Q3 2024 CompoSecure Inc Earnings Call
Operator: Good day and thank you for standing by.
Good day and thank you for standing by welcome to accomplish secured third quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
Operator: Welcome to CompoSecure third quarter 2024 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. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.
After the speaker's presentation, there will be a question and answer session.
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Speaker Change: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Steve Fetter General Counsel. Please go ahead.
Steven Feder: I would now like to hand the conference over to your speaker today, Steve Feder, General Counsel.
Steven Feder: Please go ahead. Good morning. Thank you for joining us to review CompoSecure's third quarter 2024 financial results.
Steve Fetter: Good morning, Thank you for joining us to review cargo security third quarter 2024 financial results with me on the call is Dave Coty Executive Chairman of Cabo secure John Wilkes Chief Executive Officer, and Tim for Simmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A during this.
Steven Feder: With me on the call is Dave Cote, Executive Chairman of CompoSecure, John Wilk, Chief Executive Officer, and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A.
Steven Feder: During this 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 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 actual results to differ materially from our expectations.
Steve Fetter: 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 expect we anticipate or upcoming.
Steve Fetter: 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 actual results to differ materially from our expectations.
Steven Feder: 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 available on our Investor Relations section of our website and the SEC's website at sec.gov.
Steve Fetter: Patients 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 available on our Investor Relations section of our website and the Sec's website at SEC Dot Gov.
Steven Feder: Please note that the discussion of today's call may include certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted EPS, and free cash flow. 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 derived in accordance with U.S. GAAP and may be different from similarly titled non-GAAP measures used by other companies.
Steve Fetter: Please note that the discussion on today's call may include certain non-GAAP financial measures, including adjusted EBITDA adjusted net income adjusted EPS and free cash flow. 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.
Steve Fetter: Results of operations. These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived 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 is available in our press release and earnings presentation available on the Investor.
Steven Feder: A reconciliation of GAAP to non-GAAP is available in our press release and earnings presentation available in the investor relations section of our website. Thank you.
Steve Fetter: The relations section of our website. Thank.
David Cote: And with that said, let me turn the call over to Executive Chairman Dave Cote.
Speaker Change: Thank you and with that said, let me turn the call over to executive Chairman, Dave Cody.
David Cote: Well, it's nice to address you for the first time as Executive Chairman of CompoSecure. We were attracted to the business because it hit the six hot buttons that we use to evaluate acquisitions at Honeywell. Great position, good industry, technology differentiation, organic sales growth, inorganic sales growth and margin expansion. We do see good long term opportunity.
Dave Cody: It's nice to address you for the first time as executive chairman accomplished secure.
Speaker Change: We were attracted to the business because it hit the six hot buttons that we use to evaluate acquisitions at Honeywell.
Great position good industry technology differentiation organic sales growth in organic sales growth and margin expansion, we do see good long term opportunity.
David Cote: That being said, there's work we have to do to create a high performance culture, build our operating capability and reinvigorate organic sales growth. That work will require additional expenses. You can see it reflected in our fourth quarter estimate where we're OK on sales and lowering our adjusted EBITDA range based on a combination of performance and expenses incurred to position for the future. In our early look at 2025, it appears sales growth could be lower than it was in 2024, and EBITDA growth about the same as this year, reflecting again a combination of performance and investment for the future.
Speaker Change: That being said there is work we have to do to create a high performance culture.
Speaker Change: Build our operating capability and reinvigorate our organic sales growth that work will require additional expenses you can see it reflected in our fourth quarter estimate where we're okay on sales and lowering our adjusted EBITDA range based on a combination of performance and expenses incurred to position for that.
Speaker Change: <unk>.
And our early look at 2025, it appears sales growth could be lower than it was in 2024 and EBITA growth about the same as this year, reflecting again, a combination of performance and investment for the future.
David Cote: Naturally, we expect all the actions and investments to show results, but it does take time.
Speaker Change: Naturally we expect all the actions and investments to show results, but it does take time.
David Cote: It's the right thing to do as we establish a high-performing culture that delivers for our customers, investors, and employees.
Speaker Change: It's the right thing to do as we establish a high performing culture.
Speaker Change: It delivers for our customers investors and employees, so with that I'll turn it over to John Welch.
John Wilk: So with that, I'll turn it over to John Wilk. Thanks, Dave. And thank you for joining us for our third quarter conference call. Before discussing our results, I want to take a moment and reflect on Dave's comments, where we are as a company. First, as we've previously talked about, the Resolute transaction was important as it simplified our dual-class share structure, eliminated tax distributions, and is expected to deliver approximately $20 million more in free cash flow annually. Second, we are very pleased to have Dave Cote as our executive chairman and add several highly experienced leaders to our board.
Okay.
John Welch: Thanks, David and thank you for joining us for our third quarter conference call before discussing our results I want to take a moment and reflect on Dave's comments, where we are as a company.
John Welch: First as we previously talked about the resolute transaction was important as it simplified our dual class share structure eliminated tax distributions and is expected to deliver approximately 20 million more in free cash flow annually.
John Welch: Second we are very pleased to have Dave <unk> as our executive chairman and add several highly experienced leaders to our board.
John Wilk: Finally, this is an exciting time for the company, and we are committed to building a culture centered on high performance, driving efficiency through the CompoSecure operating system, reinvigorating the organic growth, and diversifying the business and customer base through accretive M&A. We are incredibly well aligned around these priorities and look forward to working with Dave and the expanded board to drive our continued success.
Finally, this is an exciting time for the company and we are committed to building a culture centered on high performance driving efficiency through the combo secure operating system.
John Welch: Reinvigorating, the organic growth and diversifying the business and customer base through accretive M&A.
John Welch: We are incredibly well aligned around these priorities and look forward to working with Dave and the expanded board to drive our continued success now.
