Q4 2024 CompoSecure Inc Earnings Call
Hello, Welcome to accomplish secure Inc, fourth quarter and for year 'twenty 'twenty four 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 on your telephone you wouldn't hear automated message advising your hand is raised.
To withdraw your question. Please press star one again.
I would now like to turn the conference over to Steven better General Counsel and corporate Secretary for Koppel secure you may begin.
Good afternoon, and thank you for joining us.
With me on the call is Dave Coty Executive Chairman accomplish secure John <unk>, Chief Executive Officer, and Tim <unk>, Chief Financial Officer. They will begin with prepared remarks, and then we will open the call for Q&A during.
During the call we will make statements relating 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.
Really from our expectations for a discussion of risks and uncertainties that could cause actual results to differ materially from our expectations.
Please refer to the information in our annual report on Form 10-K, and other reports filed with the SEC available on the IR section of our website and on the Sec's website at SEC Gov. Please.
Please note that today's discussion will include certain non-GAAP financial measures, including adjusted EBITDA adjusted net income adjusted EPS net debt 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 a reconciliation of GAAP to non-GAAP measures is available in our press release.
And earnings presentation available on the IR section of our website. Thank you and with that said, let me turn the call over to executive Chairman Dave Cody.
Good afternoon, everyone over the past several months I've spent considerable time with the team.
An even deeper appreciation for the strength of this business its leadership in metal credit cards.
Strong culture of innovation and most importantly, the significant long term potential of the business.
We've taken foundational steps in the last six months to position the company for long term success.
We've initiated investments to build a high performance culture and strengthen our operating capabilities.
Began implementing the accomplish secure operating system, where C O S to enhance efficiency and execution across all areas of the business.
And importantly, we're reinvigorating our organic growth potential.
Given we have less than 1% penetration of the current pad market.
And the financial and brand benefits to a card issuer or a huge the upside for us is significant.
We believe these investments will drive meaningful results over time, enhancing our ability to foster a culture of excellence that delivers for our customers employees and investors.
With that I'll turn it over to John.
Thanks, Greg and thank you all for joining us for our fourth quarter and full year conference call.
2024 was a foundational year for a complex secure we.
We delivered 8% growth in net sales with robust free cash flow generation, while continuing to drive product innovation and expand our business internationally.
We also materially improved our balance sheet last year with a 60% reduction in net debt down to $120 million.
Our fourth quarter net sales were essentially flat.
Fourth quarter, adjusted EBITDA was down 10%, reflecting the investments we are making in our business to ignite organic growth and drive improved operating efficiencies throughout the organization.
We're also excited to announce our first quarter a positive net contribution for Arcturus in Q4.
Looking ahead, we continue to focus on accelerating payment card organic growth.
Driving efficiency through the copper secure operating system.
Gaining additional traction with our keyless.
And delivering accretive M&A.
We took a big step in establishing our foundation for M&A by completing the spinoff of breath to route holdings on February 28.
Positioning our business for accelerated growth and diversification of revenue.
For the upcoming year, we expect mid single digit growth for both net sales and adjusted EBITDA.
With sales momentum building through the year.
Our adjusted EBITDA expectations also include the payment of the new Resolute Holdings management fee.
For 2025.
And 2024 on a pro forma basis.
On slide four Youll see that we had several high profile metal payment card launches around the globe.
Both traditional banks and syntax.
Launches included.
City American Airlines card, which represents our first domestic metal card program with Citi.
Barclays The private bank card in the UK and Jetblue co branded card in the U S.
In addition, other examples included HSBC from capital on top among others.
On slide five you can see copper secures largest customers continue to report purchase volume growth year after year year over year.
Even in the face of economic uncertainty around tariffs.
On slide six.
We also see continued strength of the payment card industry supported by healthy consumer spending and demand for premium products and the commentary from these players.
As an example capital one continues to see strong new account growth.
Domestic card business with increased investment in premium benefits and differentiated experiences.
