CMPO - NASDAQ

Good day and thank you for standing by. Welcome to the CompoSecure Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] I would like to hand the conference over to your speaker today, Steve Feder, General Counsel and Corporate Secretary. Please go ahead.

Good evening. And thank you for joining us to review CompoSecure’s fourth quarter and full year 2022 financial results. With me on the call tonight is Jon Wilk, CompoSecure’s Chief Executive Officer and Tim Fitzsimmons, Chief Financial Officer. They will begin with prepared remarks, and then we will open up 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 and 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 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 composecure.com and on the SEC's website at sec.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures, including, adjusted EBITDA, adjusted net income and adjusted EPS. 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 Investor Relations section of our website. Thank you. And with that said, let me turn the call over to Jon to discuss fourth quarter and full year earnings.

Thank you, Steve. Good evening everyone. And thank you for joining us for our fourth quarter and full year 2022 conference call. I am excited to announce that we achieved a record growth and profitability in 2022 while closing out the year on a high note with strong results for the fourth quarter. This year, we shipped approximately 30 million metal cards, up 36% from 2021, and I want to recognize and thank all of our employees for their ongoing commitment to our success. Before I go into further financial details, I want to spend a few moments contextualizing this remarkable year for CompoSecure with 41% net sales growth and 33% adjusted EBITDA respectively. We have previously stated that we anticipate our business to grow on average at around a 15% CAGR. And I believe last year's outperformance was driven by our ability to capitalize on several fundamentals. First, metal payment cards have become an important tool to help our clients deliver on their goals of increasing customer acquisition and taking greater share of their customers’ spend, with the cards becoming top-of-wallet. Over the past eight years, the audience for metal cards has greatly expanded, beginning with high net worth individuals, moving to the mass affluent and now becoming a highly sought after product for millennial and Gen

Thanks, John, and good evening, everyone. I'll provide a more detailed overview of our 2022 financial performance and then turn it back to John before we open up the call for questions. Unless stated otherwise, all of the comparisons and variance commentary is on a year-over-year basis. As John mentioned, for the full year 2022, net sales increased 41% to $378.5 million compared to $268 million, the increase was driven by continued strong sales execution and growth of our metal card business domestically and abroad for both new and existing customers. Gross profit for 2022 increased 52% to $220 million or 58% of net sales compared to $145 million or 54% of net sales. Throughout the year we benefited from higher card issuance volumes as well as operating efficiencies as we scaled business, which was partially offset by higher supply chain costs in the back half of the year versus the first half. Net income for 2022 increased 58% to $132 million compared to $83 million and adjusted EBITDA increased 33% to $136 million compared to $102 million. The increase was driven by continued strong growth on the top line, gross margin expansion and increases from revaluation of the earnout in the warrants. Adjusted EBITDA margin for the year came in at 36% compared to 38% with a decrease driven by a combination of factors, including public company costs, a one-time settlement of a dispute through arbitration, which has been consistently disclosed in our quarterly filings and continued investment in the Arculus platform. As Jon mentioned earlier, the net impact from Arculus revenue and investments was minus $21 million for all of 2022, and in line with our latest guidance issued last year and significantly lower than the $33 million in our original projections. This reflects our continued commitment to driving profit. We’re prudently managing our investments. Turning to our balance sheet. On December 31, 2022, we had cash and cash equivalents of $14 million and total debt of $363 million, which includes approximately $233 million of term loan and $130 million of exchangeable notes. This results in a total net debt of $349 million. We want to provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences. At December 31, our overall leverage ratio improved to 2.6x based on net debt of $349 million and trailing 12 month adjusted EBITDA of $136 million. This compares to 3.6x at December 31, 2021 with the improvement driven by a combination of paying down debt and growing EBITDA. At December 31, 2022, we had a bank agreement secured debt leverage ratio of 1.6x based on a net debt of $233 million and trailing 12 month bank adjusted EBITDA of $144 million. This compares to 2.4x at December 31, 2021. Taking a look at our cash flow statement. We generated operating cash flow of $93 million and we believe our cash balances, cash flow generation and debt facilities provide us with more than adequate working capital to fund our operations. Let’s turn quickly to fourth quarter results. Fourth quarter 2022 net sales grew 25% to $94 million compared to $75 million the same quarter last year. Gross margin for the quarter increased to 54% versus 52% for the same quarter the prior year. Net income for the fourth quarter of 2022 was up 12% to $22 million. This includes a $4 million net benefit for fair value adjustments associated with the mark-to-market of warrants and the earnout. Adjusted EBITDA for the quarter was $31 million, up 44% compared to $21 million last year and adjusted EBITDA margin in Q4 improved to 33% compared to 28% in the fourth quarter of 2021. Arculus revenue and investments resulted in a net impact of approximately minus $6 million for the fourth quarter. Let’s take a look at our net sales trends. Taking a closer look at the sales trends, we continue to generate strong growth both in the U.S. and internationally with them up 35% and 68% for the full year of 2022, respectively. U.S. growth was once again driven by the strength of our sales execution and favorable industry trends, while international was up due to the expansion of our international sales team, continued distributor growth and strong customer demand. Turning to earnings per share. As discussed last year, we adopted a method under GAAP for calculating basic and diluted EPS, which allows us to allocate changes in fair value adjustments of mark-to-market instruments among the public company and the operating subsidiaries to better reflect the actual economic impact of conversion of such instruments on our net income and our per share basis. The reason we are doing this is that we believe this method better reflects the economic impact for shareholders. Our Q2, Q3 and Q4 EPS figures as reported are consistently calculated under this GAAP measure. Having said that, let me run through our EPS calculations. GAAP EPS for the 12 months ended December 31, 2022 was $1.21 per basic share and $1.13 per diluted share. GAAP EPS for the fourth quarter was $0.14 for both basic and diluted shares. You could read through the footnotes on the slides that take you through the complexities of the allocation of net income due to the Up-C structure and the shares that are included in the basic and diluted calculations. Note that the fair value adjustments in the quarter and the full year have been allocated among the operating companies that come to pre-allocation net income. Now, let’s take a look at non-GAAP earnings per share. On Slide 18 and in our MD&A, we’re also providing a non-GAAP adjusted net income and adjusted EPS that takes out the impact of the non-cash fair value adjustments such as stock-based comp, warrant and earnout re-valuations. We believe that this provides a clearer picture of the economics of the company’s operating results. Please note, these non-cash adjustments can have both a positive and a negative impact on our net income. With that background, our non-GAAP EPS for the full year 2022 was $1.10 per basic share and $0.94 per diluted share, while non-GAAP EPS for the fourth quarter was $0.23 per basic share and $0.20 per diluted share. In the appendix, you’ll find a reconciliation between GAAP and non-GAAP net income used in these calculations. I’ll now hand it back over to Jon for a final summary before we take questions.

