Q3 2023 CompoSecure Inc Earnings Call

Yeah.

Ladies and gentlemen, thank you for standing by.

Welcome to accomplish the curious third quarter 'twenty 'twenty earnings call.

I'd now like to hand, the call over to accomplish with your external Investor Relations adviser.

Sean Mansouri with elevate IR. Please go ahead.

Good afternoon, and thank you for joining us.

With me on the call is John Wilke combo secures Chief Executive Officer.

And then Chief Financial Officer.

I will begin with prepared remarks, and then we will open the call for Q&A.

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.

Forward looking statements may often be identified with words, such as we'd 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.

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, and other reports filed with the SEC.

Which are available on the Investor Relations section of our website at combo secure dot com and on the SEC website at SEC Gov.

Please note that the discussion on today's call include certain non-GAAP financial measures, 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.

These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures delivered in accordance with U S. GAAP and may be different from similarly, titled 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 on the Investor Relations section of our website.

Thank you and with that let me turn the call over to John to discuss our third quarter results.

Thank you, Sean and good afternoon, everyone and thank you for joining us for our third quarter conference call.

During the quarter, our domestic business once again achieved record results.

Exceeding our all time that sales from the third quarter of last year.

Demonstrating the resiliency and demand for our premium metal payment cards.

However, global economic uncertainty weighed on results across our smaller international business, which we will review later in the call.

Despite this we are on track to achieve the most successful year in our company's history in terms of net sales adjusted EBITDA and operating cash flow.

Now to summarize the quarter on slide three.

Net sales in the quarter were $97 million compared to $103 million in the year prior.

As I mentioned, a moment ago. The decrease was primarily attributable to lower international sales, which offset the record results we delivered domestically.

Year to date, our net sales were up 2% to $291 million compared to the prior year.

Adjusted EBITDA increased 9% to $35 million compared to $33 million in our prior year in part due to our operating expense control.

Looking at card issuer trends.

Customer feedback and broader industry sentiment indicate that the demand for premium metal cards remains strong and they continue to communicate a positive outlook. Despite the economic uncertainty.

That said select customers are more tightly managing their inventory levels, which has impacted order volumes in both Q3 and Q4.

Given these factors we are adjusting our full year sales guidance for 2023 to a range of 386 million to $392 million.

And expect adjusted EBITDA to range between $141 million and $146 million.

Which captures the low end of our original guidance for adjusted EBITDA issued earlier this year.

Regarding <unk>, we projected that net investment to improve from last year, which was $21 million.

Due to the combination of revenue growth and optimizing operating cost. We're pacing ahead of that goal and now anticipate that net investment for 2023 to be approximately $15 million.

Okay.

Turning to slide four.

That note I want to take.

And highlight a few.

Key developments in the business.

For the quarter several of our customers launched new premium metal card programs.

Including Amex with Hilton aspire.

Amex with SaaS elite and Axis Magnus Bank in India to name a few.

We also continued our BTB marketing initiatives and product enhancements.

For both <unk> cold storage and Oculus authenticate.

With a focus on lead generation through industry conferences and digital marketing.

Our efforts have recently begun to show promising developments, while our sales team worked through a growing pipeline of prospective partnerships.

Turning to slide five for some further details on our keyless enhancements.

Two things I want to highlight.

<unk> authenticate hardware past keys received official designation as a Microsoft Phyto two security key vendor.

Now compatible with the Microsoft ecosystem offering users, a reliable and user friendly password less authentication solution.

Oculus cold storage now supports 95% of crypto by market cap and has added several key enhancements, including support for custom tokens.

Three additional chains of cerium polygon and finance smart chain.

We expanded our keyless integration with meta mask and.

Proving security by enabling the <unk> card as assigning device for safe offline private key storage.

And cross chain defy capabilities were enhanced via wallet connect across major change as well.

On slide six I referred to card issuer trends earlier I'd like to provide some more insight.

You can see that our largest customers continue to experience purchase volume growth.

While the trend has moderated over the past several quarters, it still remains very healthy and well above pre pandemic levels.

On the right hand side of the slide you can see that American Express once again reported strong card acquisition numbers this quarter with $2 9 million new proprietary cards during the quarter.

In addition, they have indicated they'll continue to spend on marketing given the quality of new card acquisitions and great demand for their products.

Keep in mind. This is all publicly available information, we're providing the chart to give some additional insight and understanding based on what our customers are saying publicly.