John Wilk: Now on to the quarterly results. We deliver double-digit growth in net sales and adjusted EBITDA for the third quarter, driven by strong international performance, consistent sales execution, and continued demand for our innovative payment card. We had numerous high-profile customer card programs launched during the quarter, which I'll highlight in a few slides. And I'm also excited to share that we recently signed a two-year contract extension with one of our larger customers, Capital One. We believe that securing this contract extension continues to demonstrate the trust our customers place in our ability to deliver consistent, differentiated products at scale.
John Welch: Now onto the quarterly results.
John Welch: We delivered double digit growth in net sales and adjusted EBITDA for the third quarter driven by strong international performance consistent sales execution and continued demand for our innovative payment cards.
John Welch: We had numerous high profile customer card programs launched during the quarter, which I'll highlight in a few slides.
John Welch: And I'm also excited to share that we recently signed a two year contract extension with one of our larger customers capital one.
John Welch: We believe that securing this contract extension continues to demonstrate the trust our customers place in our ability to deliver.
John Welch: Consistent differentiated products at scale.
John Wilk: Net investment from Arculus, which includes revenue less direct expense, continues to trend favorably. Year-to-date total net investment was $6.5 million versus $11 million during the same period last year and remains on track to turn positive in 2025.
John Welch: Net investment from <unk>, which includes revenue less direct expense continues to trend favorably.
John Welch: Year to date total net investment was $6 $5 million versus $11 million. During the same period last year and remains on track to turn positive in 2025.
John Wilk: As mentioned in our press release earlier today, we've revised our 2024 Outlook. Net sales guidance is now expected to range between $418 million and $424 million. And adjusted EBITDA guidance is now expected to range between $148 million and $151 million to reflect the investments for future growth that Dave spoke about.
John Welch: As mentioned in our press release earlier today, we have revised our 2024 outlook net sales guidance is now expected to range between 418 and $424 million.
John Welch: And adjusted EBITDA guidance is now expected to range between 148, and 151 million to reflect the investments for future growth growth that Dave spoke about.
John Wilk: Now turning to slide four. I always like to share our company objectives as we progress throughout the year. We remain on track and have achieved several important milestones this year, including bringing key innovations to the market, such as the Mirror Card, completing a significant debt refinancing, enhancing our Board of Directors, and earning nine industry awards, including Best Security Initiative for Arculus and Best Payment Solution by a Vendor for the Echo Mirror Card.
John Welch: Now turning to slide four.
John Welch: I always like to share our company objectives as we progress throughout the year, we remain on track and have achieved several important milestones this year, including bringing key innovations to the market such as the mirror card.
John Welch: Completing a significant debt refinancing enhancing our board of directors and earning nine industry Awards, including Best Security initiative for Archeology and best payment solution by a vendor for the Echo mirror card.
John Wilk: Turning to slide five. You can see a few of the examples of exciting customer card programs that are launching this quarter. U.S. Bank Smartly, Goldman Sachs Debit, IDFC in India, HSBC in Singapore, as well as a few others.
John Welch: Turning to slide five.
John Welch: You can see a few of the examples of exciting customer card programs.
John Welch: That are launching this quarter U S Bank smartly Goldman Sachs debit Dfc in India, H SBC in Singapore, as well as a few others.
John Wilk: Looking at industry trends on slide six. Over the past three quarters, our customers have experienced sustained growth in purchase volumes and new customer acquisitions. This momentum is fueled by several factors, including a robust product refresh strategy and ongoing investments in marketing and business development. For example, Amex spotlighted their Amex Gold Card Program in their Q3 earnings. This program has become a top premium choice among millennial and Gen Z customers and features the limited edition white gold metal card that we mentioned last quarter.
Looking at industry trends on slide six.
John Welch: Over the past three quarters, our customers have experienced sustained growth in purchase volumes and new customer acquisitions.
John Welch: This momentum is fueled by several factors, including a robust product refresh strategy and ongoing investments in marketing and business developments.
John Welch: For example, Amex spotlighted their amex gold card program in their Q3 earnings.
John Welch: This program has become a top premium choice among millennial and Gen Z customers and features the limited edition White gold metal card that we mentioned last quarter.
John Wilk: On slide seven, you can see consistent messaging about the ongoing strength of both consumers and the economy, reflected in the latest earnings announcements from our customers and partners. Consumer spending remains robust, particularly in experience-based categories like travel and dining, areas ideally suited for premium cards.
John Welch: On slide seven you can see consistent messaging about the ongoing strength of both consumers and the economy reflected in our latest earnings announcements from our customers and partners.
John Welch: Consumer spending remains robust, particularly in experience based categories like travel and dining areas ideally suited for premium cards.
John Wilk: For those who may be newer to CompoSecure, I wanted to provide some general insight on payment cards and why they drive value. From a card holder standpoint, they provide a sense of quality, exclusivity, and a tactile experience that customers highly prefer. That appeal has expanded over the last 10 years. It was first driven in the high-net-worth private bank market, but has significantly expanded to the math-affluent now Gen Z and millennials. From an issuer perspective, metal cards offer a strong ROI by attracting new customers, encouraging increased card use, and top-of-wallet spend. all at a relatively low cost compared to other rewards expense in card program.
John Welch: For those who may be newer to accomplish secure I wanted to provide some general insight on payment cards and why they drive value.
John Welch: From a card horrible from a cardholder standpoint, they provide a sense of quality exclusivity and at tactile experience that customers highly prefer.
John Welch: That appeal has expanded over the last 10 years. It was first driven in the high net worth private bank market, but has significantly expanded the mass affluent now Gen Z and millennials.
From an issuer perspective metal cards offer a strong ROI by attracting new customers encouraging increased card use and top of wallet spend.