Thanks, Tim. Now turning to Slide 19. As I mentioned earlier, we’re expecting another year of solid growth in 2023 as we anticipate net sales to range between $400 million and $425 million and expect adjusted EBITDA to finish between $145 million and $155 million. As a reminder, these targets reflect the expectation of continued sales execution and driving economies of scale in our metal card business, as well as a net investment in Arculus below our net Arculus investment in 2022. In addition, this guidance takes into consideration some of the continuing uncertainty of the macroeconomic environment as outlined earlier. I want to close by touching on our strategic priorities on Slide 20. It’s been great to reflect on our record 2022 results, and I’m incredibly proud of our team for their hard work and commitment to get us to this point. However, our focus is now squarely on 2023. As we look ahead, we plan to continue driving organic growth in our premium metal payment card business both here in the U.S. and internationally, while also further diversifying our customer mix with fintech clients. We will also continue to innovate our product suite on both metal payment cards as well as Arculus security, authentication and cold storage offerings, while maintaining our prudent approach to capital allocation and driving efficiencies in our business to maximize the bottom line. I want to thank all of you for taking the time to join us today. We very much appreciate your support and I’ll now open it up to questions.

Thank you. [Operator Instructions] Our first question comes from John Todaro with Needham & Company. Your line is open.

Hi, this is Dan Lehmann. Actually, I’m filling in for John. So I’ve got two questions. The first one is so at the midpoint of your sales outlook guide for 2023, there's 10% gross year-over-year. Can you just give us some additional color on the level of conservatism you're baking into the outlook assumption? And whether you're a little bit more confident on the macro picture now relative to the third quarter?

Yes. So I appreciate the question. Look, we think we gave an appropriate range on the guidance. We're coming off a year of 40% growth. We've said on average we think we've got about a 15% growth business. The top end right about, it's 14%. On the top end there in our view still remains a lot of macro uncertainty. Mixed data that keeps coming out with inflation higher, raising rates, people with some concern about the back half but I'd reiterate comments I've made on other calls, which are we've operated in tough environments before and if the back half were to get tough we still believe we can deliver growth and I don't know we feel like we've laid out an appropriate range there for the top line that recognizes the context of the environment.

