evening and thank you for-
Speaker 4: We will make statements related to our business that may be considered forward looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing and acquire new customers, as well as other statements regarding our plans and prospects.
Speaker 4: Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements.
Speaker 4: Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.
Speaker 4: For discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10K and other reports filed with the SEC, which are available on the Investor Relations section of our website at complicitcure.com and on the SEC's website at SEC.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures attention motion. We'll post-
Speaker 4: including adjusted EBITDA, adjusted net income, and adjusted EPS. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations.
Speaker 4: These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with US GAAP and may be different from similarly titled non-GAAP measures used by other companies.
Speaker 4: A reconciliation of GAP to non- GAAP measures is available in our press release and earnings presentation available in the Investor Relations section of our website. Thank you, and with that said, let me turn the call over to John to discuss fourth quarter and full year earnings.
Speaker 5: Thank you, Steve. Good evening, everyone, and thank you for joining us for our fourth quarter in full year 2022 conference call. I'm excited to announce that we achieved a record of growth and profitability in 2022 while closing out the year on a high note with strong results for the fourth quarter.
Speaker 5: This year we shipped approximately 30 million metal cards, up 36% from 2021. And I want to recognize and thank all of our employees for their ongoing commitment to our success. Thank you and see you soon, everybody.
Speaker 5: Before I go into further financial details, I want to spend a few moments contextualizing this remarkable year for Composecure with 41% net sales growth and 33% adjusted EBITDA respectively. I'd also like to note that I v
Speaker 5: We've previously stated that we anticipate our business to grow on average at around a 15% mile market
Speaker 5: And I believe last year's outperformance was driven by our ability to capitalize on several fundamentals. First, mental payment cards have become an important tool to help our clients deliver on their goals of increasing customer acquisition and taking greater share of their customers spend.
Speaker 5: with the cards becoming top of wallet. Over the past eight years, the audience for metal cards has greatly expanded beginning with high net worth individuals, and the
Speaker 5: moving to the mass affluent and now becoming a highly sought after product for millennial and Gen Z consumers.
Speaker 5: Second, we continue to demonstrate the value of our deep client relationships, best-in-class products and strong sales execution.
Speaker 5: These factors, combined with our capacity to deliver the scale and high quality required by our clients, is simply unmatched.
Speaker 5: Lastly, following two years of COVID, there was pent-up demand for consumer spending, which provided a tailwind for our clients and thus our own business.
Speaker 5: It's worth noting that we see consumers around the world demanding branded experiences that support and amplify their own identity. Our financial and fintech clients are turning to Composecure to incorporate innovative form factors.
Speaker 5: as a component of the unique value proposition they can deliver to their customers. Now, onto our financial results on Slide 3.
Speaker 5: As a reminder, our original guidance for 2022 was $336 to $376 million in revenue.
Speaker 5: and $100 million to $110 million in EBITDA. We raise guidance in August and November .
Speaker 5: with our last range being net sales of $370 to $380 million and adjusted EBITDA of $130 to $137 million.
Speaker 5: I'm pleased to share that we achieved the top end of both ranges. During the year, we achieved net sales of 378.5 million, up 41% from 2021, firmly meeting our raised guidance last year. Thank you.
Speaker 5: Demand remains strong for our premium metal cards, and we continue to see solid sales trends domestically, internationally, and with Fintech customers. We also saw a 33% increase in adjusted EBITDA to 136.2 million. Our outperformance on the top and bottom line in 2022.
Speaker 5: was exceptional, driven by continued product innovation, deep and expanding customer relationships, consistent since execution.
Speaker 5: economies of scale, and managing our investments in Arculus.
Speaker 5: on a scale and managing our investment in arculus. Looking at macro drivers.
Speaker 5: The outlook for the economy is uncertain in 2023 and that has been factored into our guidance for the year. That said, card issuance trends remain positive as we enter the year.
