Q2 2023 CompoSecure Inc Earnings Call
Speaker 2: your second quarter 2023 earnings call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone.
Speaker 2: To remove yourself from the question queue, please press star 11 again. I would now like to hand the call over to Sean Mansoury, Investor Relations. Please go ahead.
Speaker 3: Good afternoon, and thank you for joining us to review Composted Care's second quarter 2023 financial results.
Speaker 3: With me on the call is John Wilk, Comforter Security CEO , and Tim Fitzsimmons, CFO .
Speaker 3: They will begin with prepared remarks, and then we will open the call for Q&A.
Speaker 3: 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 3: Forward-looking statements may often be identified with words such as, we expect, we anticipate, or upcoming.
Speaker 3: These statements reflect our views only as of today and should not be considered our views as of any subsequent date.
Speaker 3: We undertake no obligation to update or revise these for looking statements.
Speaker 3: Forelooking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainty that could cause the actual results from different materials from our expectations.
Speaker 3: For discussion of material risks and other important factors, that could affect our actual results.
Speaker 3: 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 composecure.com and on the SEC's website at sec.gov.
Speaker 3: 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 3: 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 3: These non- GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with USGAP and may be different from similarly titled non- GAAP measures used by other companies.
Speaker 3: A reconciliation of GAP to non- GAAP measures is available in our press release and earnings presentation available on the Investor Relations section of our website.
Speaker 3: Thank you, and with that, let me turn the call over to John to discuss our second quarter results.
Speaker 4: Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our second quarter conference call.
Speaker 4: As you hopefully read from our 8K file this afternoon,
Speaker 4: I'm excited to announce a five-year contract extension with one of our largest customers through December , 2028 as their exclusive provider of metal cards.
Speaker 4: This comes on the heels of the extension with American Express. We announced last quarter.
Speaker 4: which means we have now secured long-term renewals with our two largest customers.
Speaker 4: Throughout our 20-year history, our company has been driven by delivering unmatched value and business impact for our clients.
Speaker 4: as well as innovation.
Speaker 4: all while establishing long-term partnerships across the market.
Speaker 4: And I'm proud that we continue to demonstrate that unique value proposition.
Speaker 4: Now to summarize the quarter on page three.
Speaker 4: Our second quarter results once again reflected the performance and consistency of our business as net sales for the quarter increased 1% to 98.5 million.
Speaker 4: driven by strong domestic growth of 11%, which was offset by lower international sales, which Tim will cover in a bit more detail.
Speaker 4: On a year-to-date basis, net sales are up 7% to 194 million.
Speaker 4: Looking at card issuer trends, our customers continue to report strong growth.
Speaker 4: and have a positive outlook while maintaining their investment in customer acquisition and rewards despite the macroeconomic uncertainty.
Speaker 4: During the quarter, we continue to position our payment card and Arculous product offerings for growth.
Speaker 4: including expanding our sales team, continuing trade show and partnership opportunities, and executing our B2B marketing strategy.
Speaker 4: And finally, we are reaffirming our guidance for 2023, which calls for net sales to range between $400 and $425 million.
Speaker 4: with adjusted EBITDA ranging between 145 and 155 million.
Speaker 4: I'd like to take a minute and cover some of the other highlights for the quarter, turning to slide four.
Speaker 4: In addition to the contract extension, which I previously talked about, we want several new mental card programs with top issuers this quarter.
Speaker 4: To highlight a few, with Citizens Bank, we're helping to deliver an innovative metal card design that integrates a touch card feature from MasterCard.
Speaker 4: to help partially sighted or blind people easily distinguish their payment cards from one another.
Speaker 4: We also launched with Barclays in the UK, which is one of the biggest
Speaker 4: four banks in that market.
Speaker 4: Overall, one of the largest markets in Europe .
Speaker 4: In addition, we launched with Mars, a FinTech based in Turkey, which is now offering a premium metal MasterCard.
Speaker 4: From a marketing perspective, we had a strong presence at events and trade shows and we'll continue to ramp that activity as we go through the year, both domestically and internationally.
Speaker 4: These efforts have helped increase our pipeline for both PaymentCard and Arculus opportunities. I'm also excited to see industry recognition for our company, our product offerings, and our leadership team that we highlighted on page four as well.
Speaker 4: Moving on to slide five.
Speaker 4: which provides insight from issuers and payment networks.
