CompoSecure Inc

NASDAQ:CMPO

Earnings Call Analysis

Company achieves record sales and narrows guidance for 2024

In Q2 2024, the company reported a 10% increase in net sales, reaching a record $108.6 million, with strong growth in both domestic and international markets. Gross margin declined from 55% to 52% due to product mix and inflationary pressures. Net income rose by 3% to $33.6 million. The company updated its 2024 guidance, now expecting net sales between $418 million and $428 million and adjusted EBITDA between $150 million and $157 million. They also announced a strategic transaction with the Dave Cote family to simplify shareholder structure, which will generate over $20 million in annual free cash flow.

Record Financial Performance

During the second quarter of 2024, CompoSecure achieved a record net sales figure of $108.6 million, reflecting a 10% year-over-year increase from $98.5 million. This growth was attributed to sustained domestic business momentum and robust international demand. The company's net income also rose by 3%, reaching $33.6 million, while adjusted EBITDA grew by 8% to $40 million, marking a strong performance on both the top and bottom lines.

Gross Margin Dynamics

The gross margin for the quarter decreased to 52%, down from 55% in the previous year, primarily due to an unfavorable product mix and inflationary pressures affecting wages. Although margins compressed, the year-to-date financial results continue to support an optimistic outlook for the company as it adapts to market conditions.

Segment Performance Breakdown

Sales from the domestic market remained healthy, amounting to $85.2 million, a 9% increase year-over-year. International sales surged by 14% to $23.4 million amid increased demand for innovative products, including the Echo Mirror card. This performance illustrates the company’s diverse growth avenues across geographic markets.

Guidance for Future Growth

Looking ahead, CompoSecure has tightened its full-year guidance, now expecting net sales between $418 million and $428 million, an upward adjustment from earlier forecasts of $408 million to $428 million. Adjusted EBITDA is anticipated to be between $150 million and $157 million, slightly refined from the prior guidance of $147 million to $157 million. This positive adjustment reflects management’s confidence in ongoing demand and operational execution.

Balance Sheet and Debt Management

As of June 30, 2024, CompoSecure reported cash and cash equivalents of $35.4 million against total debt of $330.9 million, which has decreased from $340.3 million at the end of 2023. The overall leverage ratio improved to 2.2x, aided by debt repayments and increased trailing 12-month adjusted EBITDA. This strategic debt management enhances CompoSecure's financial flexibility and positions the company for future growth initiatives.

Operational Cash Flow and Investments

Net cash provided by operating activities increased by 24.6% to $66 million, primarily driven by higher net income and favorable changes in working capital. The company's commitment to investing in innovative products and partnerships remains strong, with specific focus on Arculus, whose investment was lower than previous periods, expected to become positive by fiscal 2025.

Strategic Changes and Leadership Transition

A notable strategic transaction announced during the earnings call involves the acquisition of a majority interest in CompoSecure by the David Cote family, which includes transitioning Dave Cote, former CEO of Honeywell, to Executive Chairman. This move aims to unlock shareholder value by simplifying the company's share structure and is expected to result in over $20 million in incremental free cash flow annually. The management transition is set to enhance leadership as the company explores new growth avenues.

Expansion of Partnerships

The partnership with Fiserv has expanded to include the marketing and reselling of Arculus Authenticate, highlighting the company's commitment to innovate within the payment card space. This collaboration is seen as a significant opportunity to provide enhanced functionality and customer experiences, tapping into a wider customer base across financial institutions and fintechs.

Future Outlook and Investor Sentiment

With a strong quarter behind them and strategic initiatives underway, CompoSecure is well-positioned to continue delivering value to shareholders. The company’s focus on innovative product offerings, coupled with a strong balance sheet and effective debt management, should support sustained growth. Given the adjustments to revenue guidance and the leadership transition, investor sentiment remains cautiously optimistic about the company's trajectory in the medium to long term.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the CompoSecure Q2 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Sean Mansouri, Investor Relations. Please go ahead.