Meanwhile, visa and Mastercard highlight value added services fraud prevention solutions, and the resilience of consumer spending even amid economic fluctuations.
For those of you new to our story on slide seven.
We showcase why metal cards continue to gain traction.
Beyond the aesthetics metal cards deliver real business value.
Enhancing issuer branding driving higher customer acquisition, and increasing top of wallet positioning.
Despite the introduction of digital wallets over the past decade payment cards remain the preferred choice for consumers.
On slide eight we highlight the archaeology security and authentication solutions.
<unk> authenticate provides seamless multi factor authentication for secure logins and fraud prevention.
Oculus cold storage enables users to safeguard their digital asset keys with advanced encryption.
As I mentioned earlier, we're pleased to report that Q4 marked our first quarter a positive net contribution from arcturus.
And we remain well positioned to achieve a net positive target for <unk> for the full year of 2025.
On a full year basis for 2020 for Arcturus generated $10 5 million of revenue.
On a net investment of three and a half million of adjusted EBITA, when adding back depreciation and stock based compensation.
With that I'll hand, it over to Tim for a deeper discussion on our financials.
Thank you John and good afternoon, everyone I'll provide a more detailed overview of our Q4 and full year 2024 financial performance and then turn it back to John before we open the call for questions.
Unless stated otherwise all comparison and variance commentary are on a year over year basis.
In Q4, net sales increased by 1% to $100 9 million.
Domestic sales were flat year over year.
International net sales were up 7% to $15 4 million.
Gross profit for the quarter was $52 5 million or 52, 1% of net sales compared to $52 9 million or 52, 9% for the same quarter of the prior year.
Net loss was $48 4 million in Q4 compared to net income of $31 million last year.
The decrease was driven by an improvement to the company's stock price during the quarter, which led to a change in the fair value of the warrant liabilities.
Our consideration liability and derivative liability.
Net loss per share was <unk> 53 per basic and 53 cents per diluted share compared to <unk> 17.
Basic and diluted share for the same quarter of the prior year.
Adjusted EBITDA in Q4 decreased by 10% to $33 $6 million with the decline being driven by strategic investments in the business that we expect will reinvigorate organic growth and improve operating efficiencies.
Adjusted net income was up 8% in Q4 to $24 8 million with the improvements driven by interest rate savings from the conversion to equity of $130 million of exchangeable notes.
Adjusted EPS was <unk> 27.
Per basic and <unk> 20 per diluted share.
<unk> 29 per basic and 24 cents per diluted share in the prior year.
Quickly reviewing our full year results net sales grew 8% to $426 million.
Domestic sales increased 7%, reflecting continued demand for premium metal cards.
International sales grew 11% highlighting our successful expansion in key global markets.
Gross profit for the full year was $219 2 million with a gross margin of 52, 1% compared to 53, 5% in 2023.
This decline was primarily due to production of new product constructions and inflationary pressures on wages and materials.
Adjusted EBITDA increased 4% to $151 4 million.
Adjusted net income increased 11% to $98 2 million.
Net loss was $83 2 million compared to net income of 120, $112 5 million in 2023.
The decrease was due to changes to the fair value of the warrant liabilities earn out consideration liability and the derivative liability, partially offset by a decrease in operating expenses adjusted.
EPS was $1 17 per basic and 95 per diluted share.
<unk> to $1 12 per basic and <unk> 92 per diluted share in 2023.
Moving on to the balance sheet as of December 31, 2024, we had $77 $5 million of cash and cash equivalents and total debt of 197 five.
$5 million.
This compares.
This compares to $41 2 million of cash and cash equivalents and $343 million of debt at December 31, 2023.
Our bank agreement senior secured debt leverage ratio was 1.25 times at December 31, 2024 based on total secured debt of 197 $5 million and trailing 12 month bank adjusted EBITDA of $157 8 million.
This compares to a leverage ratio of 1.39 times at December 31, 2023.