Speaker 5: Regardless of how the macro environment evolves in 2023, we are well equipped to adapt our playbook accordingly. As demonstrated by our performance in 2020 when faced with significant challenges due to COVID and our adjustments to Arcula spend in 2022.
Speaker 5: given the challenges in the digital asset market, to deliver strong results for shareholders in both cases. Regarding Arculus, in 2022, we established critical foundational elements, including technology enhancements, and the
Speaker 5: and brand recognition required for Arceus B2B security, authentication, and cold storage solutions. We emphatically believe in the product and continue to focus on B2B opportunities in authentication and cold storage to drive market adoption.
Speaker 5: I'll have more to discuss on Arculus later in the call. For the upcoming year, we're providing net sales guidance of 400 to 425 million. I'll have more to discuss on Arculus later in the call.
Speaker 5: which is approximately a 12% increase from 2022 at the top end. For adjusted EBITDA, we're targeting a range between 145 to 155 million, which is approximately 14% growth at the top end.
Speaker 5: These targets reflect the expectation of continued sales execution and driving economies of scale in our metal card business, as well as a net investment in arculus, which would be below our net arculus investment in 2022.
Speaker 5: These expectations also consider some moderation of growth due to uncertainties in the macro It's worth pointing out that our growth expectations for 2023 are on top of a revenue comp of 41 percent and an adjusted evit.com of 33 percent in 2022.
Speaker 5: Moving on to slide four. Along with our record growth and profitability, we also shipped approximately 30 million cards through the year.
Speaker 5: We continue to deepen partnerships with our customers, as reflected by the launch of multiple new metal card programs.
Speaker 5: such as Chase launching Disney's 100-year celebration card and Marriott Bonvoy returning to the metal card format for their popular Bonvoy Travel Focus Reward Card.
Speaker 5: For Capital One, we had Venture X, where we continued to see strong momentum through co-branding with celebrities such as Taylor Swift.
Speaker 5: and they had a commercial which aired during the Super Bowl. And the rebranding of Capital One Spark Travel Elite to Venture X Business Card highlighting a new design.
Speaker 5: We also had some other exciting launches during the quarter. We had Porsche, the German luxury and sports car manufacturer. AKT is a financial institution operating in the British Indian Ocean territories that's offering a visa metal card.
Speaker 5: to support payment or essential services with crypto. And CloudWalk or Infinite Bank, which is a Brazilian FinTech, offering a metal card as part of their Smart Loyalty Reward Program for shoppers and merchants.
Speaker 5: Just as a few of the examples on the page. Turning to slide five, on the left hand side you'll see that our largest customers continue to report solid purchase volume growth.
Speaker 5: Although this growth has tempered over the past several quarters, it remains in the double digits and is well above 2020 levels. It's worth noting that these are year-over-year comps, so hitting double-digit growth against a 30% comp in Q4 remains very impressive from our standpoint.
Speaker 5: Overall, we continue to hear positive messages from our clients.
Speaker 5: Card issuers are finding that their fee-based products remain attractive for both new and existing consumers, and that travel and entertainment remain one of the strongest segments of consumer spend. Moving to the right-hand side of the slide, physical cards continue to represent a significantly higher percentage of online and in-store forms of payment.
Speaker 5: This trend reinforces our belief that payment cards will remain the primary transacting method for consumers. On 5.6 you can see that American Express continued to report strong card acquisitions.
Speaker 5: of 3 million new customers for the quarter and 12.5 million new card acquisitions for the year. In their recent Q4 earnings report, they stated that acquisitions of US consumer platinum and gold card members, as well as business platinum card members, all reached record highs for the year.
Speaker 5: Although AMX's Q4 new card acquisitions are lower than Q2 and Q3, they remain above 2020 and 2021 levels.
Speaker 5: We remain encouraged by the strong numbers and American Express's continued commitment to invest in marketing and business development growth as they exceeded their $5 billion marketing and business development spend target for 2022.