[Sean Mansouri]

Thank you. Good afternoon, everyone, and thank you for joining us to review CompoSecure's second quarter 2024 financial results. With me on the call 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 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 acquiring 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 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 and on the SEC's website at sec.gov.

Please note that the discussion on today's may call include certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and 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. 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 all that, let me turn the call over to Jon to discuss our second quarter results.

[Jonathan Wilk, executive]

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our second quarter conference call. We've got a lot of exciting news to share with you today, but I want to start and begin by discussing the strategic transaction that we announced in a separate press release issued after market close today and covered on Slides 3 and 4 in our earnings presentation.

Dave Cote, former CEO of Honeywell and current Executive Chairman of Vertiv, will become Executive Chairman of CompoSecure following the acquisition of a majority interest in the company by the David Cote family. In the transaction, all outstanding Class B shares will be converted to Class A shares, and the David Cote family through Resolute Partners will purchase 49.3 million out of the 51.9 million shares at $7.55 per share, resulting in an investment of $372 million upon closing of the transaction.

This deal unlocks shareholder value by removing our dual class shares, eliminating tax distributions to our Class B holders, simplifying our reporting and removing market overhang and uncertainty related to the future sale of Class B shares. Importantly, we anticipate a positive impact of more than $20 million in incremental free cash flow on an annual basis, providing CompoSecure with additional cash to invest in the business, to drive growth and reward shareholders.

I've included a slide where you can see more about Dave Cote and his background. As you can see on the right side of this slide, Dave has an incredible track record of delivering returns for shareholders in his capacity as CEO of Honeywell for 15 years and as [ this ] current Executive Chairman at Vertiv. His experience during global organizations will be invaluable to CompoSecure as we enter a new phase of growth and continue to focus on creating value for our shareholders, customers and employees.

Separately, we are also pleased to announce that we have amended and extended our credit facility with favorable terms, which was due to expire at the end of 2025. Tim will walk you through the details a little bit later in the call on that.

Now, let me summarize our quarterly performance. We're pleased to report that net sales increased by 10% to a record $108.6 million and reflected the highest revenue in the history of our company. In addition, our adjusted EBITDA increased by 8% to $40 million. These results were driven by continued growth in our domestic business and strong international demand.

We expanded our partnership with Fiserv to include the marketing and reselling of Arculus Authenticate. This enhances our ability to bring FIDO 2 secure authentication to Fiserv's extensive customer base of financial institutions and fintechs. Overall, given our strong progress this year, we have narrowed our fiscal full -- fiscal year 2024 full year guidance to the higher end of our previous range.

We now anticipate net sales between $418 million and $428 million versus previous guidance of $408 million to $428 million, and adjusted EBITDA between $150 million and $157 million versus $147 million and $157 million in our prior guidance.

Turning to Slide 6. I wanted to cover some of the new, exciting programs our customers launched. We continue to support our customers' ability to offer highly attractive premium card programs, such as the limited-edition American Express White Gold Card and the first Wells Fargo and Expedia co-branded metal card. In addition, you could see that Turkish Airlines and Atlas, a fintech, also recently announced or launched new metal card programs.

Moving on to Slide 7 for some insight on the card market. Card issuers maintained steady purchase volumes and drove strong customer acquisitions in the second quarter. This continues the trends we have seen throughout the year and has reaffirmed our belief in a strong and growing market for premium and metal payment cards.

In addition, on Slide 8, you can see several of our customer and partner quotes from the second quarter. These call-outs underscore our commitment to marketing and innovations that will attract and retain premium card customers.

Turning to Arculus on Slide 9. We have maintained good momentum and remain on track for our total net investment in 2024 to be lower than 2023, with the expectation of turning positive for fiscal 2025. For the quarter, Arculus net investment was $2.3 million compared to $4.2 million last year in the same quarter and year-to-date the net investment in Arculus was $4 million as of June 2024 versus $8.7 million last year.

