Welcome to the CompoSecure Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Marc Griffin with ICR. Please go ahead..

Good evening, and thank you for joining us today to review CompoSecure's first quarter 2020 financial results. With me on the call tonight is John 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, our ability to maintain existing and acquire new customers and 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 view 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 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 as defined by the SEC, including adjusted EBITDA.

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 operation.

These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measure 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, let me turn the call over to Jon to discuss our first quarter earnings.

Jon?.

Thanks, Marc. Good evening, everyone, and thank you for joining us tonight as we discuss our first quarter 2022 earnings release. We appreciate your interest, so thank you for participating.

First, let me summarize our operating results for the quarter, and then I'll highlight the strides we are making with our strategic growth initiatives before turning it over to Tim Fitzsimmons, our Chief Financial Officer. Throughout the quarter, our team continued to exceed expectations, and we have established outstanding momentum in early 2022.

We delivered record net sales of $84 million, up 32% year-over-year, above our pre-COVID revenue levels and up 12% versus fourth quarter 2021. This was driven by strong sales execution and growth across existing and new clients, accentuated by our international performance.

Our adjusted EBITDA was also a record at $33 million for the quarter, up 14% year-over-year, which highlights the impressive margin profile of the premium card business and our relentless commitment to continuous improvement, which had a positive impact on efficiency, positioned us well to support greater output and help provide incremental lift to margins for the quarter.

International sales for the first quarter of 2022 were $22 million, 178% higher than prior year and 96% growth quarter-over-quarter, driven by strong sales execution, distributor growth and demand for premium payment cards. Revenue for Arculus continues to ramp up.

We expanded our direct-to-consumer distribution channels, adding Amazon, and delivered a co-branding partnership with BTC Inc. in the quarter. And during our last call, we highlighted that we were in advanced discussions with several B2B partners.

I'm excited to share that our payment card plus Arculus digital authentication and/or crypto cold storage has been selected by several cryptocurrency platforms and fintech partners, Voyager Digital, Lode and MassPay. I'll touch on these in greater detail in a few moments.

We expect to launch these programs in the second half of 2022 and additional partnerships continue to progress. I want to add that it takes a team working together toward a common goal to accomplish these results that we've seen in the first quarter.

On behalf of the leadership team here at CompoSecure, I'd like to thank the 700-plus members of our team for their contributions and delivering a strong start to 2022. We are reaffirming our fiscal year 2022 revenue guidance in the range of $336 million to $376 million of net sales.

We are also reaffirming our adjusted EBITDA guidance of $100 million to $110 million. And based on this quarter's adjusted EBITDA performance, we are well on track to achieve these results. On Slide 3, I want to provide a bit more context for our performance.

The backbone of our business continues to be strong sales execution, deep customer relationships and our ability to deliver high-quality premium products. We continue to demonstrate momentum with new and existing clients from traditional banks to cryptocurrency platforms to fintech partners.

Taking a deeper look at our payment card business, we had some great success, including an expansion of our relationship with Bank of America to support the new metal premium rewards Elite card. We also established an important new relationship with Wells Fargo to deliver the built fintech metal card. This means today we support 7 of the top 10 U.S.

issuers with significant opportunity for growth remaining. Capital One launched Venture X at the end of the year, and the program adds another premium segment card to the number of portfolios that we support with them in addition to Venture, Savor and Spark.

The success of the program and continued commitment to invest in the product was highlighted in the Capital One earnings call. JPMorgan expanded our long-tenured partnership by announcing the Ink Business Premier metal credit card, adding to their portfolio of Chase Ink business credit cards to meet the unique needs of larger business owners.

Moving on to our fintech wins and expansion for the payment card business. We saw a continued expansion of the Crypto.com relationship with the launch of new countries, including Australia, Mexico, Spain and the United Kingdom. Gemini is officially launching their crypto rewards metal debit card program with Mastercard.