John Welch: All at a relatively low cost compared to other rewards expense in card programs.
John Wilk: On slide nine, when we look at differentiated capabilities. We believe CompoSecure is unique in this market. We developed this market from scratch over 20 years ago and have more than 20 years of experience in doing this. Intellectual property, including over 60 issued patents and another 35 pending. And we can scale to support our customer needs. Last year, we produced over 31 million metal cards alone. We believe there's simply no other company that can provide the combination of innovation and high quality products at the scale that we can offer.
John Welch: On slide nine when we look at differentiated capabilities.
John Welch: We believe comparable securities unique in this market we develop this market from scratch over 20 years ago and have more than 20 years of experience in doing this intellectual.
John Welch: Property, including over 60 issued patents and another 35 pending.
John Welch: And we can scale to support our customer needs last year, we produced over 31 million metal cards alone.
John Welch: We believe there is simply no other company that can provide a combination of innovation and high quality products at the scale that we can offer.
John Wilk: which takes me to our RQS platform on slide 10. We can add Arculous technology to any payment card to provide enhanced security for both fiat and digital assets. Arculus Authenticate can be used for login and step-up authentication to help reduce fraud and protect assets. And Arculus Cold Storage can be used to securely store and use digital assets.
John Welch: Okay.
John Welch: Which takes me to our Oculus platform on slide 10.
John Welch: We can add <unk> technology to any payment card to provide enhanced security for both Fiat and digital assets.
John Welch: Oculus authenticate can be used for logging and step up authentication to help reduce fraud and protect assets.
John Welch: And <unk> cold storage can be used to securely store and use digital assets.
Timothy Fitzsimmons: With that, I'll turn it over to Tim for more information on our financial performance.
Speaker Change: With that I'll turn it over to Tim for more information on our financial performance.
Timothy Fitzsimmons: Thank you, John, and good morning, everyone. I'll provide a more detailed overview of our Q3 2024 financial performance, and then turn it back to John before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q3, net sales increased by 11% to $107.1 million compared to $96.9 million. As John mentioned, the increase was primarily driven by our strong national growth, which more than doubled compared to the prior year as we continue to see momentum from new products. We also had a solid domestic quarter, even though it was down compared to the year-ago period.
Tim Simmons: Thank you John and good morning, everyone I will provide a more detailed overview of our Q3 2024 financial performance and then turn it back to John before we open the call for questions.
Tim Simmons: Unless stated otherwise all comparisons and variances commentary on a year over year basis.
Tim Simmons: In Q3, net sales increased by 11% to $107 1 million compared to $96 9 million as John mentioned, the increase was primarily driven by our strong national growth, which more than doubled compared to the prior year as we continue to see momentum from new products. We also have.
Tim Simmons: A solid domestic quarter, even though it was down compared to the year ago period, we expect domestic growth to rebound in the fourth quarter.
Timothy Fitzsimmons: We expect domestic growth to rebound in the fourth quarter. As mentioned, international sales performed well this quarter, up 13% or $6 million from the prior year. Gross profit for Q3 was up 13% to $26 million, compared to $22 million from the prior year, with gross margins of 52% compared to 51% in the prior year. The increase in gross margin was mainly due to favorable product mix and improved product efficiency. Adjusted EBITDA in Q3 increased by 13% to $40 million, compared to $35.5 million in the prior year, with an adjusted EBITDA margin of 37.3%, compared to 36.7% in the third quarter of 2023.
Tim Simmons: As mentioned international sales performed well this quarter up 13% or $6 million from the prior year.
Tim Simmons: Most profit for Q3 was up 13% to $26 million compared to $22 million from the prior year with gross margins of 52% compared to 51% in the prior year. The increase in gross margin was mainly due to favorable product mix and improved product efficiency.
Tim Simmons: Okay.
Tim Simmons: Adjusted EBITDA in Q3 increased by 13% to $40 million compared to $35 5 million in the prior year with an adjusted EBITDA margin of 37, 3% compared to 36, 7% in the third quarter of 2023.
Timothy Fitzsimmons: The 69 basis point increase reflects the operating leverage inherent in our business as we drive improved efficiencies and cost management. adjusted net income, which excludes the impact of non-cash fair value adjustments to the warrants, earn out, revaluations, and stock compensation was up 18% in Q3 to 26 months. As detailed in our press release today, we reported a gap net loss for the quarter driven entirely by the significant improvement to our stock price during the quarter, which led to a change in the fair value of the warrant liability, earner consideration liability, and derivative liability. These non-cash value adjustments offset net income by $108 million this quarter compared to a $6 million non-cash benefit in the year-ago period.
Ah 69 basis point increase reflects the operating leverage inherent in our business as we drive improved efficiencies and cost management.
Tim Simmons: Okay.
Tim Simmons: Adjusted net income, which excludes the impact of noncash fair value adjustments to the warrants earn out revaluations and stock compensation was up 18% in Q3 to 26 months.
Yes.
Tim Simmons: and derivative liability. These non-cash value adjustments offset net income by 108 million this quarter compared to a 6 million non-cash benefit in the year ago period.
Timothy Fitzsimmons: Our adjusted diluted EPS was $0.27 per diluted share and $0.24 per diluted share in the prior year.
Tim Simmons: Our adjusted diluted EPS was $0.27 per diluted share and $0.24 per diluted share in the prior year.
Timothy Fitzsimmons: We always like to provide you with the year-to-date results in addition to the quarter. On slide 14 and 15, you can see our year-to-date financial results, which reflect our continued growth on the top and bottom line. On that note, and as John mentioned earlier, we've revised our 2024 guidance. We now expect net sales guidance to range between $418 to $424 million, adjusted EBITDA guidance to range between $148 and $151 million. The Q4, the implied adjusted range, is $30 to $33 million, reflecting the investment to build out our M&A capability. Separately, Q4 will include one-time, non-recurring professional expenses of between $4 million to $6 million, excluded from the adjusted EBITDA rates that I just provided.