Speaker 4: As you can see from these call-outs, Amex continues to expect double-digit revenue growth and even greater EPS growth.
Speaker 4: Capital one, emphasize continued marketing spend on their domestic hard business.
Speaker 4: These comments show confidence in the market for payment cards, and we believe we're well positioned to benefit as a market leader in metal cards. Turning to the growing opportunity for secure authentication on slide six, our lives have become highly digital, and reliance on passwords is becoming more worrisome. I've spoken to this on previous calls, and this issue, this is an issue that consumers are beginning to recognize as well. On the left hand side, you'll see that many consumers are looking to transition from passwords with 68...
Speaker 4: really connects well to our arculus offerings on 5.7.
Speaker 4: and what we can provide for our B2B customers by combining Arculous authentication and or cold storage with a payment card.
Speaker 4: I am pleased with our progress against the Arculus roadmap. We continue to add to our sales team and bolster our Arculus B2B marketing efforts.
Speaker 4: And we've added new B2B customers this quarter, including PlugWallet, an online crypto wallet, and Radix DeFi, a decentralized network.
Speaker 4: I'll now hand it over to Tim to review our financials before returning for closing remarks.
Speaker 4: John and good evening everyone. I'll provide a more detailed overview of our Q2 2023 financial performance and then turn it back to John before we open up the call for questions.
Speaker 4: Unless stated otherwise, all comparisons and various commentaries are on a year-over-year basis.
Speaker 4: As John mentioned, net sales increased 1% to $98.5 million compared to $97.2 million.
Speaker 4: The increase was primarily driven by continued domestic growth in the company's metal card payment business, which was up 11%, partially offset by lower international sales.
Speaker 4: which is a more variable market due to customer mix and a smaller sales base.
Speaker 4: International sales remained in line with the company's targeted revenue mix of approximately 20 percent.
Speaker 4: Gross margin for the quarter was 55% compared to 61% in the prior year.
Speaker 4: The decrease was primarily due to higher material and labor costs, resulting from inflationary pressures and less favorable product mix compared to 2023.
Speaker 4: It's important to note that gross margin continues to be in line with our previously stated mid-50% cash items.
Speaker 4: Q2 of 2023 had 9.2 million added to net income financial cash items. Well, Q2 of 2022 had 34.6 million.
Speaker 4: These non-cash adjustments are a result of changes in the valuations of the warrants, the earnout consideration, and derivative liabilities, which is primarily driven by the company's stock price improvement year over year.
Speaker 4: The decrease in the Justin E.B.a. Damage and which driven by product mix and the impact of the inflationary pressures that I've already spoken to as well as continued investment now sales and support teams. Adjusted to E.B.a. that includes the net impact of 4.2 million of our continued investment in Arculus. As we have stayed in the past, this is right in line with managing our investments to be at or below our overall net investment in 22. And now ongoing efforts to deliver long-term value for our shareholders.
On slide 10, year-to-date 2023 results, on this slide, you can see our year-to-date performance. Net sales are up 7% to $194 million, driven by our strong sales execution and continued demand for medical payment cards.
Our U2D gross margin of 55% is in line with our mid 50% target despite the higher labor material costs that I've just mentioned.
Net income for the first half was $43.4 million compared to $87.6 million in the prior year.
$41.3 million of the difference was
The full year of 2023 had $4.3 million added to net income for non-cash items, while the full year of 2022 had $37 million.
Adjusted EBITDA for the first half was $72 million compared to $73 million in the prior year. EBITDA margin for the first half was 37% compared to 40% in the prior year. This was impacted by the gross margin decrease and continued investment in sales and support teams.
This includes our year-to-date net investment in Oculus of $8.7 million. On slide 11, looking closer at the split between domestic and international, you can see that our domestic sales continue to improve, increasing 11% to the second quarter of $78 million.
Again, due to the strength of our sales execution and favorable industry trends, International Net Sales for the second quarter of 2023 with 21 million remaining in line with our long-term target of roughly 20% of total net sales.
Moving on to the balance sheet, which you'll find in the appendix.
We had cash and cash equivalents of 23 million and total debt of 358 million, which includes 228 million of term loan and 130 million of exchangeable notes. This resulted in a total net debt of 355 million. This resulted in a total net debt of 355 million.
As always, we want to provide both our overall debt leverage and our bank agreement, secure debt leverage ratio, as our bank agreement is calculated which flight differences.