OneUnited Bank, the largest black-owned bank in America, introduced the Greenwood card commemorating the Greenwood District of Tulsa, Oklahoma. The Greenwood digital banking platform is targeting the black and Latino communities and has a wait list of over 500,000 customers. They are also planning to launch with a CompoSecure metal debit card.

One card from FPL, a fintech in India, has experienced strong growth by highlighting the metal form factor as part of the differentiated value proposition. Our partnership with cryptocurrency platforms and fintechs to support cold storage and payment cards with multifactor digital authentication continues to expand as well.

Bitcoin 2022, a Miami conference, purchased 25,000 co-branded Bitcoin and Arculus key cards to distribute to their attendees, which I'll discuss a bit more later. Voyager Digital, a publicly traded cryptocurrency platform, selected us to deliver a product that combines our premium payment card with digital authentication technology.

The same for Lode, a digital gold and silver cryptocurrency platform. Essentially, Lode and Voyager have selected Arculus to make their debit card also a physical security token, providing additive functionality for users such as tap to authenticate to a mobile device for high-value transactions.

MassPay, a leading payments platform that enables customers to deliver mass payouts globally in fiat or cryptocurrency, has selected Arculus for an integrated payment card with cold storage and digital authentication capabilities. On Slide 4, we highlight some industry trends, something we did last quarter as well.

We are bolstered by positive market momentum. Card issuers continue to see improving customer acquisition trends for premium card products, such as increased new accounts for premium value fee-paying products and a strong pace for proprietary card acquisitions.

In their recent earnings call, American Express highlighted all-time acquisition highs for their U.S. consumer platinum and gold cards, U.S. business platinum cards and the Delta Airline cards. American Express also shared that millennials and Gen Z represented a growing percentage of their new accounts acquired.

This younger consumer profile is mirrored in other industry research as well. On Slide 5, you can see some of the highlighted statistics from a recent independent Edgar, Dunn survey across 18 countries. It found that metal cards were preferred by millennials across all regions by 77%.

Overall, we continue to have strong confidence in the growth of the metal card market. On Slide 6, we've made good progress on our product road map so far. And in the coming year, we plan to continue to expand our product portfolio to better support our customers.

Whether it's adding digital authentication security to an existing hot wallet or white labeling our crypto cold storage and digital authentication offering, we're in a strong position to continue to meet the current and growing needs for cryptocurrency platforms, fintech partners and financial institutions.

As mentioned, we're excited that our payment card plus Arculus digital authentication and/or crypto cold storage has been selected by several cryptocurrency platforms and fintech partners, and we expect additional announcements in the coming quarter.

We are also highly encouraged by the consumer response coming out of our participation at Bitcoin 2022 in Miami in April of this year, where more than 25,000 crypto enthusiasts had the chance to experience the benefits of our Arculus cold storage wallet.

Based on feedback from conference attendees, we believe we were one of the standouts of the conference with a potent marketing presence, including delivering 25,000 Bitcoin Conference, co-branded Arculus Key Cards, a main stage speaking engagement by Adam Lowe, our Chief Product and Innovation Officer, and nearly 20 media interviews with both social media influencers and leading business publications.

During the 4-day event, attendees would regularly stop me to share how excited they were by the ease of use and better security provided by the Arculus Wallet and Key Card. Moving on to our Arculus product development first half priorities on Page 7. Since the beginning, we have been guided by user feedback.

We've established consumer feedback forms, and our teams engage regularly with the Arculus user community. And we're happy to announce that we plan to have viewing, sending and receiving of NFTs and will implement WalletConnect to allow connectivity to the broader DeFi community, both launching in mid-June, as well as adding support for more coins.

Let me expand further on Page 8. We show a drill down on Arculus securing NFTs as, as you know, NFTs have become an important part of the digital asset market.