Tim Simmons: We always like to provide you with the year-to-date results in addition to the quarter. On slide 14 and 15, you can see our year-to-date financial results, which reflect our continued growth on the top and bottom line.
Tim Simmons: On that note, and as John mentioned earlier, we've revised our 2024 guidance. We now expect net sales guidance to range between 418 to 424 million, adjusted EBITDA guidance to range between 148 and 151 million.
Tim Simmons: The Q4, the implied adjusted range, is $30 to $33 million, reflecting the investment to build out our M&A capabilities.
Tim Simmons: Separately, Q4 will include one-time, non-recurring professional expenses of between four to six million, excluded from the adjusted EBITDA rates that I just provided.
Timothy Fitzsimmons: Turning to the balance sheet. As of September 30, 2024, we had $52.7 million of cash in cash equivalents and total debt of $330 million. This includes $200 million of term loan and $130 million of exchangeable notes. This compares the cash in cash equivalents of $41.2 million and total debt of $340.3 million at December 31, 2023, and cash in cash equivalents of $23.8 million and total debt of $345 million at September 30, 2023. Looking at our leverage ratios, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences.
Tim Simmons: Turning to the balance sheet, as of September 30, 2024, we had $52.7 million of cash in cash equivalents and total debt of $330 million.
Tim Simmons: This includes $200 million of term loan and $130 million of exchangeable notes.
Tim Simmons: This compares the cash and cash equivalents of $41.2 million and total data $340.3 million at December 31, 2023, and cash and cash equivalents of $23.8 million and total data $345 million at September 30, 2023.
Tim Simmons: Looking at our leverage ratios, we provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences.
Timothy Fitzsimmons: CompoSecure's secured debt leverage ratio was 1.25 times at September 30th, 2024, compared to 1.39 times at December 31st, 2023, and 1.48 times at September 30th, 2023. At September 30th, 2024, we had a bank agreement senior secured debt leverage ratio of 1.06, based on a total adjusted senior secured debt of $170 million and trailing 12-month bank adjusted EBITDA of $160 million. This compares to 1.39 times at December 31st, 2023. We'd like to mention that as a result of our recent refinancing of our credit facility, we're able to reduce our senior security deadness by cash on hand up to $30 million in this calculation.
Speaker Change: CompuSecure's Secure Debt Leverage Ratio was 1.25 times at September 30, 2024 compared to 1.39 times at December 31, 2023 and 1.48 times at September 30, 2023.
Speaker Change: At September 30, 2024, we had a bank agreement senior secured debt leverage ratio of 1.06 based on a total adjusted senior secured debt of $170 million and trailing 12-month bank adjusted EBITDA of $160 million.
Speaker Change: This compares to 1.39 times at December 31st, 2023. We'd like to mention that as a result of our recent refinancing our credit facility, we're able to reduce our senior security deadness by cash on hand up to 30 million in this calculation.
Timothy Fitzsimmons: Now turning to our cash flow statement on slide 18, you can see that the net cash provided by our operating activities year-to-date was $94 million, up 21% versus the comparable period last year.
Speaker Change: Now turning to our cash flow statement on slide 18, you can see that the net cash provided by our operating activities year to date was $94 million, up 21% versus the comparable period last year.
Timothy Fitzsimmons: I also want to take a moment to reiterate the impact of the Resolute Holdings transaction completed on September 17. As a reminder, the selling shareholders exchanged all of their Class B units for Class A shares, and Resolute acquired 49.3 million Class A shares, representing approximately 60 percent of CompoSecure's outstanding shares. Therefore, tax distributions to the former unit holders of our subsidiary LLC will no longer take place. We will pay taxes as a C-Corp going forward with the anticipation of approximately $20 million of additional free cash flow per year. At September 30, 2024, CompoSecure had 82.7 million shares outstanding, all of which were Class A shares, with the increase resulting from the Resolute Holdings transaction.
Speaker Change: I also want to take a moment to reiterate the impact of the Resolute Holdings transaction completed on September 17.
Speaker Change: As a reminder, the selling shareholders exchanged all of their Class B units for Class A shares, and Resolute acquired 49.3 million Class A shares, representing approximately 60% of Compose Secure's outstanding shares.
Speaker Change: Therefore, tax distributions to the former unit holders of our subsidiary LLC will no longer take place. We will pay taxes as a C-Corp going forward with the anticipation of approximately $20 million of additional free cash flow per year.
Speaker Change: At September 30, 2024, Compost Secure had 82.7 million shares outstanding, all of which were Class A shares, with the increase resulting from the Resolute Holdings transaction.
John Wilk: I'll now turn it back to John to provide closing remarks. Thank you, Tim.
Speaker Change: I'll now turn it back to John to provide closing remarks.
John Wilk: As we are two months from closing out the year, I want to take the opportunity to provide some early thoughts on 2025. You can see on page 19 some headwinds and tailwinds. As our market expands, we continue to monitor closely increased competition, as well as the use of digital wallets. In addition, we as many companies continue to face rising labor costs and competition for top talent. in addition to some global uncertainty that still looms for 2025.
John Welch: Thank you, Tim. As we are two months from closing out the year, I want to take the opportunity to provide some early thoughts on 2025. You can see on page 19 some headwinds and tailwinds.
John Welch: As our market expands, we continue to monitor closely, increase competition, as well as the use of digital wallets.
John Welch: In addition, we as many companies continue to face rising labor costs and competition for top talent.
John Welch: in addition to some global uncertainty that still looms for 2025.