Turning to our cash flow statement on slide 15, you can see that net cash provided by operating activities for 2024 was $129 6 million up 24% compared to last year with free cash flow up 62% to $84 9 million.
John: I will now hand, it back over to John for closing remarks, before we take questions.
Thanks, Tim as I mentioned earlier for 2025, we expect mid single digit growth.
In both net sales and adjusted EBITDA.
Our sales momentum as expenses is expected to build throughout the year supported by our deep customer relationships and innovative product offerings.
We're also planting seeds to accelerate growth, while leveraging the accomplished secure operating system to drive operational excellence.
John: We remain mindful of global economic tensions, including tariffs and further pressure on our consumer.
And are committed to being thoughtful about running and investing our business to ensure we deliver.
Both short and long term value for our shareholders.
On slide 17, I'll close by sharing a reminder of our key objectives for 2025.
Accelerating payment card organic growth.
Driving efficiency through the accomplished secure operating system.
Continuing to deliver arcturus traction.
With that I'd like to open up the call for Q&A.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of Moshe Orenbuch with TD Cowen Your line is open.
Great can you guys hear me.
We can great.
So I guess you did say that the.
Your revenue growth will accelerate during the course of the year.
Can you talk a little bit about what might end.
Right.
2025.
What are the factors that are kind of causing that acceleration like are those things those contracts you already have in hand, like how does that how does that work.
Sure.
Moshe: Thanks Moshe.
Look, we're not giving quarter by quarter guidance Moshe we're just trying to give you some insight into what.
What we see in a combination of the backlog and pipeline that we used to manage the business.
With pretty good visibility.
Okay. Okay.
And maybe.
Yes.
Could kind of just expand in the flesh out a little bit the things and the steps that the Cabo secure operating systems.
But what will what do you expect to be realized during 25, what kind of things are going on that will be realized after 2020.
So for us the.
Operating system looks that really the entirety of the company.
Manufacturing lean manufacturing.
Concepts that we're deeply diving deep.
Within that function. So we're literally looking at every function across the place.
<unk> finance.
Sales, how we process orders and then Moshe again, a deep dive into the manufacturing and a lot of the lean manufacturing concepts to drive out those efficiencies.
It's a combination of a somewhat relentless and maniacal focus that we bring to that discipline and we always think we've been good at this.
Dave and what he brings to the table is just Max level.
Around how to think about this so that's where he is pushing us and that's where we are driving as a team to deliver those efficiencies in.
We expect to see those and we're making the investments now we expect to see those building as well as we move through the year and into next year, where we should really start to see the benefit.
Our site and the efficiency side.
Great. Thanks, I'll get back in the queue.
Thanks Moshe.
Speaker Change: Please standby for our next question.
Our next question comes from the line of how goes would be rally Securities. Your line is open.
Speaker Change: Okay. Thank you.
First question is on <unk>. Thanks for the commentary on the details or kind of what was kind of the exit rate.
Revenue for Oculus.
<unk> run rate and what can we expect.
Speaker Change: This business maybe to contribute.
Versus 2024.
How we're not going to break down the guidance sort of.
Within.
Payment card versus Oculus.
But the run rate exit.
<unk> was quite strong so the fourth quarter was very strong.
In terms of how we finished and it does sort of roll us into.
Good run rate to ensure that we're going to deliver that net positive.
Results in 2025, and really start to see we think what this business can deliver.
We feel really good about where we ended.
We're we're entering this year around our to US both on the authentication side.
And momentum, we're seeing on the cold storage side.
Okay.
On the railcar business can you just give us maybe a feel for.
What the funnel and pipeline is for domestic and then international because.
They basically grow at different rates are very very difficult to predict.
Quarter, one contributes one quarter, one and the other give us your thoughts on that.
Yeah. So if you remember last year, how we talked that we had kind of lower first quarter internationally.
Talk very specifically about.
Think of it over kind of.