On slide seven.

Looking at the overall payment market with.

We highlighted several customer and partner partner quotes.

And the themes that we're seeing first we're hearing positive sentiment related to market growth, including consumer demand for products and continued marketing investment to drive customer acquisition.

Second our cautious optimism remains despite global economic uncertainty in part due to a relatively strong U S labor market and inflation levels moderating slightly domestically.

These factors point towards continued growth for the premium payment card market.

I'll now hand, it over to Tim to review our financials before returning for closing remarks.

Thanks, John and good afternoon, everyone I will provide a more detailed overview of our Q3 2023 financial performance and then turn it back to John before we open the call for questions.

Unless stated otherwise all comparisons in variance commentary on a year over year basis.

Net sales were $96 9 million compared to $103 3 million domestic sales increased modestly compared to the record year ago period, which was offset by lower international sales, which is a more variable market due to global economic uncertainty customer mix and a smaller sales base.

Gross margin for the quarter was 51% compared to 60% in the prior year.

The decrease was primarily due to lower production efficiencies from new card constructions as well as an impact from inflationary pressures on wages and materials.

Net income for the quarter increased 74% to $38 million compared to $21 9 million in the prior year. The increase was driven by prudent operating expense controls as reflected by a reduction in our selling general and administrative expenses as well as changes to the fair value of the warrants.

Earn out consideration and derivative liabilities.

Adjusted EBITDA in Q3 increased 9% to $35 5 million compared to $32 7 million in the prior year and our adjusted EBITDA margin increased approximately 500 basis points to 37% compared to 32% in the third quarter of 2022.

The increase in adjusted EBITDA was driven by the aforementioned operating expense controls.

On Slide 10, you can see our year to date performance net sales were up 2% to $297 million driven by our strong sales execution and the resilience of our domestic market, partially offset by lower international sales.

Year to date gross margin was 54% compared to 60% in the prior year due to the lower production efficiency and inflationary pressure from labor and materials.

Net income for the first nine months was $81 5 million compared to $109 5 million in the prior year. The lower net income was driven primarily by the noncash changes to the fair value of the warrant earn out and derivative liabilities.

Adjusted EBITDA for the first nine months increased 2% to $107 9 million.

Compared to $105 6 million in the prior year.

<unk> EBITDA margin for the first nine months of 23, 2023 was 37%, which was flat compared to the prior year.

On slide 11, we'll take a closer look at the split between domestic and international sales you can see that our domestic sales are holding strong. Despite comping record results from last year and increased modestly to $84 4 million in the third quarter of 2023 compared to the third quarter of 2022.

International net sales for the quarter of 2023 were $12 6 million with the decrease primarily due to the global economic uncertainty.

Moving on to the balance sheet, we had cash and cash equivalents of $23 8 million and total debt of $345 million, which includes $215 million of term loan and $130 million of exchangeable notes. This resulted in a total net debt of $321 2 million.

As always we want to provide both our overall debt leverage and our bank agreement secured debt leverage as our bank agreement is calculated with slight differences at.

At September 30, our overall leverage ratio was 231 times based on a net debt of $321 2 million and a trailing 12 month adjusted EBITDA of $138 9 million.

This compares to $2 83 times at September 32002, with the improvement driven by paying down debt and increased TTM adjusted EBITDA.

At September 32023, we had a bank agreement secured debt leverage ratio of 148 times based on a total secured debt of $215 million and trailing 12 month bank adjusted EBITDA of $145 5 million.

This compares to one nine times at September 32022.

I want to turn now to the earnings per share as a reminder, our method under GAAP for calculating basic and diluted EPS allows us to allocate changes and adjustments of mark to market instruments, among the public company and the operating subsidiaries to better reflect the actual economic impact on the conversion of <unk>.

Such instruments on our net income and a per share basis.

GAAP EPS for the three months ended September 32023 was 39 per basic share and 34 per diluted share. This compares to <unk> 18 per basic and diluted share in the year ago period.

The increase was primarily driven by changes to the fair value of the warrants earn out consideration and derivative liabilities, primarily driven by the change in our stock price.

You can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the up sea structure and the shares that are included in the basic and diluted calculations.

Turning to slide 14, you can see how we are tracking with GAAP EPS for the year to date, which now puts us at 86 per basic share and 75 per diluted share.

This compares to $1 two and 94.

Basic and diluted share respectively in the year ago period.