John Wilk: When we look at the tailwinds heading into 2025, we've got strong long-term contracts, solid backlog, and confidence in the metal card market supported by positive customer sentiment. With a growing focus on fraud reduction, we see opportunities to make an impact with Arculous Authenticate, and we plan to continue our commitment to innovation with a robust pipeline. We also anticipate greater supply chain stability, enabling more consistent material costs, and expect strong cash flow to support business diversification and growth through accretive M&A activities.
John Welch: When we look at the tailwinds heading into 2025, we've got strong long-term contracts, solid backlog and confidence in the metal card market supported by positive customer sentiment.
John Welch: With a growing focus on fraud reduction, we see opportunities to make an impact with Arculus Authenticate, and we plan to continue our commitment to innovation with a robust pipeline.
John Welch: We also anticipate greater supply chain stability, enabling more consistent material costs, and expect strong cash flow to support business diversification and growth through accretive M&A activity.
John Wilk: I want to conclude by highlighting a few key points we covered today. We delivered strong results with growth on both the top and bottom line, driven by international performance and consistent sales execution, and we signed a two-year contract extension with one of our larger customers. Our customers are reporting sustained growth and commitment to ongoing marketing investment for premium card programs, which reaffirms our belief in a strong, growing market for metal payment cards. Arculus net investment continues to trend favorably and we remain on track for Arculus to turn profitable in 2025.
John Welch: I want to conclude by highlighting a few key points we covered today.
John Welch: We delivered strong results with growth on both the top and bottom line driven by international performance and consistent sales execution, and we signed a two-year contract extension with one of our larger customers.
John Welch: Our customers are reporting sustained growth and commitment to ongoing marketing investment for premium card programs, which reaffirms our belief in a strong growing market for metal payment cards.
John Welch: Arculas Net Investment continues to trend favorably and we remain on track for Arculas to turn profitable in 2025.
John Wilk: With the addition of Dave Cote as our Executive Chairman and new prominent leaders on the board, we are well equipped to continue driving organic growth, maximizing operating efficiencies in the business, and pursuing new strategic growth opportunities through M&A.
John Welch: With the addition of Dave Cody as our executive chairman and new prominent leaders on the board, we are well-equipped to continue driving organic growth, maximizing operating efficiencies in the business, and pursuing new strategic growth opportunities through M&A.
Operator: With that, I'd like to open up the call for Q&A. 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. Please stand by while we compile the Q&A roster.
Speaker Change: With that, I'd like to open up the call for Q&A.
Speaker Change: Thank you. As a reminder to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 11 again.
Please stand by while we compile the Q&A roster.
John Todaro: Our first question comes from the line of John Todaro from Needham & Cote. Hey, guys. Thanks for taking my question, and congrats on all the progress that we've seen over the last quarter.
Speaker Change: Our first question comes from the line of John Todaro from Needham & Co.
John Todaro: Hey guys, thanks for taking my question and congrats on all the progress that we've seen over the last quarter.
John Todaro: I guess first, if I could get into, one, can you just give us a little bit better sense on M&A, whether that would be focused on the supplier side to grow margin, or are we talking more different revenue opportunities with different business segments?
John Todaro: I guess first, if I could get into, one, can you just give us a little bit better sense on M&A, whether that would be focused on the supplier side to grow margin, or are we talking more different revenue opportunities with different business segments?
David Cote: And then second, I would love to get David's view on visual authentication in Arculous and where he kind of sees that business long-term and any kind of strategy there.
John Todaro: And then second, I would love to get David's view on visual authentication in Arculus and where he kind of sees that business long-term and any kind of strategy there.
John Todaro: Thanks, John.
John Wilk: I'll take the first one first. So when we think about M&A, right, we've talked about looking really up and down the value chain. Think about things that could be close in to things that we do today, to things adjacent to what we do today, or things that Compo's expertise would, you know, sort of be well aligned to, and or things that fall into Dave's wheelhouse and his experience set. So we are looking sort of up and down the value chain, but it's still early for us in terms of talking more specifically than that.
Speaker Change: Thanks, John. I'll take the first one first. So, when we think about M&A,
Speaker Change: Right? We've talked about looking really up and down the value chain. Think about things that could be close in to things that we do today, to things adjacent to what we do today, or things that COMPO's expertise would, you know, sort of be well aligned to.
Speaker Change: and or things that fall into Dave's wheelhouse and his experience set. So we are looking sort of up and down the value chain, but it's still early for us.
in terms of talking more specifically than that.
David Cote: And with that, I'll let Dave answer around Arculus Authenticate and that technology in general. When it comes to Oculus, I'd say for a technology neophyte like me, it takes a little bit of work in the beginning to try to understand what exactly is it doing. Once you do, it's actually pretty impressive. So the technology's there. We spent a lot of money to develop it. I like what it looks like.
Dave Cody: And with that, I'll let Dave answer around Arculus, Authenticate, and that technology in general. Yeah, when it comes to Oculus, I'd say for a technology neophyte like me, it takes a little bit of work in the beginning to try to understand what exactly is it doing.
Once you do, it's actually pretty impressive.
Dave Cody: So the technology is there, we spent a lot of money to develop it, I like what it looks like.
David Cote: The thing that we need to do a better job with is the go-to-market and having customers internalize what's there and how they can use it to save money themselves, just preventing fraud. So that's part of the thing that we have to solve here is how do we do that. But I like the technology. Great.
Dave Cody: The thing that we need to do a better job with is the go-to-market and having customers internalize what's there and how they can use it to save money themselves, just preventing fraud.
Dave Cody: So that's part of the thing that we have to solve here is how do we do that? But I like the technology.
Operator: Thank you both. Appreciate it. Thank you.
Great, thank you both, appreciate it.
Thank you. Thank you.
Thank you. One moment for our next question.