At June 30, our overall leverage ratio was 2.5 times based on a net debt of $335 million and trailing 12-month adjusted EBITDA of $136 million.
This compares to three times at June 30, 2020-22 with the improvement driven by paying down debt and increase trailing 12-month adjusted EBITDA.
At June 30, 2023, we had a bank agreement to secure debt leverage ratio of 1.6 times based on a total secured debt of 228 million and trailing 12-month bank adjusted of 143 million. This compares to 2.2 times at June 30, 2022.
We've generated the in-a-date operating cash flow of $53 million.
I want to turn now to earnings per share. As a reminder, our method under gap for calculating basic and diluted EPS allows us to allocate changes and adjustments of mock-to-mark instruments among the public company and operating subsidiaries to better reflect the actual economic impact of the conversion of such instruments.
on our net income and our per share basis. GAP EPS for the three months ended June 30, 2023 was 31 cents per basic share and 29 cents per diluted share. This compares to 56 cents and 52 cents per basic and diluted share respectively in the year ago period.
The decrease was primarily driven by changes to the fair value of the warrants and act consideration and derivative liabilities, primarily driven by outstop price improvement.
You can read through the footnotes on the slide 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.
Now let's look at the six months EPS. Turn to slide 13, you can see how we are tracking with gap EPS for the year, which now puts us at 45 cents per basic share and 41 cents per diluted share. This compares to 80 cents and 75 cents per basic and diluted share respectively in the year ago period.
Again, this was in fact impacted by the same factors I outlined on the previous slides, as non-cash adjustment can have either a positive or a negative impact on net income.
On slide 14, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of non-cash fair value adjustments on the warrants earn-out and stock-based comp. We believe that this provides a clearer picture of the economics of the company's operating results.
With that background, a non-GAPEPS for the second quarter, 2023, was 29 cents per basic share and 25 cents per diluted share.
This compares the 33 cents per basic share and 29 cents per diluted share in the year-go period.
The decrease in adjusted EPS was driven primarily by the previously outlined product mix, inflationary pressures, and continued investment in our sales and support teams.
Any appendix you'll find a reconciliation between the gap and non-gap net income used in these calculations.
One, we've reaffirmed our guidance and have now resigned long-term contracts with our two largest customers. Our customers continue to maintain a positive outlook for the premium payment, payment, and from the current opportunity around arculus authentication and cold storage. We are bolstering our position to take advantage of growth opportunities by adding salespeople and focusing on our B2B marketing efforts. We remain thoughtful about our investments to better capture long-term value for our shareholders, and that continues to pay off.
simultaneously supporting margin, and driving growth opportunities. With that, I'd like to open it up to questions. Thank you. To ask a question, you will need to press star 11 on your telephone.
Again, that's Star 11 on your telephone to ask a question.
Please stand by while we compile the Q&A roster. Thank you for standing by. Our first question comes from the line of Reggie Smith of JP Morgan. Hey, good evening. Thanks for taking the question. Yes, my first view, you cited, I guess, macro uncertainty in the press release. I was curious if it can felt or saw any macro weakness.
a wider band if the financial outcome to the last two quarters. And that's sure if that would, if that's even accurate or the message you're trying to convey. But cheer is, you know, how you think about that. So essentially you've got a $25 million range over the last two quarters of the year, where before you had similar range over three quarters.
of performance would be following my question. Yeah, I think you may be reading too much into it from that perspective.
And if you look at where we are here to date on EBITDA, we're right about halfway to the bottom end of that range as well. So, I mean, those are the implications I wouldn't read more into it than that, other than we feel very comfortable with the ranges we've given. Just fine, I appreciate that. If I'm getting one more in, quickly. So obviously, 22 was an amazing year for you guys. It's a very difficult comp. If you were to kind of control for that, how are you thinking about the growth of the business, kind of long term? So we haven't given an updated. You know.
But more specifically, the implications around gross margins.
in the core business north of 40 with investment perhaps, mid 30s. So that's how we think about it. Perfect, thank you. Thank you. Thank you. Our next question comes from the line of John Tadaro, of Needham and Company. Great, thanks for taking my questions. Can Graff's on the contract renewal. First one here, I have two, but if we could just go back to the sales outlook for a moment without trying to dig too deep into it, as you mentioned, it does imply kind of an uptick. Are there any?
from our top clients.
Domestic expansion outside of those top clients.
international growth and FinTechs really across domestic and international and we're seeing opportunities coming in across all four of those areas and feel good about that.