Consumers have been asking for Arculus NFT functionality and in mid-June, we'll launch the capability to securely store, view, send and receive Ethereum NFTs in the Arculus Wallet, allowing users to securely hold NFT private keys and enabling self-custody. You can see visually what the NFT screens look like in the Arculus Wallet.

Moving from left to right, you can see the choice for coins or NFTs in the far left. If you click on NFTs, you can see the Ethereum NFT gallery. And clicking on that will bring up a display of all of the NFTs that you hold in your Arculus Wallet. And you can drill into the detail, gaining more information on each one.

NFTs are now secured by our multifactor authentication that includes a biometric scan, a 6-digit PIN and the touch of the Arculus Key Card. We plan to launch with Ethereum NFTs, but we expect to add others in the future, such as Solana, Flow, Binance and SmartChain to name a few. Let me also share what WalletConnect is expected to look like.

If you move to Slide 9, you can see where you can access WalletConnect in the app. Once you click on that, you'll be able to connect to any DeFi exchange or platform you choose such as OpenSea, Rarible, Uniswap, et cetera.

The benefit is that you're accessing from a secure environment with multifactor authentication requiring transactions to be signed with the Arculus Key Card.

Moving to Slide 10, you can see how this opens the larger DeFi ecosystem to Arculus users, but with the user-friendly familiar process have to authenticate what you do every day when you buy something at a store, our 3-factor authentication is transparent, simple and secure for the user.

We've accomplished a lot in the past quarter for Arculus, and I thought it would be interesting to provide you with a view of our progress on Slide 11. We've seen strong media and social media impact as well as brand coverage at key events and expanded our distribution channels.

We expect to continue to ramp our Arculus investment in line with our overall strategy. With that, let me hand it over to Tim to walk through the financials in more detail..

Thanks, Jon, and good evening, everyone. I'll provide a more detailed overview of our first quarter 2022 financial performance and then briefly turn it back to Jon before we open up the call for questions. The first quarter net sales grew 32% to $84 million, up from $64 million in the same quarter of the prior year.

Moreover, our quarterly trend demonstrated strength up 12% in the first quarter of 2022 over the fourth quarter of 2021. As John mentioned, demand continues to grow across our customer base due to strong execution of our sales strategy that led to growth from existing and new customers, both domestic and international. Moving on to gross margin.

Gross margins were 58% in the first quarter of 2022 versus 54% in the first quarter of 2021. This increase in gross margin was driven by production efficiencies and increased scale. Net income for the first quarter of 2022 was $26.9 million, up 16% compared to net income of $23.2 million in the first quarter of 2021.

As Jon mentioned, adjusted EBITDA was a record $33 million in the first quarter of 2022. The combination of Arculus revenue and investment as well as other costs associated with being a public company provided a net negative impact of approximately $6 million in the quarter.

An important factor to note is that our Arculus spend is not linear due to our strategic execution and rollout. Therefore, we anticipate increased quarterly Arculus spend throughout the remainder of the year. International sales in the quarter increased by $14 million or 178% in the first quarter of 2022 versus the quarter -- first quarter of 2021.

Domestic sales were also robust, increasing 12% year-over-year to $62 million. As you can see on Slide 14, our international sales as a percentage of revenue has trended up from 12% in Q1 of 2021 to 26% this quarter.

We had an operating cash flow of $12 million and free cash flow from operations of $11 million when you back out $1 million of capital spend. Turning to the balance sheet. As of March 31, we had secured debt of $272 million, $247 million of a term loan, $25 million of a revolver, an unsecured convertible debt of $130 million.

We had cash of $15 million on the balance sheet, resulting in a secured net debt ratio of 2.5 and total net debt ratio of 3.7% based on $104 million in trailing 12-month EBITDA per our bank agreement. The secured debt facility provides a revolving loan up to $60 million with $25 million drawn as of March 31, 2022.

The company forecasted results and the debt facility are anticipated to provide adequate working capital to fuel our growth plans. Let's speak about earnings per share. Our basic EPS for the first quarter of 2022 was $0.32 per share. I'd like to cover how we calculate the earnings per share due to the structure of the company.