Again this was impacted by the same factors I outlined on the previous slide as noncash adjustments can have either a positive or negative impact on net income.

On Slide 15, we're also providing a non-GAAP adjusted net income and adjusted EPS, which excludes the impact of the noncash fair value adjustments for warrants earn out revaluations and stock comp we believe.

This provides a clearer picture of the economics of the Companys operating results.

With that background, our non-GAAP EPS for the third quarter 2023 was 27 per basic share and 24 per diluted share. This compares to 26 per basic share and 22 cents per diluted share in the year ago period, and the appendix you will find a reconciliation between the.

GAAP and the non-GAAP net income used in these calculations.

Turning to slide 16, adjusted EPS for the nine months ended September 32023 puts us at <unk> 83 per basic share and 72 cents per diluted share. This compares to 86.

74.

For basic and diluted share respectively in the year ago period.

I'll now turn it back to John to discuss our guidance and give closing remarks.

Thanks, Tim.

Now turning to slide 17 as I previously stated we are revising our 2023 net sales guidance and now expect it to range between 386 and $392 million.

And we expect adjusted EBITDA to range between $141 million to $146 million, which still captures the low end of our previously issued adjusted EBITDA guidance.

In closing I want to reiterate a few key takeaways from our call today.

We're on track to achieve the most successful year in our company's history in terms of net sales adjusted EBITDA and operating cash flow.

Even following a record year that saw 41% revenue growth and 33% adjusted EBITDA growth.

During the third quarter, our domestic business once again achieved record results.

Demonstrating the resiliency and demand for our metal payment cards.

Although select customers have begun to.

Manage tighter inventory levels and macro uncertainty has weighed on the international results customer sentiment regarding consumer demand remains positive.

We continue to expand our marketing and sales capabilities at both our payment card and <unk> offerings.

While investing to deliver unique innovations to the market.

We remain focused on optimizing our balance sheet.

As reflected by another reduction in debt this quarter.

And I remind you of our long term contract renewals that we put in place with our two largest customers that we discussed in our last quarter.

With all of that we believe we are well positioned to execute on our growth and profitability objectives as we move forward.

With that I'd like to open up the call to Q&A.

Thank you, ladies and gentlemen to ask a question at this time you wanted to Westar one one on your telephone.

Plan aimed to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

And our first question coming from the line of.

John <unk> with Needham Your line is open.

Great. Thanks for taking my question and congrats guys on a record year.

So John obviously, you build the business for quite some time just wondering on.

The macro uncertainty and weakness if we could get a bit more color on.

Kind of how far ahead card issuance typically manage their inventory any kind of stateline our thoughts on 2024 trends and then I have one more question on the authentication side.

Sure so.

Typically.

Customers can keep anywhere from.

Let's say three to six months of inventory, John and at certain times stalled tweak that up slightly at certain time sell tweak it down slightly.

And that has the potential to impact any given quarter, we think that is call it transitional type.

Impact as that happens over time, they will adjust levels up or down.

On the international front, we've talked about two things one just generally that part of our business is made up by.

Yes.

Number of customers smaller customers, but more of them and generally that has more variability.

With some of the economic uncertainty on a global basis right now we just see.

Modest slowdown in that business.

But it will still we think perform well for the year coming in right around 20%.

Total revenue for the year, which is our long term guide and that's where we ultimately think it comes in but it will be slightly down from last year.

Got it and then just one more on digital authentication.

So.

In the past in his last earnings call you, specifically called out some of the non crypto opportunities on that side has been quite a large opportunity set. So just curious kind of how that shaped up quarter over quarter.

Any kind of update on how you're framing the cold storage versus the <unk> authentication non crypto.

Continue to remain very excited about the opportunities in the authentication space having.

Meaningful conversations across large institutions and syntax.

Domestically and internationally right now.

The movement of our implementation of these as I've mentioned in prior quarters.

<unk> takes longer and it requires sort of technology change within institutions.

It is taking some time, but I'd say those conversations.

Continue to go very well and in our view, we're starting to see that in the.

The overall sort of net investment numbers for Oculus, which are heading in the direction.

That we want.

Great. Thanks.

Thank you John.

Thank you.

Our next question.

And our next question coming from the line of.

Reggie Smith with Jpmorgan. Your line is now open.

Hey, everyone. This is Charlie on for Ed Thanks for taking the question.

<unk>.