Speaker 5: This is all publicly available information and we update this chart every quarter to provide insight into our customer's guidance. On slide 7 you can see the positive macroeconomic sentiment expressed recently by a number of our large customers and partners.
Speaker 5: and the general view remains positive but cautious. On slide 8, I want to discuss some of our new and exciting product innovations and security enhancements. Our DNA has always been about innovation and growth.
Speaker 5: In 2022, we had some very unique offerings, such as an American Express Delta card made from a decommissioned 747 airplane. Going into 2023 will be no different. Some of our recent advances include an LED card which will illuminate the bank's logo when it comes to...
Speaker 5: We added the Echo Mirror card to our portfolio, which is a durable, buffed stainless steel card featuring a wide variety of customization options with a mirror-like finish.
Speaker 5: We are also introducing a biometric card, which includes a fingerprint sensor to verify transactions at the point of sale terminal, eliminating the need to physically type in a pin.
Speaker 5: This delivers both an improved experience and enhanced security at the point of a transaction.
Speaker 5: And finally, we're adding a new dynamic CVV technology on metal cards as an added security feature. On slide 9, I want to switch gears to Arculus. I think it's important to provide further context on the Arculus value proposition for those newer to our story.
Speaker 5: Archaealist is a security and authentication platform that has broad applicability across many areas and industries. The first application for us was a digital asset Cold Storage Wallet for both B2B and B2C.
Speaker 5: At its core, arculus authentication capabilities can deliver secure login or step-up authentication incorporating seamless, multi-factor authentication. Think about how you log into your bank account.
Speaker 5: It's with a password which is a growing security concern for organizations. Since 2017, there were over 500 million passwords stolen, and 81% of hacking related breaches used stolen passwords and or weak passwords. While many institutions offer some additional security for the
Speaker 5: making that same physical card and authentication token to store private keys and ensure user authentication.
Speaker 5: So let's say a bank or Fintech wants to authenticate a user for login purposes or for high value or riskier transactions.
Speaker 5: With arculous, secure, multi-factor authentication, all the customer would have to do is tap their payment card to the back of their phone.
and use their biometric end or a unique six-digit pin that's different than your phone. Turning to the chart on 510, you can see that consumers prefer authentication processes that are simple and seamless, but the most common used form today still remains passwords.
We offer frictionless security and an easy-to-use form factor that everyone carries knows how to use and has with them all the time.
We think this can deliver big value for our clients and believe the market opportunity for secure authentication is just as big or even greater than the opportunities within the digital asset market. Moving on to some arculus highlights for the year on slide 11.
We are initiating a Payment Plus authentication pilot in partnership with a Banking as a Service Provider from Global Crypto Exchange with over 1 million card holders.
In addition, CoinZoom, a US-based crypto exchange with customers in 194 countries announced the partnership with these last year and will leverage their partnership to allow customers to convert crypto and send their fiat to eligible debit cards in real time.
They plan to combine their current metal payment card which we provide with FIDO2 authentication capabilities. Meld is working with Composicure to issue a metal debit card that will double as a cold wallet
The Meld branded debit card provides a safe and easy way to store crypto and NFTs while interacting with the world of DeFi. In addition, we'll be partnering with IC Payments, a Fintech Program Manager, and HWAY, a financial platform that provides banking services.
They will launch two separate programs this year, the first a debit card powered by Arctulus authentication.
which enables their customers to tap their cards to their mobile phones to authenticate as a way to enable money transfers and to a payment card plus arduous cold storage which will provide customers with a safe and easy way to store their digital assets.
These opportunities in addition to continuing to advance our work with clients like UNBESCO and Change continue to demonstrate the strength and capabilities of the arculus platform.
As you turn to side 12, you can see how some of the customers I just mentioned are now actively marketing and promoting Arculus as their cold storage wallet, including Change, Inbesco and Melt. With that, I'll hand it over to Tim for a deeper discussion on our financials before returning for closing remarks. Thanks, John , and good evening, everyone. Thank you.