The year, where we expect international to be about 20% of revenue.
As we move through the year it just.
Because of the size because of the nature of those orders, we do see more variability in when some of those come through but we said it would come out about 20% I think for the full year, we came out about 18%.
Which was right in line with what we expected.
And I'd say as we look into 2025, we're pretty balanced about what we see in both the domestic and the international growth side, India and international growth was stronger.
Year over year for us last year.
Okay. Thank you I'll get back in the queue. Thanks, Thanks, Sean.
Thanks Al.
Please standby for our next question.
Our next question comes from the line of Cathy Chan with Bank of America. Your line is open.
Hey, guys. Thanks for taking the question I guess first just wanted to ask about resolute. Obviously, that's all squared away now, but just wanted to walk through and just make sure we understand what the resolute impact on your P&L is further for 2025 and I guess more broadly what part they are going to be playing in terms of overall strategy for Europe.
No.
You guys had talked about accretive M&A a lot can you just give us a little bit more detail in terms of the type or size of the companies that youre looking at as well. Thank you.
Sure surpass the I'd say the.
The impact on the business.
Is incredibly meaningful so and it's to me across all three dimensions that we talk about organic growth.
It is the operating system work and it is the M&A work.
Very active input and participation with the resolute woman with Dave specifically across all three of those so days literally been on customer calls with us.
Meeting with me meeting with the team.
On the operating system work.
And there is a very robust pipeline of opportunities.
Resolute had a robust pipeline of opportunities when they were looking at accomplish secure that.
That work remains in terms of things we will look at.
Up and down the spectrum.
Opportunities that will deliver accretive M&A.
M&A that is the sort of number one criteria that will deliver value for our investors and Dave I don't know if you want to jump in there.
Yes.
Yes.
Okay.
Gosh I hope that was helpful.
Speaker Change: Okay.
Speaker Change: Yes.
Please standby for our next question.
Our next question comes from the line of Jacobs, Stefan with Lake Street Capital markets. Your line is open.
Hey, guys I appreciate you taking the questions.
Maybe if you could just kind of.
Piece the guidance out for us a little bit the mid single digit growth revenue growth.
How do you kind of think about it when you look at.
Stabilized kind of card programs versus kind of some of your newer ramping programs and overall kind of new card launches.
Speaker Change: Yes.
Jacob every year for us is mix up each of those variables right. It's the.
Existing programs existing clients new programs existing clients in what we call new new.
Speaker Change: Last year really strong growth with kind of new.
Speaker Change: New clients.
New programs from existing clients.
Would expect.
All three to be important contributors to the growth in 2025.
Importantly, we're planting the seeds, we're building out the sales team further to help ensure that we can accelerate that organic growth and drive the kind of long term results. We have historically and you don't want to make sure we're driving for investors as we move forward here.
Okay helpful. And then maybe just on Arqiva.
Obviously, you know tracking well ahead of expectations on kind of a net investment level, but maybe I know you said there is kind of broad based strength in the programs, but at the end of the day is it more on the authenticate side or more on the kind of cold storage side that customers are paying for currently yes.
It's both appear with lean one way or the other or probably more towards authentication, we've seen strength in both.
Okay got it I'll hop back in the queue.
Thanks.
Please standby for your next question.
Our next question comes from the line of Brian <unk> with Needham Your line is open.
Hey, Thanks, John.
Johnson from <unk>.
Adam.
Hey, guys I had two here.
And I know we've been through this before but it is very topical for investors. So can you just kind of give us a refresher on <unk>.
Spinning off resolute versus kind of keeping a team internally.
That and explore M&A opportunities.
Speaker Change: And then I have a follow up on the authentication comments.
Yes.
So Jonathan the Michigan doesn't change right in terms of driving accretive M&A.
We strongly believe that this structure delivers more value to shareholders.
Her time as you look at.
Asset managers are valued in the market that sort of steady.
Predictable stream of <unk>.