As I mentioned earlier, we recently signed a marketing agreement with Fiserv to expand our relationship and allow Fiserv to begin marketing and reselling Arculus Authenticate. This builds on our already successful collaboration and solidifies our joint commitment to add functionality to payment cards that improves the customer experience.

In addition, we recently previewed an exciting Arculus capability that leverages our secure hardware wallet to enable payment at point-of-sale terminals using digital assets. This capability is still in the early phases, but has promising applicability for Web3 payments.

With that, I'll now hand it over to Tim to review our financials in more detail.

[Timothy Fitzsimmons, executive]

Thank you, Jon, and good afternoon, everyone. I'll provide a more detailed overview of our Q2, 2024 financial performance and then turn it back to Jon before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis.

In Q2, net sales increased by 10% to a record level of $108.6 million, compared to $98.5 million. As Jon mentioned, the increase was driven by continued growth in our domestic business and strong international demand.

Gross margin for the quarter was 52%, compared to 55% in the prior year. This decline was mainly due to product mix related to the timing and demand for some of our new card constructions, as well as inflationary pressures on wages.

Net income for the quarter increased by 3% to $33.6 million, compared to $32.7 million. Adjusted EBITDA in Q2 increased by 8% to $40 million, compared to $36.9 million in the prior year, with an adjusted EBITDA margin of 36.8% compared to 37.4% in the second quarter of 2023, again, driven by the factors I just mentioned. We always like to provide you with the year-to-date results in addition to the quarter.

On Slide 12, you could see our year-to-date financial results, which reflect our continued growth on the top and bottom lines, and puts us on track for the updated guidance that Jon provided.

Now turning to Slide 13, and looking closer at the split between our domestic and international business. You can see that our second quarter domestic net sales remained strong at $85.2 million, up 9% year-over-year. Our international business also improved, increasing 14% to $23.4 million, compared to the year-ago period. This is due to strong international demand that included accelerated demand for our innovative products such as the Echo Mirror card.

Turning to the balance sheet. As of June 30, 2024, we had cash and cash equivalents of $35.4 million, and total debt of $330.9 million. This includes $200.9 million of term loan and $130 million of exchangeable notes.

As of December 31, 2023, we had cash and cash equivalents of $41.2 million and total debt of $340.3 million. The decrease in our cash balance compared to year end 2023 was primarily driven by the special cash dividend/distribution of $0.30 per share, or approximately $24.5 million paid on June 11, 2024.

It also included the tax distributions to members of $26.2 million, payments of debt of $9.4 million, as well as other CapEx and financing activities totaling $11.8 million. These were partially offset by positive cash flows from operations of $66 million [Technical Difficulty]. 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.

On June 30, 2024, our overall leverage ratio was 2.2x based on a total debt of $330.9 million and trailing 12-month adjusted EBITDA of $150.4 million. This compares to 2.35x at December 31, 2023, with the improvement driven by paying down debt and increased trailing 12-month adjusted EBITDA.

At June 30, 2024, we had a bank agreement secured debt leverage ratio of [ 1.9 ] -- 1.29x based on a total secured debt of $200.9 million, and trailing 12-month bank adjusted EBITDA of $153 million. This compares to 1.39x at December 31, 2023.

As Jon mentioned earlier, we recently amended our credit facility led by JPMorgan Chase with Bank of America and TD Bank, which now includes lower rates, an upsized revolving line of credit, a longer-term and more flexible covenants.

Importantly, a majority of our lenders in the previous debt agreement participated in the amendment, reflecting the confidence of our lenders [ that ] have in our business. The amended facility also provides us with the capacity to continue driving growth and innovation along with the ability to retire our exchangeable notes maturing December 2026.

Turning to our cash flow statement on Slide 15. You can see that net cash provided by operating activities increased 24.6% to $66 million, compared to $53 million in the comparative period. The increase is primarily driven by an increase in net income of $7.2 million and favorable changes in working capital accounts of $8.1 million.