Cassie Chan: Our next question comes from the line of Cassie Chan from Bank of America. Hey guys, thanks for taking my question. I guess just wanted to ask on the implied fourth quarter guide that you guys gave, can you just give a little bit more color as to, you know, obviously it implies a pretty significant deceleration versus the third quarter relative to the 11% revenue growth. And just any, you know, expectations around the international versus domestic piece, obviously international saw really strong growth. Are you expecting that to carry over into the fourth quarter as well?
Speaker Change: Our next question comes from the line of Cassie Chan from Bank of America.
Hey guys, thanks for taking my question.
Speaker Change: I guess just wanted to ask on the implied fourth quarter guide that you guys gave, can you just give a little bit more color as to, you know, obviously it implies a pretty significant deceleration versus the third quarter relative to the 11% revenue growth and just any, you know, expectations around the international versus domestic piece, obviously international saw a really strong growth, are you expecting that to carry over into the fourth quarter as well? And then I have a follow-up on free cash flow, thank you.
Cassie Chan: And then I have a follow up on free cash flow.
Cassie Chan: Thank you. Thanks, Cassie.
Timothy Fitzsimmons: So, when we step back and look at the year, right, we had guided at the start of the year 408 to 428. Our updated guide is 418 to 424, just reflective of, you know, where we think we finished the year. Fourth quarter for us, as you look at last year, you know, you see some down relative to Q3, and that's not abnormal for us. So, you know, finishing up, we think overall, you know, above the midpoint of where we guided for the year.
Speaker Change: Thanks Cassie. So when we step back and look at the year, right, we had guided at the start of the year 408 to 428.
Speaker Change: you know, where we think we finish the year. Fourth quarter for us, as you look at last year, you know, you see some down relative to Q3, and that's not abnormal for us. So, you know, finishing up, we think,
Speaker Change: overall, you know, above the midpoint of where we got in for the year.
Timothy Fitzsimmons: And on the international side, yeah, we definitely saw a strong third quarter. What I've said is international will just be lumpier than the domestic business, and think about international for the year, right, at approximately 20%. Think of that range, 17 to 23, given where we started the year. I've said last quarter, you know, think of it on the perhaps the lower end of that range. So, you know, a nice recovery in terms of international performance in Q2, Q3, but we'll always see some volatility in that number.
Speaker Change: And on the international side, yeah, we definitely saw a strong.
Speaker Change: Third quarter, what I've said is International will just be lumpier than the domestic business and think about international
For the year
right at approximately 20% think of that range 17 to
Speaker Change: given where we started the year. I've said last quarter, think of it on the perhaps the lower end of that range. So a nice recovery in terms of international performance in Q2, Q3, but we'll always see some volatility in that number.
Cassie Chan: Okay, that's helpful. And then I guess just on free cash flow, you know, just anything about what's driving that. And then obviously, the Resolute Investment helped unlock another $20 million.
Speaker Change: Okay, that's helpful. And then I guess just on free cash flow, you know, just anything about what's driving that. And then obviously, the Resolute Investment helped unlock another $20 million. I guess what free cash flow growth could look like going forward in the future as well, what leverage do you have there? Thank you.
Timothy Fitzsimmons: I guess what free cash flow growth could look like going forward in the future as well, what levers you have there. Thank you.
Timothy Fitzsimmons: So Cassie, we haven't given a forward, you know, free cash flow forecast. What we've given is the increase that we believe we'll see because of the Resolute transaction. And I think we talked last time about. The levers that drive it with the reduced tax distributions, increased actual cash tax payments with the tax receivable agreement, the net of those three being an increase of, we believe, $20 million a year annually in free cash flow that we can use to reinvest back in the business.
Speaker Change: So Cassie, we haven't given a forward, you know, free cash flow forecast. What we've given is the increase that we believe we'll see because of the Resolute Transaction and I think we talked last time about
the levers that drive it with
Speaker Change: The, you know, reduce tax distributions, increase actual cash tax payments with the tax receivable agreement. The net of those three being an increase of, we believe, $20 million a year annually in free cash flow that we can use to reinvest back into business.
Cassie Chan: Got it. Thank you.
Got it. Thank you.
Thank you. One moment for our next question.
Jacob Stephan: Our next question comes from the line of Jacob Stephan from Lake Street Capital Markets. Thanks for taking the questions. Congrats on all the progress you guys have made in the last quarter here as well. Just kind of wanted to ask on Arculous a little bit, obviously, you know, some some positive commentary on track to turn positive in 25. But over the last kind of week or so here, we've seen some announcements on a Capital One visa, kind of fraud prevention. And, you know, how does how does Arculous currently stack up? And, you know, is there anything that you guys can do to differentiate yourself there in this environment?
Speaker Change: Our next question comes from the line of Jacob Stefan from Lake Street Capital Markets.
Jacob Stefan: Hey guys, thanks for taking the questions. Congrats on all the progress you guys have made in the last quarter here as well.
Jacob Stefan: Just kind of wanted to ask on Arculus a little bit, obviously, you know, some some positive commentary on track to turn positive in 25, but over the last kind of week or so here, we've seen some announcements out of Capital One, Visa, kind of fraud prevention, and you know, how does how does Arculus currently stack up? And, you know, is there anything that, you know, you guys can do to differentiate yourself there in this environment?
John Wilk: Yeah, so if you look, as our understanding at the visa solution, it ties to cardholder but not individual. It doesn't solve the same fraud problems that we see in the market in terms of being able to use the two-factor authentication for step-up authentication for medium to high-risk transactions. And yes, you know, we do see other technologies out there. The benefit to Arculous, right, is it's using the FIDO standard, which we believe people are coalescing around in terms of large tech companies, Microsoft, Apple, Google, Facebook, etc. Leveraging that in a new and novel way by incorporating it into a payment card.