Revenue that they receive is ultimately is how we believe the market will look at resolute over time has that.
Revenue builds for them so the emissions and outcomes don't change the structure, we believe delivers better returns for investors.
And net debt sort of after the spin if you looked at.
Kind of accomplish stock price and kind of value of resolute net net we were up slightly after.
The spin obviously your stocks moving up and down.
But we firmly believe that delivers more value for our investors over the long term.
Okay understood. Thanks for that John and then just on the authentication piece.
Speaker Change: It's interesting that that's growing.
It's bits here actually.
So.
Speaker Change: Just walk us through a little bit to that sales process is your longer term contracts.
When do those conversations began and ultimately.
The <unk> being signed.
Would love a little bit more color on that piece.
Sure so that sales cycle follows something somewhat akin to.
Speaker Change: No payment cards in terms of.
Now, we're working through with clients.
The different use cases, how that product in <unk>.
Reduce fraud increased security for them, particularly for medium to high risk.
Transactions it puts a hardware token in their hands not having to carry a separate dongle.
So.
Medium length of sales cycle, where you've got sort of the card buyers plus the fraud teams typically engaged.
With larger banks, it's been a lot of longer sales cycle, which is why it's taken us a little longer I think to ramp that.
Syntax tend to move a little quicker in terms of pace. So.
We're pleased with the momentum here John.
Great I'll hop back in the queue. Thank you.
<unk>.
Please standby for our next question.
Our next question comes from the line of registry.
J P. M. Your line is open.
Yes, just as a follow up on the Resolute holdings.
Assuming from earlier just curious is.
That Ah resolute will only manage accomplish the door or is the plan to eventually.
And third party capital and or maybe even manage other companies and I have a few follow ups. Thank you.
Graduate a primary intention is to drive the value of it.
<unk> secure share price.
Have.
Roughly six to 700 million of equity capital in <unk>.
<unk> stock and the goal is to drive that up period full stop that's the intention.
Things that we acquire would be acquired by <unk>.
That's the model.
It doesn't exclude resolute from ever having another agreement with someone else.
Trust me when I say the intention here is.
To drive the value of <unk> stock.
How the incentives are aligned stock compensation is aligned that way.
That's what we're driving towards.
Okay, Perfect and then I guess, Dave just thinking about.
Thinking about the <unk> operating system and I guess, we've never really got a great view into how the extensive breakdown within.
Is there a way to think about.
I guess material costs like if thats. The significant thing is it people is it process and I heard you guys talk about investment is there any plans to.
Maybe do Capex investment to improve the process.
Like how should we think about the opportunity there. Thank you.
Sure.
From a capex standpoint, it's generally not that expensive.
This is more a method of operating and.
And getting everybody in the factory involved in understanding.
Speaker Change: What they are doing how can they make it better.
And ensuring that anything thats not going to pass muster it doesn't get passed along quite honestly.
And it's a big process and people focus.
That's where the cultural headset makes a big difference. So this is not the sort of thing where you tell people, Hey, Friday keep doing what youre doing Monday come and prepared to do.
There has been acculturation process. If you will that you have to go through to get everybody onboard and understanding.
How significant their job is in the scheme of things. So you don't see the benefit of it immediately in terms of big numbers takes a few months to really get it rolling.
Smaller operation of course than what we had to deal with at Honeywell. So.
Should happen a little faster.
But the benefits are huge and as you said improving yields in particular that gets you to just.
Tremendous place.
Costs go down free capacity free floor space, it's really pretty impressive what you can do.
And think of it this way as it's really.
The Toyota production system.
We're modifying for compounds.
Ma'am.
I feel very good that guys are off to a great start.
Our manufacturing leaders and engineering leaders working with John.
Really driving the headset and the cultural change, but this is more of a process people and.
Cultural headset more than anything else.
Does that answer your question it does.