Got it, great, thank you. And then just the second question, inflationary pressures were recorded as some of the gross margin decline. Would imagine from here maybe a little additional inflationary pressures, but would love to hear if there's any color there, and if we should kind of expect that new number for those margin moving forward. And continue to say and Tim, reiterate or not.
that mid 50s is the right.
range for people to be thinking about. And this quarter, we're right on that number. So the time Tim spent was around explaining the difference between second quarter of last year, and those were the examples he gave. But net net, we've been saying for a long time, we think mid 50s.
Great, thank you guys, appreciate it. Thank you, John . Thank you. Our next question comes from the line of how ghosts are be Riley. Hey guys, thanks for taking my question. My question is, you know, just been a little bit of scare in the banking sector in the back half of Q1, Q2, and I'm wondering if was there any impact of any inventory drawdown in the channel? What do you think inventory are in the right shape both at your company and with your big partners? Thanks.
Thanks, so we've certainly been watching and monitoring the activity among things like regional banks. We have not seen an impact on our business from that. We've seen, I'd say, continued strong levels of conversation across that next level of bank in the US.
And feel good about that. Citizens are a great example of a new launch which we're very proud of.
with reference to inventory levels. We don't have perfect visibility into what clients could be carrying around that. I'd say generally speaking, we've carried more inventory post COVID. We've wanted higher inventory levels of key raw material items going in.
Generally, I think we're keeping appropriate amounts of safety stock of cards on hand, and I really haven't seen a change there.
Okay, thank you. Thank you, Hal.
Thank you. Please stand by for the next question.
The next question.
Comes on the line of Chase White of Compass Point Research and Trading.
Thank you very much.
Thanks guys. So on your contract extension, you've got top two clients now extended. Is it safe to assume that the contract extension that you just announced is on similar terms when it comes to escalators and other KPIs?
Does that give you any better visibility, obviously kind of touched on this earlier, but any better visibility into early 2024 in terms of the business, and then I'll follow up after that. Thanks for the question, Chase. I'm not gonna comment on terms and conditions of the renewal except to say that
We have planned for all of the contract renewals we had coming up as part of our normal business cycle. We remain comfortable with our overall guidance in that context of all of our renewals.
for all of the contract renewals we had coming up as part of our normal business cycle. We remain comfortable with our overall guidance in the context of all of our renewals. For example, if a client sizes up a newly Stanford company,
You know, we'll give updated guidance as we move toward the end of the year here, but just having our top clients.
under contract and winning those opportunities, we think is a very important statement around our business. Yes. Yes.
That, thanks. And follow up, you know, any updates on your exchange partner for Arculus, or we'll make it here more about that.
So.
We're continuing to advance partnerships, some previously announced, some I announced today. And I continue to feel terrific about the product we've built.
the platform, the arduous roadmap, we maintain and continue to maintain a positive outlook there. Things always seem to take a little bit longer than you anticipate as you're trying to get some of these programs up and running and we continue to work through with
the exchange partner that we highlighted earlier this year around piloting the Archaeos authentication technology. So we'll forward to more updates as we move through the years as well.
Thanks guys.
Got it. Thanks guys. Thank you.
Thank you. Once again, to ask a question, please press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question.
Our next question.
comes from the line of Mark Palmer, a barren bird capital markets. Yes, good evening and thanks for taking my question. The company is throwing off a very healthy amount of cash flow, on a pretty consistent basis. What are your priorities right now with regard to the use of that cash?
And you see that your overall leverage ratios that we're gonna do in a half times, what do you think is being an optimal level of leverage that you wanna maintain as you continue to operate the business? Thank you.
Thanks, Mark. And thanks for the question. Yes, we continue to throw off significant amount of cash. As we've highlighted before, our two state of priorities are organic growth and continuing to pay down debt. And as Tim highlighted and you highlighted in your question, we've continued to lower those leverage ratios. So feel good about that when you look.
Tim's reference points were for June of last year, same time, if you go back further to when we went public, it's even further de-leveraging from that point. And we got there through a combination of paying down that and growing EBITDA and would look to continue to do both of those things.
Beyond that, it's board level conversations around capital allocation that we will continue to have and monitor on an ongoing basis.
Thank you.
Thank you. As there appear to be no further questions in queue, this does conclude today's conference call. Thank you for participating. You may now disconnect.
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