Speaker Change: Yeah, so if you look as our understanding at the visa solution
Speaker Change: It ties to cardholder but not individual. It doesn't solve the same.
Fraud problems that we see
Speaker Change: in the market in terms of being able to use the two-factor authentication to
People are coalescing around.
in terms of large tech companies.
Microsoft, Apple, Google, Facebook, etc.
Jacob Stefan: Leveraging that in a new and novel way by incorporating it into a payment card and Jacob We believe we're the the first and only people that are doing that You know with a FIDO authentication token at this point. So
John Wilk: And Jacob, we believe, we're the first and only people that are doing that, you know, with a FIDO authentication token at this point. So, you know, we, you know, I share Dave's comments in terms of, you know, I'm really pleased with the technology we've built. I've said, and I'll say again, you know, we want to see more progress in the market.
Speaker Change: I share Dave's comments in terms of, I'm really pleased with the technology we've built. I've said, and I'll say again, we want to see more progress in the market.
John Wilk: And when we look at the conversations we're having and the pipeline ahead, we feel good about that.
Speaker Change: When we look at the conversations we're having and the pipeline ahead, we feel good about that.
Jacob Stephan: Got it. That's helpful.
David Cote: And maybe just, if I could kind of ask a broader strategy question, you know, Dave, you've been at Compo, with Compo for a little bit here now. What are you seeing internally in the business areas that you could, you know, overall improve efficiency? Well, that's kind of a comprehensive question for me, because there's very little I ever look at in any company that I'm associated with that I don't think can be better. whether it's operations, sales, M&A. So I would point to everything just like I did at Verdiv and just like I did at Honeywell.
Speaker Change: Got it, that's helpful. And maybe just, if I could kind of ask a broader strategy question. You know, Dave, you've been at Compo, with Compo for a little bit here now. What are you seeing internally in the business areas that you could, you know, overall improve efficiency today?
Dave Cody: Well, that's kind of a comprehensive question for me because there's very little I ever look at in any company that I'm associated with that I don't think can be better.
whether it's operations, sales, M&A
Dave Cody: So, I would point to everything, just like I did at Verdive and just like I did at Honeywell. So you'll see us working on everything.
David Cote: So you'll see us working on everything. Okay. It comes back to, you know, you've heard me probably say this before, but I always say any company is just an accumulation of processes, most of them cross-functional. And if you truly believe every process can be made more efficient and more effective, Well, it gives you a lot of work to do and a lot of upside. So I feel I feel good about all the, let's say, opportunity that we have. Okay, got it.
Dave Cody: Okay. It comes back to, you know, you've heard me probably say this before, but I always say any company is just an accumulation of processes, most of them cross-functional.
Dave Cody: And if you truly believe every process can be made more efficient and more effective.
Dave Cody: Well, it gives you a lot of work to do and a lot of upside. So I feel good about all the, let's say, opportunity that we have here.
Operator: Thank you guys. Thank you.
Okay, got it. Thank you guys.
Operator: One moment for our next question.
Thank you. One moment for our next question.
Harold Goetsch: Our next question comes from the line of Harold Goetsch from B Riley Security. Good morning, guys. Hey, can I just get a little more color on the... Costs in Q4 may be ongoing for the M&A infrastructure. Can you just give us a little more detail on that? Is it an entire team of people? Is it a permanent several-million-dollar? increase in your fixed cost structure to implement your infrastructure? Give us some thoughts on that.
Speaker Change: Our next question comes from the line of Hal Gutsch from B. Reilly Securities.
Speaker Change: Good morning, guys. Hey, can I just get a little more color on the...
Speaker Change: The cost in Q4 may be ongoing for the M&A infrastructure. Can you just give us a little more detail on that? Like, is it an entire team of people? Is it a permanent several million dollar?
increase in your fixed cost structure to
implement your infrastructure. Give us some thoughts on that. Thanks.
Timothy Fitzsimmons: So how we're making investments in building out M&A capability inside this company. And yes, that starts with there were a team of folks working with Dave and Tom Knott that actually identified CompoSecure as an opportunity and led to this transaction. We have brought those resources in-house to help drive that function for this company. Yes, those would be some of the ongoing expenses that we will see. We think it's a critical investment for the future that Dave talked about earlier. In addition, there are just some one-time costs closing out the transaction. And as we look to position ourselves for future M&A.
Speaker Change: We're making investments in building out M&A capability inside this company. And yes, that starts with, there were a team of folks.
Speaker Change: working with Dave and Tom Knot that actually identified CompoSecure as an opportunity and led to this transaction. We have brought those resources in house to
Speaker Change: help drive that function for this company. Yes, those would be some of the ongoing expenses that we will see. We think it's a critical investment for the future, you know, that Dave talked about earlier. You know, in addition, there are just some one-time costs.
Speaker Change: closing out the transaction and as we look to position ourselves for future M&A.
Timothy Fitzsimmons: But the ongoing cost, would you say it's $2 to $4 million a quarter? Give us a total. We haven't broken that estimate out yet how and there's there's more in that bucket. So please don't use that as your as your guide forward. No, that would not be the right number. So. OK.
Speaker Change: But the ongoing cost, would you say it's $2 million to $4 million a quarter? Give us a thought on what it is.
Speaker Change: We haven't broken that estimate out yet how and there's there's more in that bucket so please don't use that as your as your guide forward no that would not be the right number so okay
Harold Goetsch: All right. Thank you.
Thank you.
Operator: One moment for our next question.
Thank you. One moment for our next question.
Reggie Smith: Our next question comes from the line of Reggie Smith from JPM. Hey, good morning. Thanks for taking the question. I was disconnected. And so you may have covered this already, David, but I'm curious, you mentioned the culture of excellence. And I heard the last question about the last answer rather about, you know, kind of looking at everything and cleaning things up, but curious, like, how do you define that? And if you could, you know, give us a roadmap of how cleaning that up or improving that looks, does it require, you know, different operators or like how should we think about that and how long it would take to achieve that.