As of Friday reminds me of reading the goal in business school here in those terms floor space and things like that so that's great. That's good to hear I guess last question for me I guess in terms of tariffs I'm not sure. If you guys get your metal cards in the country is there anything to think about there as it relates to tariffs and how that may impact your.
Your raw material costs.
Yes, thanks for the question Rajeev.
Certainly it is something we are keeping.
A keen eye on we definitely have materials that come.
From Europe, some from Asia very little from China.
But it is.
Something we're watching closely yes, it could have an impact I would say as you think about industrial companies.
Or much less.
At risk to those fluctuations than what you would typically see in an industrial our industrial Tech company.
That said, it's a very important watch item for us.
Speaker Change: Okay ill jump back in the queue appreciate it.
Reggie: Thanks Reggie.
Speaker Change: Please standby for our next question.
We have a follow up question from the line Moshe Orenbuch with TD Cowen Your line is open.
Speaker Change: Just to see if you're on mute.
Moshe do you have a follow up.
Speaker Change: Alright, we have a follow up question. Please standby.
Follow up question from the line of Reggie Smith Your line is open.
Yes.
Back again.
I was curious it may be hard to answer but is there a way to frame kind of an up to limited as far as like the size of a deal.
You may be interested in obviously, it's not a commitment, but just just trying to understand.
The scale of the things you may be exploring if possible. Thank you.
So I'm happy to take it and then.
Once the policy can bet Reggie.
We I think we said before.
Speaker Change: We will look at things.
Speaker Change: More medium and large and I know that's not answering your question, but it's it's.
Not limited to sort of smaller small to medium we will look at.
Pretty broad spectrum of things.
Dave: There are a set of criteria that Dave looks at pre acquisition.
Speaker Change: Is included.
It's got a hit those and it's got to be at.
Speaker Change: Now you're in a price that we think can deliver exceptional returns for our investors.
Yes.
The critical criteria for us right now.
Yes, if I could just add to John's.
Speaker Change: John's point. This is all going to come down to where can we add value with the.
Operating tools that we bring so youre not going to see us do something that you look at it and go why I don't understand how they can add value here it will make sense.
But just to reinforce something John said earlier.
Tom Me the rest of the acquisition team.
Our equity is in combo.
Speaker Change: Not in resolute.
Speaker Change: So we are heavily incentivized to make sure that.
Compo performs really well.
The stock performed well for our for our shareowners.
So that's where our focus is.
Thank you.
Please standby for our next question.
We have a follow up from the line of Moshe Orenbuch with TD Cowen Your line is open.
Great sorry about that before I couldnt figure out on the phone.
On mute.
Thanks for that last comment actually is very helpful.
Question is just kind of a technical one could you just.
Got a couple of people kind of narrowing in and asking what exactly does that pro forma.
<unk> mean with respect to the.
To the.
Rachel payments.
Speaker Change: Is it does it mean as if it were in effect for the entire year. We're in effect from some other date like just could.
Speaker Change: Could you just say what that means.
Speaker Change: Moshe.
It is.
Business right.
If you want to look at it with the reservoir management fees last year and this last year on a pro forma basis in this year.
Speaker Change: When I looked at it without the business is expected to grow mid single digits.
Right.
And I think just as a follow up to that you had said that the adjusted EBITDA was positive in the fourth quarter related to oculus by $3 $5 million range.
Yes.
So.
If that had been zero or negative.
For the rest of the year I guess shouldnt that will own if that continues.
Be a big driver of adjusted EBITDA growth into 2025.
Yeah.
Speaker Change: We are also making investments Moshe talked about this in terms of.
The investments, we're making in engineering talent sales talent somebody asked about Capex.
To essentially get to where we want to get too.
Around.
The operations and the efficiency and it's sort of taking those things into account.
Okay, alright, thanks, thanks very much.
Thank you.
Ladies and gentlemen, I'm showing no further questions in the queue and that concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
[music].
Yeah.
Yes.
Okay.
[music].
Yes.
Speaker Change: [music].