We had $27 million of total company net income. $4.7 million is used in the EPS calculation based on the public ownership of approximately 20% of the overall company. The outstanding public shares were approximately 14.9 million, resulting in a basic EPS of $0.32 per share.

With that, let me hand it back over to Jon for a final summary before we take questions..

Thanks, Tim. I want to take a minute to address macro trends in the overall economy. We've been able to outpace rising material and labor costs through volume and efficiency. In addition, we feel our focus on operational excellence positions us well to continually manage macro challenges as we move forward.

On Slide 18, I won't go through this in detail, but I wanted to quickly share some of our ESG initiatives and corporate recognition that we highlighted and laid out on this page. Turning to Slide 19, I also want to reshare our strategic priorities as these will continue to drive our focus as we pursue long-term value creation for our shareholders.

Finally, I'll close by returning to where I began. We are off to a strong start for 2022. We believe we will continue to see increased demand for our offerings from both new and existing customers, driven by strong sales execution, deep relationships and market momentum.

We expect that our relentless focus on operational excellence will allow us to meet increasing customer demand and continue to deliver high-quality products.

We remain encouraged by both the business and consumer response to Arculus and believe we will gain more momentum as we increase our marketing efforts in the coming quarters while also delivering enhanced features and functionality for our customers. With that, I want to thank you all for taking the time to join us today.

We very much appreciate your attention, and we look forward to updating you throughout the year as we progress. I will now open the call to questions..

[Operator Instructions]. First question is from John Todaro with Needham..

Great. Congrats on the beat this quarter and another quarter down. I had a couple of questions here. One, we still hear a decent amount about supply chain issues and just if there's anything worth highlighting there and touching on, if there's any additional supply chain concerns that are cropping up for you guys.

And then two, have you guys published any of the price points for the Arculus card at that Bitcoin conference? And do you have any just commentary details on what percent of those might be actively used or anything additional there?.

Thanks, John. I appreciate the question here. Let me start on the supply chain side. So it is something that we are monitoring and continue to monitor very closely. We have been able to manage the impacts of supply chain slowdowns and other things, we think, quite well.

So while we had very modest impacts in Q4, we think the results in Q1 somewhat speak for themselves in terms of the growth in delivery that we were able to achieve. So something we're definitely still watching very closely as it is affecting many people across the globe. But so far, our team has done an excellent job helping us manage through this.

With respect to Arculus and the work we did with BTC. We did not put that in our public disclosures beyond the number of cards. I will say, reiterate what I -- my comments in the communication itself. The feedback that we got throughout the conference from many, many folks was very positive around user experience, around security.

And as you saw being down there, 25,000 influential people in that space. So we were pleased with the partnership and continuing to get our name out there. Probably more importantly is some of the progress we're making on the partnership side with folks like Voyager, Lode and MassPay, to name a few, with many other conversations underway..

Next question is from Steve Moss with B. Riley..

Maybe just starting here with the -- [indiscernible] announcements on the Arculus side of the business. Jon, during the roadshow, you guys provided a range for 2022 of $20 million to $60 million in revenues for Arculus.

Just kind of curious how you're thinking about the -- where these announcements put you relative to that range and any color you could give there..

Sure. Thanks for the question, Steve. So when we think about the Arculus revenue, I think we would describe it as Tim mentioned in his comments, right, that we would expect some of the spend to ramp up through the year. We would expect, I think, revenue to be ramping up through the year as well.

So my comments around the partnerships were that those will be executed in Q3 and Q4 of this year. So you can sort of think of revenue ramping up through the year on the Arculus side..

Okay. And then in terms of the metal card business, I assume most of that came from the -- most of the revenue this quarter came from the metal card business. Just kind of curious as to how you guys are thinking about revenue for the rest of the year for that business relative to the first quarter level..