I'll provide a more detailed overview of our 2022 financial performance and then turn it back to John before we open up the call for questions. Unless stated otherwise, all of the comparisons and variance commentary is on a year-over-year basis.
As John mentioned for the full year 2022, net sales increased 41% to 378.5 million compared to 268 million.
The increase was driven by continued strong sales execution and growth of our metal card business domestically and abroad for both new and existing customers.
Gross profit for 2022 increased 52% to 220 million or 58% of net sales compared to 145 million or 54% of net sales.
Throughout the year, we've benefited from higher-card issuance volumes, as well as operating efficiencies as we scale business.
which was partially upset by higher supply chain costs in the back half of the year versus the first half. Net income for 2022 increased 58% to 132 million compared to 83 million and adjusted EBITDA increased 33% to 136 million compared to 102 million.
The increase was driven by continued strong growth on the top line, gross margin expansion, and increases from revaluation of the urn out in the warmth. Adjusted eva job margin for the year came in at 36% compared to 38%.
With a decrease driven by a combination of factors, including public company costs, a one-time settlement of a dispute through arbitration, which has been consistently disclosed in our quarterly filings, and continued investment in the Oculus platform. As John mentioned earlier,
The net impact from Oculus revenue and investments was minus 21 million for all of 2022 and in line with our latest guidance issued last year.
and significantly lower than the 33 million and our original projections. This reflect how continued commitment to driving profit were approving managing our investments. Turn to our balance sheet. On December 31st, 2022, we had cash and cash equivalents of 14 million.
and total that of 363 million, which includes approximately 233 million of term loan and 130 million of exchangeable notes.
This results in a total net debt of 349 million. We want to provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences. At December 31st, our overall leverage ratio improved to 2.6 times.
based on net data of 349 million in trailing 12 month adjusted eva. of 136 million. This compares to 3.6 times at December 31, 2021.
with the improvement driven by a combination of paying down debt and growing EBITDA. At December 31, 2022, we had a bank agreement secured debt leverage ratio of 1.6 times.
based on a net debt of 233 million and trailing 12-month bank adjusted EBITDA of 144 million. This compares to 2.4 times at December 31, 2021.
Taking a look at our cash flow statement, we generated operating cash flow of 93 million, and we believe our cash balances, cash flow generation and debt facilities provide us with more than adequate working capital to fund our operations. Let's turn quickly to fourth quarter results.
Fourth quarter 2022 net sales grew 25% to 94 million compared to 75 million the same quarter last year. Gross margin for the quarter increased to 54% versus 52% for the same quarter the prior year. The quarter increased to 54.5% for the same quarter. Gross margin for the quarter increased to 54.5% for the same quarter.
That income of the fourth quarter of 2022 was up 12% to $22 million. This includes a $4 million net benefit for fair value adjustments associated with the market market of warrants and the urnown. Adjusted evasant for the quarter was 31 million. Up 44% compared to 21 million last year.
And the Justity of the Margin and Q4 improved to 33% compared to 28% in the fourth quarter of 2021. Oculus revenue and investments resulted in a net impact of approximately minus 6 million to the fourth quarter.
Let's take a look at our net sales trends. Taking a closer look at the sales trends, we continue to generate strong growth both in the U.S. and internationally.
with them up 35% and 68% for the full year of 2022 respectively. URF's growth was once again driven by the strength of our sales execution and favorable industry trends, while international was up due to the expansion of our international sales team.
continued distributed growth, and strong customer demand. Turning to earnings per share, as discussed last year, we adopted a method under GAAP for calculating basic and diluted EPS, which allows us to allocate changes in fair value adjustments of mark-to-market instruments among the public company and the operating subsidiaries.ator of this video is Michael
the better reflect the actual economic impact of conversion of such instruments on our net income and our per-share basis. The reason we are doing this is that we believe this method better reflect the economic impact shareholders. Our Q2, Q3, and Q4 EPS figures as reported are consistently calculated under this cap measure.