Speaker Change: Our next question comes from the line of Reggie Smith from JPM.
Hey, good morning. Thanks for taking the question.
Speaker Change: I was disconnected, so you may have covered this already, David, but I'm curious, you mentioned the culture of excellence.
Speaker Change: And I heard the last question about, or the last answer, rather, about, you know, kind of looking at everything and cleaning things up. But curious, like, how do you define that? And if you could, you know, give us a roadmap of how.
Cleaning that up or improving that looks doesn't require
You know
Speaker Change: different operators or like how should we think about that and how long it would take to achieve that. Thank you. I got a follow-up question. Thanks, Reggie.
Reggie Smith: Thank you.
Reggie Smith: And I got a follow-up question.
David Cote: Thanks, Reggie. So. When we look at that kind of work, Reggie, as an example, I will continue to refer to the CompoSecure operating system. This is building on work that Dave and team did at Honeywell and have done at Vertev as well, in terms of putting in far more systematic ways at looking at improving the efficiency and effectiveness of all of the processes that we've had here. So, Reggie, if you think about it, right, we've grown from a company, when I started, we were about 90 million in revenue. This year, we're, you know, 400 million plus.
Speaker Change: When we look at that kind of work, Reggie, as an example, I will continue to refer to the Compost-Secure Operating System. This is building on work that Dave and team did at Honeywell.
and have done at Vertiv as well.
in terms of putting in
Speaker Change: far more systematic ways at looking at improving the efficiency and effectiveness of all of the processes.
Speaker Change: that we've had here. So Reggie, if you think about it, right, we've grown from a company, when I started, we were about 90 million in revenue, this year we're, you know, 400 million plus.
David Cote: Right.
David Cote: As you think about the maturing of that company and the operational processes using these tools and frameworks to drive out that efficiency and effectiveness, we're literally sitting in a conference room as we speak with value stream maps up on the walls, looking at opportunities and how we can attack them. So we look to make improvements as we move through 25 that will help margins and or reinvest back in the business to fuel our growth. But we are incredibly serious about it from our side in embracing some of these concepts and tools. Sounds like it. Appreciate that.
Speaker Change: Right as you think about the maturing of that company and the operational processes
Speaker Change: using these tools and frameworks to drive out that efficiency and effectiveness. We're literally sitting in a conference room as we speak with value stream maps up on the walls looking at
Speaker Change: opportunities and how we can attack them. So we look to make improvements as we move through.
Speaker Change: 25 that will help margins and or reinvest back into business to fuel our growth. But we are incredibly serious about it from our side in embracing some of these concepts and tools.
Sounds like it.
John Wilk: And then there was a comment or phrase in the release where they talked about, or where they mentioned opportunities and challenges. And I noticed you guys included a slide in the presentation where you called out, I think, competition in metal cards and acknowledged digital wallets. Wasn't sure if those two concepts were at all linked. Maybe talk a little bit about the challenges that are exciting you guys. Yeah, so Reggie, we highlighted both headwinds and tailwinds, and this is something stylistically, I think, that Dave has done historically at Honeywell, Invertiv, and other places, and likes to, you know, as we're ending a year, starting a year, sort of help give a state of the state and what's happening.
appreciate that and then there was a there was a
Speaker Change: a comment or phrase in the release where they talked about or they mentioned opportunities and and uh challenges
Speaker Change: and I noticed you guys included a slide in the presentation when you called out
Speaker Change: I think competition in metal cards and acknowledged digital wallets. Wasn't sure if those two concepts were at all linked. Maybe talk a little bit about the challenges that are exciting you guys. Thanks.
Speaker Change: Yeah, so Reggie, we highlighted both headwinds and tailwinds, and this is something stylistically I think that Dave has done historically at Honeywell and Vertiv and other places and likes to
Speaker Change: you know, as we're ending a year, starting a year, sort of help give a state of the state and what's happening. So we try to outline both on that page. And, you know, we've talked, I think, almost every time about some of the things on the right side in terms of tailwinds, which is
John Wilk: So we tried to outline both on that page, and, you know, we've talked, I think, almost every time about some of the things on the right side in terms of tailwinds, which is competition, competitors that are out there. We've been competing for the last four or five years with a number of the traditional card manufacturers and others, and it's something we continue to monitor closely, you know, as we have in past years, and the work that we're doing around the operating system, right, a lot of that puts us in a more competitive position over time.
Speaker Change: competition and competitors that are out there. We've been competing for last four or five years with a number of the traditional card manufacturers and others, and it's something we continue to monitor closely, you know, as we have in past years.
Speaker Change: the work that we're doing around the operating system, right? A lot of that puts us
in a more competitive position over time.
Reggie Smith: The digital wallet comment is one that, you know, when people ask me what keeps you up at night, it's something we're always watching, Reggie, but my conclusions about digital wallets haven't changed. Cards are going to be around a long time in terms of, you know, what we've seen from consumers. A lot of that fueled by tap to pay and its capability at point of sale. And that makes sense. And I agree. I think cards will be around for a while as well. Thanks for taking the questions. Appreciate it.
Speaker Change: The digital wallet comment is one that, you know, if people ask me, what keeps you up at night?
Speaker Change: It's something we're always watching, Reggie. But my conclusions about digital wallets haven't changed. Cards are gonna be around a long time in terms of what we've seen from consumers. A lot of that fueled by tap to pay and its capability at point of sale.
Speaker Change: I agree. I think cards will be around for a while as well. Thanks for taking the questions. Appreciate it. Thanks, Reggie.
Operator: Thanks, Reggie. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: [music].