Turning to EPS. GAAP EPS for the 3 months ended June 30, 2024, was $0.44 per basic share and $0.32 per diluted share, compared to $0.31 per basic share and $0.29 per diluted share for the 3 months ended June 30, 2023.

On Slide 16, you can read through the footnotes on the slide that take you through the complexities of the allocation of net income due to the [ FC ] structure and the shares that are included in the basic diluted calculations.

On Slide 17, we're also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of non-cash fair value adjustments to the warrants, the earn-out revaluation and stock compensation. We believe that this provides a clearer picture of the economics of the company's operating results.

Non-GAAP adjusted net income for the 3 months ended June 30, 2024 increased by 10% to $25.2 million, compared to $22.9 million with adjusted EPS of $0.31 per basic share and $0.27 per diluted share, compared to $0.29 per basic share and $0.25 per diluted share during the 3 months ended June 30, 2023.

On Slide 18, you will find our year-to-date GAAP EPS and on Slide 19, our year-to-date adjusted EPS.

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

[Jonathan Wilk, executive]

Thanks, Tim. As I mentioned earlier, we've tightened our fiscal 2024 full year guidance. We now anticipate net sales between $418 million and $428 million and adjusted EBITDA between $150 million and $157 million.

In closing, I'd like to summarize the call today. We generated a record quarter of results on both the top and the bottom line, and the momentum in our business is strong. Our amended credit facility supports our continued growth and enables us to retire our exchangeable notes maturing in December 2026.

We expanded our partnership with Fiserv to include the marketing and reselling of Arculus Authenticate, and we remain on track for our total net investment for Arculus to be lower than 2023, with the expectation of turning positive in 2025.

And finally, we are very excited about the benefits related to the strategic transaction with the Dave Cote family through Resolute holdings with our Class B stockholders. This transaction provides compelling benefits for CompoSecure and our shareholders. And Dave's career and track record is unparalleled, and I am excited to leverage his deep expertise steering global public companies.

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

[Operator]

[Operator Instructions] Our first question comes from Brian Vieten with Needham.

[Brian Vieten, analyst]

Congrats on a great deal here. Just a quick one on the Robinhood side. What's the sales sensitivity around that Robinhood card? It sounds like there's been a lot of signups from the waitlist. What's the embedded assumption, I guess, for this piece within the guidance? Is that a possible source of upside? Just wanted to better understand there. And it's obviously [ topical ] with Robinhood also presenting right now.

[Jonathan Wilk, executive]

Thanks, Brian. We are very excited about the partnership with Robinhood. If you remember, there are 2 parts of it. We've got our core sort of metal veneer gold card, and then the unique, very limited-edition solid gold cards that we're doing. And as you mentioned, the excitement around that from their customers, we think is really high.

So we are excited about building and growing that relationship. And yes, we think it can turn into a nice growth opportunity for us. I'm not going to comment on specific volumes with the program, but suffice to say, we are very excited about the program.

[Operator]

Our next question comes from Cassie Chan with Bank of America.

[Jinli Chan, analyst]

I just wanted to ask -- I mean, it seems like you guys raised the full year guide by a bit more than the 2Q beta, at least relative to our estimates. Just wanted to know what's driving that underlying shift? Is it a change around expectations for domestic versus international growth, number of cards issued, or maybe growth from top 2 clients or the posture of the macro? Just wanted to know, relative to 3 months ago, has there been any underlying shift that you've seen in demand that's driving the full year outlook rate?

[Jonathan Wilk, executive]

Thanks, Cassie. As we look at full year, yes, we had a strong quarter both domestically and internationally. So we talked about expecting to see that bounce back in international after a slower first quarter. And what we saw there, I think was some excitement about some new programs launching internationally that drove some nice volume in the quarter, we think [ steadies ] out as we move through the year.