Having said that, let me run throughout EPS calculations. GAP EPS for the 12 months ended December 31, 2022, was a $1.21 per basic share and a $1.13 per diluted share. GAP EPS for the fourth quarter was $0.14 for both basic and diluted shares. You could read through the footnotes.
on the slides that take you through the complexities of the allocation of net income due to the up-c structure and the shares that are included in the basic and diluted calculations. Note that the fair value adjustments in the quarter and the full year have been allocated among the operating companies to come to pre-allocation net income.
Now let's take a look at non-GAP earnings per share. On flight 18 and in our MDNA, we're also providing a non-GAP adjusted net income and adjusted EPS that takes out the impact of the non-CASH fair value adjustment.
such as stock-based comp, warrant, and earn-out evaluations. We believe that this provides a clearer picture of the economics of the company's operating results.
Please note these non-cash adjustments can have both a positive and a negative impact on our net income. With that background, our non-GAAP EPS for the full year 2022 was $1.10 per basic share and $0.94 per diluted share. While non-GAAP EPS for the fourth quarter was $0.23.
for basic care and 20 cents per diluted chair. In the appendage, you'll find a reconciliation between gap and non-gap net income used in these calculations.
I will now hand it back over to John for a final summary before we take questions. Thanks Tim. Now turning to slide 19, as I mentioned earlier, we're expecting another year of solid growth in 2023, as we anticipate net sales to range between 400 and 425 million, and expect adjusted EBITDA to finish between 145.
and 155 million. As a reminder, these targets reflect the expectation of continued sales execution and driving economies of scale in our metal car business, as well as a net investment in arculis below our net arculis investment in 2022. In addition, this guidance takes into consideration
However, our focus is now squarely on 2023. As we look ahead, we plan to continue driving organic growth in our premium metal payment car business, both here in the U.S. and internationally, while also further diversifying our customer mix with Fintech clients. We will also continue to innovate our product suite.
on both metal payment cards as well as Arculus security authentication and cold storage offerings while maintaining our prudent approach to capital allocation and driving efficiencies in our business to maximize the bottom line.
I want to thank all of you for taking the time to join us today. We very much appreciate your support and I'll now open it up to questions. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. But again, we're excited to have an only
To withdraw your question, please press star 11 again. Please stand by while I compile the Q&A roster.
Our first question comes from John with Needham & Company. Your line is open. Hi, this is Dan. I am filling in for John . I have a few questions. At the midpoint of your sales outlook, guys, it is 22 minutes.
We think we gave an appropriate range on the guidance. Coming off a year of 40% growth, we've said on average, we think we've got about a 15% growth business, the top end.
Right about 14% on the top end. There, in our view, still remains a lot of macro UN: certainty. Mixed data that keeps coming out with inflation, higher raising rates, people with some concern about the back half.
But I'd reiterate comments I've made on other calls, which are we've operated in tough environments before and if the back half were to get tough, we still believe we can deliver growth. And, you know, I don't know, we feel like we've laid out an appropriate range there for the top line that recognizes.
the context of the environment. Got it. Yeah, definitely makes sense. And thank you so much for the color on that. And then in terms of gross margins, it looks like the outlook is baking in a thickened gross margins. So can you just give sort of a reminder of some of the levers that you could pull to achieve your target for a full year or 23?
Thank you. Sure. So the full year, 23 guidance, if you use the low end and the low end and the high end and the high end are around 36 percent, evit.margin, which is actually in line with where we came in this year. So that's actually fairly steady.
from our perspective and recognizes that we will continue to invest in growing the core mental payment car business as well as arculus, although we've tried to be clear that, you know, that net impact we believe should be at or lower than what it was.
this year. So that's how we're thinking about sort of the revenue and margin story for next year. Thank you. One moment for our next question.
exactly and I guess historically has contracts have come up how early did you renew them in the past and how did she follow up. Thanks. Thanks, Reggie. So the JP Morgan contract expires at the end of this year and we would
being negotiating in normal course with any client in that year when things are expiring. There are times when we might renew a contract earlier than that if there's specific reasons to, but the normal course would suggest in that final year is the time when we would be renewing.