Yes, Steve, we're seeing strength in that business. And that was messaging. We tried to be very specific in terms of what we put in to the discussion today.

It was a combination of growth with some important clients like a BofA, which was a small client; opening up Wells Fargo as a client; the success of Venture X and their launch as well as Chase launching new cards; the fintechs that we're talking about. All of that, for us, we think, bodes well for the metal payment card business.

We also included some of the trends that we're seeing in the industry, American Express is one issuer that releases data in their earnings release, and we shared some of that where it was record number of customers acquired, strength in areas like platinum and gold, the premium fee-based products, which many, many, many of those cards are metal.

So we think that bodes well for the metal payment card business..

Our next question is from the line of Dan Weiskopf with Toroso..

Guys, congratulations.

You guys -- you can hear me, right?.

We can hear you, Dan. Thanks..

Okay, cool. So first up, are you going to be doing something similar or do you have plans to do something similar at Consensus? I ask because I'm going to be attending, so I was curious. And then I've got probably a little bit more detailed questions on similar things, too..

Yes. We do plan to have a significant presence at Consensus. Yes, a lot of team members down there with a lot of buzz that we're trying to generate. The partnership will be a little bit different down there but look for a big presence there from us..

Cool. Well, I'll see you down there then.

Can you walk me through what the relationship is, as an example, with Voyager and the other companies that you mentioned? Is it a trial? Is it -- are there shared economics? Is it just a straight-out purchase of cards and then they use them however they want to use them?.

Dan, each one is going to be a little different and unique. Our typical model, right, is we're selling cards that have functionality, whether it's payments or payments plus digital authentication, that is our typical model. It gets a little different if folks need our digital wallet. Folks that have their own wallet already wouldn't need our wallet.

So I don't want to go through and comment specifically on each one as that's part of proprietary strategy that each of them are executing.

But each of those partners was willing to step up and say, hey, yes, we selected Arculus and the CompoSecure team to partner with because we believe in the additional security features that the cards enable, whether that's payments plus digital authentication, payments plus cold storage or in some cases, trying to bring together all 3 of those.

So we had talked on the last call about progress that we were making, and I wanted to share some of those updates with the group at this point just to help you guys understand the momentum that we think we're building in the business..

I follow you. And I totally respect how you've disclosed it for competitive reasons.

In regards to the NFT side, is that something that people have asked you to do and you're seeing serious demand pull-through as a result of inbound requests or expectations would be that, that would be the case?.

So on NFTs, that functionality for us will launch in June. And it is absolutely feedback we've gotten from the community. So we are actively listening through user groups, through reviews, other forums. And yes, we're taking that feedback from those places and enhancing features and functions all the time. It's part of the normal course.

The point that we're making on this call is that we view 3 of these things as most important, and that is, NFT sort of storing, viewing, sending and receiving connectivity to the DeFi community and then continuing to add additional currencies.

Those are, in our view, the 3 most important things to help make sure that we're delivering for our customers. And we're excited that those will be launching in the quarter, consistent with our discussion last time in terms of the priorities for the first half of the year..

As a user, I look forward to putting my NFT on the card..

Yes, it's really terrific. We have it running in beta at this point. And it just helps give you peace of mind the same way it does with your cryptocurrency that you've got the 3-factor authentication to leverage to keep your NFT secure in addition to other digital assets. So we're very excited about that.

Operator, if you could see if there are any other questions out there..

[Operator Instructions]..

So while we see if there are any other questions out there, I will -- I'll take a moment to thank the group for assembling, for their interest in the company and just reiterate some of the messages that we had throughout, which is we believe we're off to a very strong start to the year and look forward to continuing to update the markets as we move through additional quarters here.

So if there are no other questions, operator, in the queue, please let me know. If not, we'll wrap up..

There are no more questions in the queue..

Great. Thanks, everyone, and have a good evening..

Thank you..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..