So as we started the year, if you remember, Q1 International was about 11% of business. This quarter was about 22% of our business. We've said historically that, that comes in around 20% with the slow start that we had, we said it would get back on track. We think that does on a full year basis.

It still probably comes in on the -- slightly under where it would be typically. So net-net, our answer is strong domestic growth with returning international business, sort of getting us back to a nice pace there.

[Jinli Chan, analyst]

And if I could just ask a follow-up. I know you guys mentioned removing the dual-class shares and an incremental $20 million in annual free cash flow, which was nice to hear. I guess, do you guys have a longer term free cash flow conversion or target out there? And how are you guys prioritizing capital return?

[Jonathan Wilk, executive]

So we gave you the free cash flow conversion calculation at the end of the year. Last year, I think it was about 13% on a full year basis. This unlocks quite a nice sized chunk of additional free cash flow. So obviously it depends on where the stock price comes out as we compare it to the value of our equity.

But we expect to see really nice pop in that metric for us in terms of the free cash flow that comes from the elimination of the dual share class structure, and importantly, gives us more to invest back in the business. So I think, we're excited about it for the business. We're excited about it for shareholders. We have not set a long-term guide for where that should come out.

[Operator]

Our next question comes from Jacob Stephan with Lake Street Capital Markets.

[Jacob Stephan, analyst]

Congrats on the results here. Maybe if I could just touch on the Fiserv Arculus partnership. Certainly, seems like a nice announcement, but maybe if you could kind of give us some color there? What do you think this distribution, kind of reseller partnership does for the card?

[Jonathan Wilk, executive]

Number one, I think it helps validate the thesis here around the capability of a card can do more than it does today, by turning a credit or debit card into an authentication token. We've been talking about that, and we're starting to see those conversations with banks and feeling the momentum there a bit. So, being able to open up a distribution channel like Fiserv, we think is a terrific opportunity.

They are an amazing company, an amazing partner, and the roster of clients -- the number of clients they have is extraordinary. So, we look forward to building this out, but wanted to share that announcement.

[Jacob Stephan, analyst]

And maybe if you could help us understand the kind of seasonal new card program launches? It seems like for this quarter -- obviously, we had Robinhood last quarter, but maybe help us understand do you kind of expect more kind of in the second half of the year here, or is the first half typically the seasonally strong point for new card launches?

[Jonathan Wilk, executive]

Sorry, Jacob. So please don't take the [ 4 ], as these are the only ones we had in the quarter. We're giving you just a select set of examples of some new programs that we think are exciting. There are a good number of more than that in any given quarter. But you asked about seasonality, and we've said we don't typically see something that -- fourth quarter, Q1 are always up, down. It doesn't follow that type of seasonality.

What we do see internationally, and we've talked about this, is we've got a smaller number of customers, smaller volume, and there's more lumpiness at times where you'll see customers launching programs in a specific quarter, where you may see more volume, where they have a need to deliver cards.

We saw a little bit of that in Q2, with some popular programs that we were running in Europe. But net-net, we don't see it sort of based on time of year, it has to do more with time of launch for our customers.

[Operator]

[Operator Instructions] Our next question comes from Reggie Smith with JPMorgan.

[Charles Pearce, analyst]

It's Charlie on for Reggie. I realize it's early days on M&A and I [ doubt ] the strategy is fully [ backed ] yet. But how are you thinking about M&A? I guess on the consolidation side where you acquire a different card manufacturer versus product extension where you acquire a company offering different products that might also fit your bank partners?

[Jonathan Wilk, executive]

So thanks, Charlie. We appreciate the question. We've had an M&A framework in place where we've looked at potential deals that I think cut across the different types of opportunity, you describe vertical, horizontal opportunities. Today, we haven't seen anything that we fell in love with. For us, its early days with this deal just signed. It's too soon to get into details.

I think about what our forward strategy will look like. Really look forward to partnering with Dave Cote and his partner [ Tom Nott ] with their experience in this space and look forward to sharing more down the line on this.

[Operator]

Thank you. I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.