And Reggie, I had one comment. We've been through multiple renewal cycles on that contract. It's not the first. I think there have been at least three renewal cycles at this point. The AMX contract factor have been at least four if not more renewals there. And we've been through multiple renewal cycles on that contract.
Got it, that big sense. Okay, so, you know, I appreciate the color on the guidance. What can you tell us about, I guess, your order backlog today versus maybe this time last year? Just trying to get some context around what you're seeing. Okay.
right now on the ground versus maybe a year ago? I'd say it's actually fairly consistent, Reggie, in terms of strong visibility and what we refer to as the pipeline and the backlog. So that backlog is hard orders that cover kind of the next three or four months and the pipeline that goes out further than that. And...
You know, I think as you look into kind of the back half of the year, I think is when people, there's more uncertainty out there, you know, I think JP Morgan CEO did an interview recently, you know, commenting on the back half and uncertainty still remaining in the back half just in general. But if you look and we played some of the commentary in our deck, you know, generally speaking, our issuer clients believe that we are going to drive growth this year, they're planning for it, that's how we're planning. And...
what we've said is we're prepared if things turn, but we actually believe it could be quite a nice year.
what we've said is we're prepared if things turn, but we actually believe it could be quite a nice year.
Understood. Thinking about your EBITDA guidance, which is fairly strong, how should we think about debt repayment or use of cash as that EBITDA number continues to kind of grow? So we've stated two priorities, I'll reiterate for folks on the phone, driving organic growth in the business and by that I mean the metal payment card business continuing to
expand capacity, drive, innovation around not just the form factor but new security technology, things like dynamic CVB, biometrics, the authentication, and the integration of arculus into credit and debit cards as kind of our first priority and second, paying down debt. We did a very nice job paying down debt this year and I think him see you again,
highlighted that in his comments. You know, we're talking about leverage ratios that went from, I think it was 3.6 down, you know, well below three in total debt and secured debt at, you know, mid-toes down to 1.6. So we are, you know, delivering through a combination of paying down debt.
and growing EBITDA. Regia, I like the fact that we're doing it with both. That's the right way to approach it, but we will continue to pay down that. Got it. If I could speak one more one more in. He had some really cool plot of announcements in your release and that you talked about.
earlier in the call. How should we think about my child quickly can those go from, you know, kind of launch to like really seeing them out?
should we think about my child quickly can those go from, you know, kind of launch to like really seeing them out in the wild if you will.
Yes I think for us the types of products we talked about would be second half of this year into the first half of next year when we start to see those things start to appear. But strong interest from our perspective and a number of thoseperfect.
For us, you know, the types of products we talked about would be, you know, second half of this year into the first half of next year when we start to see those things start to appear. But strong interests from our perspective and a number of those. Perfect. Thank you. Appreciate it, Reggie. Thank you. Thank you.
Thank you. And there are no other questions in the queue. I could turn it back to Mr. John Wilk for any further remarks. I just want to take a moment and thank all of the people who joined the webcast who are listening to the story. We are excited about the year that we just completed. We think as our first year as a public company.
Raising guidance twice, finishing at the top end of that range, I'm extremely proud of what our team has accomplished. I'm even more excited for what's ahead of us. In terms of continued growth of our metal payment car business, domestically, internationally, and with Fintech clients, as well as continuing to push on the arculus expansion on security authentication, as well as cold storage for.
digital assets. So thank you all for attending. We appreciate it and have a good night. This concludes today's conference call. Thank you for participating. You may now disconnect.