Got it. Yes. Definitely makes sense and thank you so much for the color on that. And then in terms of gross margins, it looks like the outlook is baking into uptick and gross margins. So can you just give, sort of remind us on some of the levers that you could pull to achieve your target for full year at 2023? Thank you.

Sure. So the full year 2023 guidance, if you use the low-end – the low end and the high end and the high end are around 36% EBITDA margin, which is actually in line with where we came in this year. So that's actually fairly steady from our perspective, and recognizes that we will continue to invest in growing the core metal payment card business as well as Arculus. Although we've tried to be clear that – that net impact we believe should be at are lower than what it was this year. So that's how we're thinking about sort of the revenue and margin story for next year.

Thank you. One moment for our next question. We have a question from Reggie Smith with JPMorgan. Your line is open.

Hey, good evening guys. Thanks for taking the question.

Thanks, Reggie.

I guess my first question; I believe one of your key customer contracts expires this year. I guess what can you tell us about the renegotiations? When does the contract expire exactly, and I guess historically as contracts have come up, how early did you renew them in the past? And I have a few follow up. Thanks.

Thanks Reggie. So the JPMorgan contract expires at the end of this year, and we would be negotiating a normal course with any client in that year when things are expiring. There are times when we might renew a contract earlier than that if there's specific reasons to, but the normal course would suggest in that final year is the time when we would be renewing.

Understood.

And Reggie, I'd add one comment. We've been through multiple renewal cycles on that contract. It's not the first I think there've been at least three renewal cycles at this point. The Amex contract there have been at least four if not more renewals there.

Got it. That makes sense. Okay. So I appreciate the color on the guidance. What can you tell us about I guess your order backlog today versus maybe this time last year? Just trying to get some context around what you're seeing right now on the ground versus maybe a year ago?

I'd say it's actually fairly consistent Reggie in terms of strong visibility and what we refer to as the pipeline and the backlog. So that backlog is hard orders that cover kind of the next three or four months and that the pipeline that goes out further than that. And I think as you look into kind of the back half of the year, I think is when people, there's more uncertainty out there. I think JPMorgan's CEO did an interview recently commenting on the back half and uncertainty still remaining in the back half just in general. But if you look and we put some of the commentary in our deck, generally speaking our issuer clients believe that we are going to drive growth this year. They're planning for it. That's how we're planning. And what we've said is we're prepared if things turn, but we actually believe it could be a quite a nice year.

Understood. Thinking about your EBITDA guidance which is fairly strong; how should we think about debt repayment or use of cash as that EBITDA number continues to kind of grow?

So we've stated two priorities. I'll reiterate for folks on the phone. Driving organic growth in the business and by that I mean the metal payment card business continuing to expand capacity, drive innovation around not just the form factor but new security technology, things like dynamic CVV, biometrics, the authentication and the integration of Arculus into credit and debit cards as kind of our first priority, and second paying down debt. We did a very nice job paying down debt this year, and I think Tim highlighted that in his comments. We're talking about leverage ratios that went from, I think it was 3.6 down, well below 3 in total debt and secured debt at mid-2s down to 1.6. So we are de-levering through a combination of paying down debt and growing EBITDA. And Reggie, I like the fact that we're doing it with both. For me, that's the right way to approach it, but we will continue to pay down debt.

Got it. And if I could sneak one more; you had some really cool product announcements in your release and that you talked about earlier in the call. How should we think about, like how quickly can those go from kind of launch to like really seeing him out in the wild, if you will?

Yes. I think for us the types of products we talked about would be second half of this year into first half of next year when we start to see those things start to appear, but strong interest from our perspective in a number of those.

Perfect. Thank you.

I appreciate it, Reggie. Thank you.

Thank you. And there are no other questions in the queue. I'd like to turn back to Mr. Jon Wilk for any further remarks.

I just want to take a moment and thank all of the people who joined the webcast who are listening to the story. We are excited about the year that we just completed. We think as our first year as a public company raising guidance twice, finishing at the top end of that range. I'm extremely proud of what our team has accomplished. I'm even more excited for what's ahead of us in terms of continued growth of our metal payment card business, domestically, internationally, and with fintech clients as well as continuing to push on the Arculus expansion, on security authentication as well as cold storage for digital assets. So thank you all for attending. We appreciate it and have a good night.