I'm curious if we can dig in a little bit more on the international slowdown.

Was there any specific geographies that pulled back and our.

Are there any large money center banks out there that could be an opportunity moving forward or is that not so much an option.

Thanks.

Yeah.

Yes, so Charlie thanks for the question.

I'd say we.

We saw some of those impacts.

Really across Europe.

And a little bit in Asia.

To answer the second part of the question.

Yes, we think.

We opened up new business with a couple of money center banks in Europe last quarter, and expect those kinds of opportunities to bear fruit.

In our international business over time. So it is just a more variable base for us given.

Yes, it's more spread out more customers.

Dealing with.

Different economic conditions within different countries and regions.

Got it that's helpful.

And if I can sneak in one more sure is there any do you see any risk to that sentiment spreading to the U S.

And looking back.

Any cracks there may be subtle signs that could've predicted slowdown I mean, you mentioned the variability but.

Any color there would be helpful. Thanks.

Yes, Charlie.

We're not seeing it domestically as.

Evidenced by.

What we announced today, which was third quarter of last year was our strongest domestic quarter ever we beat that this year.

And our view of really strong domestic quarter, we as I mentioned renewed contracts with our two largest customers that was one of the big outstanding questions for us as we moved into this year.

And as I mentioned earlier, we couldnt be.

More pleased with that.

As we look at.

Whether or not we could have predicted it.

I think youre seeing across a variety of industries.

Not.

Yes, we're still seeing consumer spending we are still seeing resiliency there.

Seeing a little bit of cautiousness in this point about inventory management, I think youre seeing across a variety of industries not necessarily specific to card manufacturing, which is not a major pullback, but just.

Improving cost controls in an uncertain world. So no we don't see that impact domestically.

And.

Hindsight is 2020, but.

But we think we're seeing this impact not just specific to card manufacturing.

That's great. Thanks for taking the questions.

I appreciate it.

Thank you.

Hi, I'm on for next question.

Our next question coming from the line of.

Hello goes with B Riley your line is now open.

Hey, John can you just give us your thoughts on maybe where you think inventories in the channel are now after some of this cautiousness or is it.

The quarter for you guys. This was good domestically at the channel inventories were high it's probably why it was.

Not not meeting your expectations this inventory drawdown, but what do you think inventories are in.

Right now thank you.

Thanks Al we don't have.

Visibility into inventory levels across all of our customers data that they.

Generally hold tight across a few.

We do have some visibility.

But it's.

I think ranges.

Towards the areas that I talked about could be three to six three to seven months of inventory that they can dial up or down.

Depending on how they're feeling going into end of year.

Okay.

Thank you very much.

Thank you Hal.

Thank you.

Our next question.

And our next question coming from the line of.

Chase White with Compass point research and trading LLC. Your line is now open.

Thanks for taking the question guys.

So on the updated guidance what factors would drive you to the top end of the range in revenues and EBITDA versus the bottom end.

For us.

It's largely locked from.

Orders and production there is sort of a few things that we need to close out that would take you to the higher end of the range and then.

Just from a production standpoint.

Being able to.

Run without.

Without challenges and one of the things that we talked about here briefly.

What I mentioned is.

As we innovate and so as we deliver new products to the market that we're excited about.

We will see some up and down in our margin.

Title, we launched new products.

We'll see.

Small bumps down in that other times youll see small bumps up.

But we will continue to deliver innovative new products that is the lifeblood of this company and helps drive our future growth and so.

Making sure.

That is those products are ramping up their running through efficiently in the factory. So closing out a few orders here.

And then making sure that we run efficiently between now and the end of the year would deliver us closer to the high end of the ranges.

Got it that's helpful and can you just remind us what needs to happen before you are able to return capital to shareholders, whether it be buybacks or dividends or both.

Chase, it's I appreciate the question on capital allocation.

<unk>.

We've said specifically, our two priorities are organic growth and paying down debt.

And beyond that we have conversations at the board as you can imagine regarding capital allocation and what we might do in land and.

As.

As the board, where it make decisions that would alter those priorities, we'll certainly let you and the market know.

But at this point those are still our priorities.

Got it thank you.

Thank you.

Thank you.

And as there appear to be no further questions in queue. This does conclude today's conference call. Thank you all for participating you may now disconnect.

Okay.

[music].

Okay.

Okay.

Okay.

[music].

Yes.

[music].

Sure.

[music].